Unit Tax Research Articles

A welfare comparison of ad valorem and unit tax regimes

This paper strives to merge two strands of the literature. The first group of papers compares ad valorem and unit taxes in a tax competition framework in terms of welfare. The second group of papers regards capital income taxes as a conjunction of taxes on pure profits and taxes on capital income. We find that, given decreasing returns to scale, there always exists a level of the share of deductible capital costs strictly smaller than one, such that for all values larger than this threshold, an ad valorem tax regime unambiguously Pareto-dominates a unit tax regime.

Tax Reform in Monopolistic Competition with Increasing Preferences for Variety

Nearly all comparisons of ad valorem and unit taxes follow Suits and Musgrave in demonstrating the welfare dominance of ad valorem taxes. We study unit and ad valorem taxes in a monopolistic competition model where, as is the normal case, consumers have increasing preferences for variety. We show that introducing more unit taxation and less ad valorem taxation can increase consumer welfare and the tax revenue when consumers’ utility depends on both quantity and variety. To understand this, notice that more unit taxation, under a price-neutral criterion, increases tax revenue. That is, aggregate output increases after the tax change. On the other hand, we show that aggregate output goes up because variety goes up, which explains that decreased product variety cannot offset the favorable change in aggregate output.

Examples of unit tax superiority for a price-discriminating monopolist

This paper compares the welfare effects of per-unit and ad valorem taxes in four pervasive price discrimination schemes: quantity discounts, two-part tariffs, bundling, and package size price discrimination. The paper shows by example that per-unit taxes may welfare dominate ad valorem tariffs in a market with a monopoly that maximizes profits by engaging in second-degree price discrimination.

Unit taxes and ad valorem taxes with vertically differentiated products

This article analyses a model in which a local monopolist that produces low-quality goods competes against a foreign competitive industry that produces a higher quality version of the goods. We use the model to analyse the welfare implications of introducing a unit tax on the local producer, relative to an ad valorem tax. We find parameter values for which the unit tax dominates the ad valorem tax, in the sense of increasing welfare while not reducing government revenues. This result contrasts with the mainstream results on the dominance of ad valorem over unit taxes.

Unit vs. Ad Valorem Taxes under Revenue Maximization

We compare unit and ad valorem commodity tax regimes under the “Leviathan hypothesis” that the government seeks to maximize tax revenue. We show that the ad valorem tax regime welfare-dominates the unit tax regime if and only if the economy exhibits “ad valorem under-shifting” in response to a change in the tax level. Under Cournot competition, the level of shifting depends entirely on whether demand is not too convex so that elasticity of demand is increasing in price. In a more general framework, with di erentiated goods, the threshold level of convexity such that unit taxes welfare dominate ad valorem ones can be lower.

Environmental Taxes in Duopoly with Soft Capacity Constraints

Abstract This paper examines an environmental tax when duopolistic firms engage in capacity-price competition. Under soft capacity constraints, the equilibrium ranges from Bertrand competition to Cournot competition, depending upon parameters. It is shown that a unit tax potentially changes the qualitative nature of equilibrium. That is, the type of tax affects the mode of competition between firms. This effect gives rise to the result that a unit tax is sometimes an inefficient instrument. The explanation is that the tax that leads to the first-best under Cournot competition will in fact sustain Bertrand competition, and vice versa.

Some Taxation Theorems in the Hotelling Model

In this paper, we investigate the relationship between the demand ad valorem, cost ad valorem and unit taxes in terms of price, quantity and tax revenue. In particular, we prove that the Musgravian transformation holds in the Hotelling model. In addition, we show that the Suits-Musgrave theorem must be revised as output in the Hotelling model remains invariant in the presence of different taxes. That is, for a given price instead of a given output, the tax revenue under demand ad valorem tax exceeds that under the corresponding unit tax as long as profit levels for both stores are positive, a very general assumption. The exception is when the two stores are located close to each other and transportation cost is zero. Only in this case, are tax revenues and price under both tax regimes the same. If both stores are symmetrically located, the superiority of the ad valorem tax holds true except when the two stores are located back to back. Finally the farther away the location of a firm from the end point is, the smaller the difference in tax revenues between demand ad valorem and unit tax will be: the effect of the Suits-Musgrave theorem weakens in the presence of location clustering.

Ad Valorem versus Unit Taxes in Oligopoly and Endogenous Market Conduct

In oligopoly, comparison of the tax pass-through favors the use of ad valorem taxes compared to unit taxes. We argue that, in addition to differences in tax pass-through, the two taxes have a dissimilar effect on firms’ strategic interaction. The anticompetitive effects of the two taxes favor unit taxes over ad valorem taxes. We show both when there is a preference for unit taxation and when it is likely that the conventional preference for ad valorem taxation is upheld.

