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Indirect taxation of monopolists: A tax on price

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  • Vetter, Henrik
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    Abstract

    A digressive tax like a variable rate sales tax or a tax on price gives firms an incentive for expanding output. Thus, unlike unit and ad valorem taxes which amplify the harm from monopoly, a digressive tax lessens the harm. We analyse a tax on price with respect to efficiency and practical policy appeal. Using a tax on price in combination with ad valorem taxation it is possible to achieve the Ramsey solution. That is, the combination of the two taxes secures tax revenue in the least distortive way. We also show how tax reforms based only on observation of price and quantity can make use of a tax on price in order to improve welfare. That is, it is practical to use a tax on price. --

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    Bibliographic Info

    Paper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2012-60.

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    Date of creation: 2012
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    Handle: RePEc:zbw:ifwedp:201260

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    Keywords: tax on price; ad valorem tax; tax incidence;

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    1. Hamilton, Stephen F., 1999. "Tax incidence under oligopoly: a comparison of policy approaches," Journal of Public Economics, Elsevier, Elsevier, vol. 71(2), pages 233-245, February.
    2. Tam, Mo-Yin S, 1993. "Tax on Price: A Response," Public Finance = Finances publiques, , , vol. 48(2), pages 303-09.
    3. 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.
    4. Stephen F. Hamilton, 2009. "Excise Taxes with Multiproduct Transactions," American Economic Review, American Economic Association, American Economic Association, vol. 99(1), pages 458-71, March.
    5. Sumner, Michael, 1993. "Tax on Price: A Comment," Public Finance = Finances publiques, , , vol. 48(2), pages 297-302.
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