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Ad Valorem Taxation on Intermediate Goods in Oligopoly

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  • Giuseppe Colangelo
  • Umberto Galmarini
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    Abstract

    Thepaper compares the efficiency of value added taxation (VAT),in which intermediate goods are not taxed, with that of cascadetaxation, in which they are, when levied on imperfectly-competitivevertically-related industries. One type of commodity taxationis not always superior to the other in terms of welfare. Indeed,when intermediate-goods have close substitutes, VAT is the optimalcommodity tax system. But when input substitutability is weakor absent and input producers have market power, they shouldbe taxed. In fact, in the absence of lump sum taxes and withno input substitutability, it is optimal to tax, not to subsidize,the most monopolistic industry. True cascading, in which bothupstream and downstream industries are taxed, is thus betterthan VAT when, besides no input substitutability and both intermediateand final good producers with market power, the needed revenuerequirement is not small. We therefore submit a rationale forthe coexistence of VAT and cascade taxation. Copyright Kluwer Academic Publishers 2001

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    File URL: http://hdl.handle.net/10.1023/A:1008741516400
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    Bibliographic Info

    Article provided by Springer in its journal International Tax and Public Finance.

    Volume (Year): 8 (2001)
    Issue (Month): 1 (January)
    Pages: 53-73

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    Handle: RePEc:kap:itaxpf:v:8:y:2001:i:1:p:53-73

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    Web page: http://www.springerlink.com/link.asp?id=102915

    Related research

    Keywords: Optimal commodity taxation; Value added taxation; Cascade taxation;

    References

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    1. Gareth Myles, 1996. "Imperfect competition and the optimal combination of ad valorem and specific taxation," International Tax and Public Finance, Springer, Springer, vol. 3(1), pages 29-44, January.
    2. Konishi, Hideki, 1990. "Final and intermediate goods taxation in an oligopolistic economy with free entry," Journal of Public Economics, Elsevier, vol. 42(3), pages 371-386, August.
    3. Skeath, Susan E. & Trandel, Gregory A., 1994. "A Pareto comparison of ad valorem and unit taxes in noncompetitive environments," Journal of Public Economics, Elsevier, vol. 53(1), pages 53-71, January.
    4. Sofia Delipalla & Michael Keen, 1991. "The Comparison Between Ad Valorem and Specific Taxation under Imperfect Competition," Working Papers, Queen's University, Department of Economics 821, Queen's University, Department of Economics.
    5. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production: I--Production Efficiency," American Economic Review, American Economic Association, vol. 61(1), pages 8-27, March.
    6. Ebrill, Liam P. & Slutsky, Steven M., 1990. "Production efficiency and optimal pricing in intermediate-good regulated industries," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 8(3), pages 417-442, September.
    7. Seade, J, 1985. "Profitable Cost Increases and the Shifting of Taxation : Equilibrium Response of Markets in Oligopoly," The Warwick Economics Research Paper Series (TWERPS) 260, University of Warwick, Department of Economics.
    8. Myles, G.D., 1989. "Imperfect Competition And The Taxation Of Intermediate Goods," The Warwick Economics Research Paper Series (TWERPS) 315, University of Warwick, Department of Economics.
    9. Myles,Gareth D., 1995. "Public Economics," Cambridge Books, Cambridge University Press, number 9780521497695, 9.
    10. Gottfried, Peter & Wiegard, Wolfgang, 1991. "Exemption versus zero rating : A hidden problem of VAT," Journal of Public Economics, Elsevier, vol. 46(3), pages 307-328, December.
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    Cited by:
    1. Hajime Sugeta & Shigeru Matsumoto, 2007. "Upstream and downstream pollution taxations in vertically related markets with imperfect competition," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 38(3), pages 407-432, November.
    2. Steve Mccorriston & Ian Sheldon, 2005. "Export Competition and the Remission of Domestic Environmental Taxes," International Tax and Public Finance, Springer, Springer, vol. 12(5), pages 627-637, September.
    3. Horacio L. P. Piffano, 2007. "Argentina and Brazil: Fiscal Harmonization and Subnational Sales Taxation – State / Provincial VAT versus State / Provincial Retail Sales Tax," Department of Economics, Working Papers 069, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata.

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