Unit tax versus ad valorem tax: A tax competition model with cross-border shopping

Within the framework of spatial tax competition with cross-border shopping, we examine the choice of tax method between ad valorem tax and unit (specific) tax. This study shows that governments endogenously choose the ad valorem tax method not because of a classic welfare reason, but because it is a good strategy to compete for mobile consumers. Another key finding is that while governments are committed to the ad valorem tax method, the choice leads to inferior outcome; tax-cutting competition becomes more serious when countries adopt ad valorem tax, and competition in ad valorem tax results in smaller tax revenue than competition in unit tax.

Tax effects in a two‐region model of monopolistic competition

AbstractI examine how unit tax and ad valorem tax affect firm location in a monopolistic‐competition model with asymmetrically sized regions and a quasi‐linear preference. Tax revenue is evenly distributed to all workers or evenly distributed to the workers residing in the region generating the tax revenue. When a homogeneous good is traded, despite reimbursement systems, the ad valorem tax retains the firm share, while the unit tax accelerates firm agglomeration in the larger region. When the homogeneous good is nontradable, despite taxation schemes, the intraregional distribution retains the firm share, while the interregional one accelerates agglomeration in the larger region.

A new version of Edgeworth's taxation paradox

Edgeworth’s taxation paradox states that a unit tax can decrease the market price of a good. This paper presents a new version of the paradox in which a tax reduces price — and increases industry output — because it attracts additional entry into the market. It is particularly striking that the demand conditions under which cost pass-through exceeds 100% for a …xed number of …rms are also those for which passthrough can turn negative with endogenous entry. A novel application to the environment shows that a Pigouvian emissions tax can lead to an increase in industry emissions. A basic principle of environmental policy therefore fails under the conditions of the paradox.

台湾纸烟管理政策对需求影响之探讨

本文探讨主要烟品管理政策，如烟盒加注警示标语、烟害防制法以及课征健康捐等对国产与进口烟品需求的影响，以建议政府规划有效之烟品管理政策。研究方法采用1971~2009年之纸烟消费量及零售价格等时间序列数据以近似无关回归(SUR)估计国产与进口纸烟之需求函数。模型中并以虚拟变量量化台湾纸烟开放进口、烟盒警示标语、烟害防制法以及烟品健康捐等管理政策之推行。此外建立吸烟风险讯息指数以评估吸烟危害人体健康讯息对需求之影响。实证结果发现，样本期间国产纸烟及进口纸烟之价格弹性分别为−0.88及−0.47，所得弹性则分别为0.06及0.18；国产纸烟对进口纸烟之交叉弹性为0.40，进口纸烟对国产纸烟之交叉弹性为0.63。此外，吸烟健康风险讯息、烟盒警告标语以及烟品健康捐对国内纸烟需求具有负面影响，烟品开放进口对国产纸烟消费具负面影响；但对进口纸烟消费具正面影响。最后，烟害防制法对国产纸烟需求具负面影响；对进口烟品需求的影响并不明显。综合实证发现，本文建议以价制量是有效之纸烟管理政策，但政府应再提高烟品健康福利捐之税赋，并将烟品健康福利捐，改为从价计税，才能更有效降低国人对进口纸烟的需求。 This paper aims to analysis the comprehensive influence of regulation policy such as, Tobacco Hazards Prevention Act, Tobacco Health and Welfare Tax, on demand for cigarette inTaiwan. Annual data through 1971 to 2009 are used to estimate the demand for cigarettes by applying SUR model. The impacts of deregulation of foreign cigarettes imports, anti-smoking campaigns on cigarette case, the implementation of Tobacco Hazards Prevention Act, and levy of Tobacco Health and Welfare Tax are taken into account by using dummy variables. The empirical results indicate that the price elasticities for domestic and imported cigarettes are −0.88 and −0.47, respectively. The income elasticities are 0.06 for domestic and 0.18 for imported cigarettes and the cross-price elasticities are 0.40 for domestic and 0.63 for imported cigarettes. The regulation policies of revelation of cigarette health information, anti-smoking campaigns on cigarette case, and the Tobacco Health and Welfare Tax have significantly negative effects on both domestic and imported cigarette consumption. In addition, opening the markets to imported cigarettes has had a significantly negative effect on domestic cigarette consumption, but had a significantly positive effect on imported cigarette consumption. Finally, Tobacco Hazards Prevention Act has a significantly negative effect on domestic cigarette consumption, but had an insignificantly effect on imported cigarette consumption. In conclusions, the effects of regulation policy on domestic cigarettes are more significant than on imported cigarettes. Taiwan Government should increase the amount of the Tobacco Health and Welfare Tax, and transform it from unit tax into ad valorem tax in order to effectively reduce the demand on imported cigarettes.

