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Failure of Ad Valorem and Specific Tax Equivalence under Uncertainty

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  • Laszlo Goerke
  • Frederik Herzberg
  • Thorsten Upmann

Abstract

Applying a framework of perfect competition under uncertainty, we contribute to the discussion of whether or not ad valorem taxes and specific taxes are equivalent. While this equivalence holds without price uncertainty, we show that ad valorem taxes and specific taxes are “almost never” equivalent in the presence of uncertainty if we demand equivalence to hold pathwise. Since we obtain this result under perfect competition, our analysis also provides a further rationale for why the equivalence must fail under imperfect competition.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3946.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3946

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Keywords: ad valorem taxes and specific taxes; revenue neutrality; price uncertainty; concept of pathwise neutrality;

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  1. Liqun Liu, 2003. "Relative Efficiency of AD Valorem and Unit Taxes: The Case of Endogenous Quality," Public Finance Review, , vol. 31(3), pages 291-301, May.
  2. Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, vol. 41(4), pages 477-91, October.
  3. Stephen F. Hamilton, 2009. "Excise Taxes with Multiproduct Transactions," American Economic Review, American Economic Association, vol. 99(1), pages 458-71, March.
  4. Francis K. Cheung, 1998. "Excise Tax on a Non-Uniform Pricing Monopoly: Ad Valorem and Unit Taxes Compared," Canadian Journal of Economics, Canadian Economics Association, vol. 31(5), pages 1192-1203, November.
  5. Kind, Hans Jarle & Koethenbuerger, Marko & Schjelderup, Guttorm, 2009. "On Revenue and Welfare Dominance of Ad Valorem Taxes in Two-Sided Markets," Discussion Papers 2009/9, Department of Business and Management Science, Norwegian School of Economics.
  6. 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.
  7. Blackorby, Charles & Murty, Sushama, 2006. "Unit Versus Ad Valorem Taxes : Monopoly In General Equilibrium," The Warwick Economics Research Paper Series (TWERPS) 761, University of Warwick, Department of Economics.
  8. Sophia Delipalla, 2009. "Tobacco Tax Structure and Smuggling," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 65(1), pages 93-104, March.
  9. Simon P. Anderson & Andre de Palma & Brent Kreider, 2000. "The Efficiency of Indirect Taxes under Imperfect Competition," Virginia Economics Online Papers 342, University of Virginia, Department of Economics.
  10. Sofia Delipalla & Michael Keen, 2006. "Product Quality and the Optimal Structure of Commodity Taxes," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(4), pages 547-554, October.
  11. Philipp J. H. Schröder, 2003. "The Comparison between Ad Valorem and Unit Taxes under Monopolistic Competition," Discussion Papers of DIW Berlin 333, DIW Berlin, German Institute for Economic Research.
  12. Runkel, Marco & Hoffmann, Magnus, 2012. "Why Countries Compete in Ad Valorem Instead of Unit Capital Taxes," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62079, Verein für Socialpolitik / German Economic Association.
  13. Fraser, R. W., 1985. "Commodity taxes under uncertainty," Journal of Public Economics, Elsevier, vol. 28(1), pages 127-134, October.
  14. Harvey E. Lapan & David A. Hennessy, 2011. "Unit versus Ad Valorem Taxes in Multiproduct Cournot Oligopoly," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 13(1), pages 125-138, 02.
  15. Lisa Grazzini, 2006. "A Note on Ad Valorem and Per Unit Taxation in an Oligopoly Model," Journal of Economics, Springer, vol. 89(1), pages 59-74, October.
  16. Robert Earle & Karl Schmedders & Tymon Tatur, 2007. "On Price Caps Under Uncertainty," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 93-111.
  17. Laszlo Goerke, 2011. "Commodity tax structure under uncertainty in a perfectly competitive market," Journal of Economics, Springer, vol. 103(3), pages 203-219, July.
  18. Hamilton, Stephen F., 1999. "The comparative efficiency of ad valorem and specific taxes under monopoly and monopsony," Economics Letters, Elsevier, vol. 63(2), pages 235-238, May.
  19. Dickie, M. & Trandel, G.A., 1993. "Comparing Specific and Ad Vaslorem Pigouvian Taxes and Output Quotas," Papers 431, Georgia - College of Business Administration, Department of Economics.
  20. repec:bla:restud:v:74:y:2007:i:1:p:93-111 is not listed on IDEAS
  21. Ben Lockwood, 2004. "Competition in Unit vs. Ad Valorem Taxes," International Tax and Public Finance, Springer, vol. 11(6), pages 763-772, November.
  22. Susanne Dröge & Philipp Schröder, 2009. "The welfare comparison of corrective ad valorem and unit taxes under monopolistic competition," International Tax and Public Finance, Springer, vol. 16(2), pages 164-175, April.
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