Unit Tax Research Articles

Competition in Unit vs. Ad Valorem Taxes

This paper shows that in a standard model of tax competition, the Nash equilibrium in capital taxes depends on whether these taxes are unit (as assumed in the literature) or ad valorem (as in reality). In a symmetric version of the model, general results are established: taxes and public good provision are both higher, and residents in all countries are better off, when countries compete in unit taxes, as opposed to ad valorem taxes. However, the difference in equilibrium outcomes is negligible when the number of countries is large.

Tax and subsidy incidence equivalence theories: experimental evidence from competitive markets

A basic tenet in microeconomics is tax incidence equivalence, which holds that the burden of a unit tax on buyers and sellers is independent of who actually pays the tax. By contrast, policymakers and the public often mistake statutory incidence for economic incidence. Using competitive laboratory markets, I test both tax incidence equivalence and an analogous theorem for subsidies. For sufficiently large markets, the results show strong support for both theories; there is little to no evidence, even in the short run, of the popular misperception that statutory incidence equals economic incidence. In smaller markets in which competitive forces are weaker and relative bargaining strengths may play a role, the evidence for tax incidence equivalence is weaker as minor price discrepancies may persist between markets.

The Comparison between Ad Valorem and Unit Taxes under Monopolistic Competition

This paper shows that the welfare dominance of ad valorem over unit taxes under imperfect competition, extends to the Dixit-Stiglitz framework with dierentiated products, entry and love of variety. This contrasts against findings by Anderson et al. (J Public Econ, 2001) made in a similar framework, but under Bertrand competition.

Shipping the Good Apples Out: A New Perspective

An alternative explanation is provided for the Alchian and Allen substitution theorem, which posits that a per unit tax or shipping fee applied to similar goods will increase the relative consumption of the higher‐quality good. The usual explanation is that consumers substitute out of “bad apples” and into “good apples.” This article generalizes the Alchian and Allen result in an n‐good world, providing an alternative explanation that is more cogent in situations where the two goods (for example $500 and $5 wines) are not close substitutes.

A behavioral and welfare analysis of progressive forest taxation

We use the Hartman rotation model to study behavioral and social welfare effects of forest tax progression. The following new results are shown for harvest and timber taxes. First, a tax-revenue neutral increase in the timber tax rate, compensated by a higher tax exemption, will shorten the optimal private rotation age. A sufficient condition for this to hold for the yield and unit taxes is that the marginal valuation of amenities is nondecreasing with the age of the forest stand. Second, for the socially optimal forest taxation, if society can use the neutral site productivity tax to collect tax revenue, the proportional forest tax is enough to internalize the externality caused by private harvesting. Finally, even though site productivity tax is not available, the tax structure should be designed so that tax exemption is neutral, implying that the optimal corrective forest taxes remain unchanged.

An analysis of lumber trade restrictions in North America: application of a spatial equilibrium model

Abstract The impact of different trade restrictions on Canadian softwood lumber exports to the United States are examined using a spatial equilibrium trade model of the North American (NA) lumber market. Scenarios designed to result in equivalent US domestic market impacts including ad valorem tariffs quotas and a unit tax increase on Canadian timber inputs are simulated. The 27.2% tariff and the quota have the same overall welfare impacts in the two markets with US producers gaining and US consumers losing for an overall market loss of approximately $520 million in the US. Ignoring quota rents, Canadian producers lose and consumers gain as prices fall in Canada for an overall loss of $880 million. Tariff revenues or quota rents, at over $1 billion per year, mean that tariffs (collected by the US) clearly yield a benefit for the US over Free Trade and quotas (rents accruing to Canadian producers) an overall benefit for Canada. If US producer protection is gained through increased Canadian unit timber fees, it has markedly different consequences. Markets that import NA lumber face higher prices in this situation and domestic Canadian prices rise as much as those in the US as the price wedge present in the other scenarios disappears.

