We examine the effects of two different types of commodity taxation, specific and ad valorem, on wages and profits. We analyze two models of wage determination, one with efficiency wage setting and one with union-firm bargaining. In the former, a (locally) revenue-neutral shift from specific to ad valorem taxation leads to an increase in both employment and wages, and a reduction in profitability. In the latter, the effect on wages and profits may be reversed: predominantly ad valorem taxation raises employment but lowers wages, and under certain circumstances, the net effect is an increase in profits.
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Paper provided by Department of Economics, University of Kent in its series Studies in Economics with number
0016.
Length: Date of creation: Dec 2000 Date of revision: Publication status: Forthcoming in Journal of Public Economic Theory, 2001 Handle: RePEc:ukc:ukcedp:0016
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