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Failure of Ad Valorem and Specific Tax Equivalence under Uncertainty

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  • Laszlo Goerke

    ()
    (Institute for Labour Law and Industrial Relations in the EU, University of Trier)

  • 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 Institute of Labour Law and Industrial Relations in the European Union (IAAEU) in its series IAAEU Discussion Papers with number 201205.

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Date of creation: Oct 2012
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Handle: RePEc:iaa:dpaper:201205

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

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  1. Anderson, S.P. & de Palma, A. & Kreider, K., 1999. "The Efficiency of Indirect Taxes Under Imperfect Competition," Papers 99-09, Paris X - Nanterre, U.F.R. de Sc. Ec. Gest. Maths Infor..
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  3. 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.
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  7. Fraser, R. W., 1985. "Commodity taxes under uncertainty," Journal of Public Economics, Elsevier, vol. 28(1), pages 127-134, October.
  8. Kind, Hans Jarle & Koethenbuerger, Marko & Schjelderup, Guttorm, 2009. "On revenue and welfare dominance of ad valorem taxes in two-sided markets," Economics Letters, Elsevier, vol. 104(2), pages 86-88, August.
  9. 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.
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  18. 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.
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  22. Ben Lockwood, 2004. "Competition in Unit vs. Ad Valorem Taxes," International Tax and Public Finance, Springer, vol. 11(6), pages 763-772, November.
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