Tax Implementation and Market New Equilibrium - An Alternative Method

In an equilibrium, quantity demanded equals quantity supplied at a particular price for the product. When the tax is imposed by the government in the market, it is obvious that the tax imposed has an impact on the equilibrium and tends to establish a new equilibrium with changes in price and quantity. This explanation provides a basis of how the slopes of the simple (straight linear) demand and supply curves can be used to determine the new equilibrium price, in particular. Simple linear equations of the demand and supply curves are the limitation of this paper. Demand and supply are the two forces that determine equilibrium of price and quantity for a product in a market. In an equilibrium, quantity demanded equals quantity supplied at a particular price for the product. When the tax is imposed by the government in the market, it is obvious that the tax imposed has an impact on the equilibrium and tends to establish a new equilibrium with changes in price and quantity. It is understood that the total tax per unit of product cannot be the total increase in price of the product, since the market operation makes the supplier to pass only a certain proportion of the unit tax imposed. As the tax affects supply, the supply curve tends to shift upward, thus establishing the new equilibrium with the same demand curve. Therefore, the new price has to be established for the new supply curve equation and the new supply equation is equalized to demand equation to determine new equilibrium price. This explanation provides how the slopes of the simple (straight linear) demand and supply curves can be used to determine the new equilibrium price, in particular. To understand the simplicity of determining the tax-based new equilibrium, it is important to know how the formal application takes place for the same as currently available. 2. Formal Determination of the tax-based new Equilibrium Price Consider that a market demand and supply equations for a product are

Consumption taxes in monopolistic competition: a comment

We show that an ad valorem tax is better than an equal-revenue unit tax when consumers spend some fixed proportion of income on taxed goods, when firms use constant mark-up pricing, and entry and exit drive per-firm profit to zero. These key assumptions implies that ad valorem taxes are superior in oligopoly as well as monopolistic competition, showing that earlier results on taxes in monopolistic competition (Schroder in J Econ 83(3):281–292, 2004) are not due to the mode of competition, but rather are due to the functional forms used.

Endogenous Competition: Unit and Ad Valorem Taxes in Bertrand-Edgeworth Duopoly

We analyze unit and ad valorem taxes in Edgeworth-Bertrand duopoly. In Edgeworth-Bertrand duopoly the mode of competition is endogenous through firms’ choice of capacity (Maggi, 1996). We show how commodity taxes co-determine capacity and thus competition intensity. In particular, we argue that shifts from ad valorem taxes towards unit taxes increase competition. We show that this effect can reverse the conventional preference for ad valorem taxation.

Why Countries Compete in Ad Valorem Instead of Unit Capital Taxes

This paper contributes to resolving the puzzle that in practice most countries use ad valorem (corporate income) taxation, while a large part of the tax competition literature views business taxes as unit (wealth) taxation. We point to the dual role corporate taxation plays in attracting mobile capital, on the one hand, and in absorbing economic rents, on the other hand. In contrast to the previous literature, we show that detrimental tax competition may be less severe in a system of ad valorem taxes than in a system of unit taxes and that ad valorem taxation may be the equilibrium outcome in a decentralized world where countries decide themselves on the tax system. Interestingly, the decentralized choice of the ad valorem system may be a prisoner’s dilemma since the countries’ welfare may be higher if they choose unit taxes.

Do Taxes Produce Better Wine?

Theory predicts that unit taxes increase the quality consumed in a market since unit taxes reduce the relative price of high quality goods. Ad valorem taxes, on the other hand, have no effect on relative prices and should not affect product quality. The hypothesis is tested empirically in the US wine market. I find that the market share of high quality wine is significantly increased by unit taxes and that there is no significant effect of ad valorem taxes, in accordance with the hypothesis and previous empirical studies.

Endogenous choice on tax instruments in a tax competition model: unit tax versus ad valorem tax

This paper analyzes an endogenous choice problem with regard to tax instruments in a capital tax competition model. Using a symmetric and two-region model of tax competition, where each region is allowed to choose either a unit or an ad valorem tax, we show that selecting a unit tax as a policy instrument is the dominant strategy.

Do Taxes Produce Better Wine?

Theory predicts that unit taxes increase the quality consumed in a market, since unit taxes reduce the relative price of high quality goods. Ad valorem taxes, on the other hand, have no effect on relative prices, and should not affect product quality. The hypothesis is tested empirically in the US wine market. I find that the market share of high quality wine is significantly increased by unit taxes, and that there is no significant effect of ad valorem taxes, in accordance with the hypothesis and previous empirical studies.

Unit versus Ad Valorem Taxes in Multiproduct Cournot Oligopoly

AbstractThe welfare dominance of ad valorem taxes over unit taxes in a single‐market Cournot oligopoly is well known. This article extends the analysis to multimarket oligopoly. Provided all ad valorem taxes are equal and positive, unit costs are constant, firms are active in all considered markets, and a representative consumer has convex preferences, ad valorem taxes are shown to dominate in multiproduct equilibrium. Conditions exist, however, under which economic efficiency declines upon replacing specific taxes with ad valorem taxes that preserve output levels. We discuss the roles of unit cost covariances across multiproduct firms, and also of complementarity in demand, in determining the extent of cost efficiencies arising under ad valorem taxation. For goods that are complementary or independent in demand, conditions are found such that industry profits decline upon use of ad valorem taxes.