Optimal Forest Taxation under Private and Social Amenity Valuation

Abstract This article analyzes the socially optimal forest taxation in the rotation framework when the government has a binding tax revenue requirement. In the Faustmann model, the optimal design of taxation consists of nondistortionary taxes, such as site productivity tax, site value tax, or profit tax. A combination of distortionary unit (or yield) tax and timber tax can also be used to collect the tax revenue in a nondistortionary way. In the Hartman model, with forest amenity services as a public good, the optimal design consists of a nondistortionary tax and a Pigouvian tax, which adjusts the private rotation age to the socially optimal one. Now only the site productivity tax is nondistortionary, while unit, yield, timber, site value, and profit taxes generally serve as corrective Pigouvian taxes. Finally, in the absence of a nondistortionary tax, if the marginal valuation of amenity services is nondecreasing with the age of forest stand, a combination of unit (or yield) and timber taxes can be used for both tax revenue collection and Pigouvian correction. FOR. SCI.49(4):596–607.

Nonpoint Source Pollution Taxes and Excessive Tax Burden

If a regulator is unable to measure firms' individual emissions, an ambient tax can be used to achieve the socially desired level of pollution. With this tax, each firm pays a unit tax on aggregate emissions. In order for the tax to be effective, firms must recognize that their decisions affect aggregate emissions. When firms behave strategically with respect to the tax-setting regulator, under plausible circumstances their tax burden is lower under an ambient tax, relative to the tax which charges firms on the basis of individual emissions. Firms may prefer the case where the regulator is unable to observe individual firm emissions, even if this asymmetric information causes the regulator to tax each firm on the basis of aggregate emissions.

Relative Efficiency of AD Valorem and Unit Taxes: The Case of Endogenous Quality

This article studies the relative efficiency of unit and ad valorem taxes in a competitive market in which the quality of product is endogenous. The author finds that the relative efficiency of these two taxes depends on exactly how individuals value the quality of a product. Specifically, the unit tax welfare dominates the ad valorem tax in the “casket” case and the “full-price” case, whereas the ad valorem tax welfare dominates the unit tax in the “lightbulb” case.

Taxes and quality: A market–level analysis

A conventional assumption of product homogeneity when the commodity of interest is actually heterogeneous will lead to errors in an analysis of the incidence of policies, such as taxes. In this article, an equilibrium displacement model is used to derive analytical solutions for price, quantity, and quality effects of ad valorem and per unit taxes. The results show how parameters determine the effects of tax policies on quality. The potential for tax–induced distortions in quality, and the distributive consequences of those distortions, are illustrated in a case study of the market for Australian wine.

Taxes and Quality: A Market-Level Analysis

A conventional assumption of product homogeneity when the commodity of interest is actually heterogeneous will lead to errors in an analysis of the incidence of policies, such as taxes. In this article, an equilibrium displacement model is used to derive analytical solutions for price, quantity, and quality effects of ad valorem and per unit taxes. The results show how parameters determine the effects of tax policies on quality. The potential for tax-induced distortions in quality, and the distributive consequences of those distortions, are illustrated in a case study of the market for Australian wine.

Tax and Subsidy Incidence Equivalence Theories: Experimental Evidence from Competitive Markets

A basic tenet in elementary microeconomics is tax incidence equivalence. This tenet holds that the burden of a unit tax on buyers and sellers is independent of who actually pays the tax. By contrast, policymakers and the public often mistake statutory incidence for economic incidence. Recent evidence of the empirical validity of tax incidence equivalence is mixed. In this paper, using competitive laboratory markets, I test both tax incidence equivalence and an analogous theorem I refer to as subsidy incidence equivalence. For sufficiently large markets, the results show strong support for both theories. In these markets, there is little to no evidence, even in the short run, of the popular misperception that statutory incidence equals economic incidence. In smaller markets in which competitive forces are weaker and relative bargaining strengths may play a role, the evidence for tax incidence equivalence is weaker as minor price discrepancies may persist between markets.

The efficiency of indirect taxes under imperfect competition

This paper considers the relative efficiency of ad valorem and unit taxes in imperfectly competitive markets. We provide a simple proof that ad valorem taxes are welfare-superior to unit taxes in the short run when production costs are identical across firms. The proof covers differentiated products and a wide range of market conduct. Cost asymmetries strengthen the case for ad valorem taxation under Cournot competition, but unit taxation may be welfare-superior under Bertrand competition with product differentiation. Ad valorem taxation is superior with free entry under Cournot competition, but not necessarily under price competition when consumers value variety.

Green Tax Reforms in a Computable General Equilibrium Model for Italy

The paper studies the effects of green tax reforms within a walrasian computable general equilibrium model of the Italian economy calibrated on a microconsistent data set derived from the Input-Output table for the year 1990. Tax reforms increase taxation on the energy sector either through an increase in the revenue of the unit tax on all transactions, or by introducing a tax on final demand; in both cases a compensation is either operated through a reduction in personal income tax rates or the social security contributions on employees so as to keep public expenditure constant in real terms. The paper analyses the effects both on consumers' welfare and on total emissions of some pollutants; for a thorough assessment of the reforms both effects should be considered keeping in mind that the benefits of emissions' reduction are not incorporated into individual utility functions. None of the reforms emerge as unambiguously preferable with respect to others.

Optimal Forest Taxation Under Private and Social Amenity Valuation

This article analyzes the socially optimal forest taxation in the rotation framework when the government has a binding tax revenue requirement. In the Faustmann model, the optimal design of taxation consists of nondistortionary taxes, such as site productivity tax, site value tax, or profit tax. A combination of distortionary unit (or yield) tax and timber tax can also be used to collect the tax revenue in a nondistortionary way. In the Hartman model, with forest amenity services as a public good, the optimal design consists of a nondistortionarytax and a Pigouvian tax, which adjusts the private rotation age to the socially optimal one. Now only the site productivity tax is nondistortionary, while unit, yield, timber, site value, and profittaxes generally serve as corrective Pigouvian taxes. Finally, in the absence of a nondistortionary tax, if the marginal valuation of amenity services is nondecreasing with the age of forest stand, a combination of unit (or yield) and timber taxes can be used for both tax revenue collection and Pigouvian correction.

The Efficiency of Indirect Taxes Under Imperfect Competition

The relative efficiency of ad valorem and unit taxes is analyzed for oligopolistic markets. We provide a simple proof that ad valorem taxes welfare-dominate unit taxes in the short run if production costs are identical across firms. The proof covers a wide range of market conduct and differentiated products. Cost asymmetries strengthen the case for ad valorem taxation under Cournot competition, but unit taxation may be preferred under Bertrand competition with product differentiation. Ad valorem taxation is welfare-superior with free entry under Cournot competition, but unit taxation may be more efficient under price competition if consumers value variety.

Tax incidence under oligopoly: a comparison of policy approaches

This paper presents a methodological approach for the analysis of tax incidence that encompasses familiar forms of taxation in a general and analytically convenient model. In oligopolistic industries, the performance of a tax depends on the sensitivity of the unit tax rate to changes in industry output. Output-elastic tax schedules are less likely to be over-shifted and have superior welfare properties relative to regulatory instruments that are less responsive to the equilibrium market quantity. For revenue neutral tax reforms, the finding of Delipalla and Keen (1992)that ad valorem taxes welfare-dominate specific taxes under oligopoly is derived as a special case of this general result.

An Algorithm for Optimal Pigouvian Taxes Without Benefits Data

The Pigouvian prescription to internalize external diseconomies and to achieve the optimum social equilibrium is well known: a unit tax on polluting activities equal to the marginal social damage arising at the after-tax optimal level of activity. If an authority imposes an effluent fee on emissions equal to the marginal social damage, the resulting equilibrium is Pareto-efficient. It has not been possible to translate the Pigouvian dictum into actual because of the problem of quantifying such a tax and its heavy subjective information requirements. This makes the monetary value of the damage difficult to determine. In order to overcome this difficulty, this paper develops a different theoretical approach. The main goal is to provide the environmental authority with an algorithm which allows policy-makers to base decisions on technical data (i.e. firms' production functions) rather than on subjective information (i.e. individuals' utility functions). The paper illustrates advantages offered by this approach, providing some theoretical and practical conditions useful in calculating the optimal tax.

Excise Taxes on a Non-Uniform Pricing Monopoly: Ad Valorem and Unit Taxes Compared

In this paper ad valorem and unit taxation are compared on a model that allows for various monopolistic pricing policies, including uniform pricing and all three types of Pigouvian price discrimination. It shows that, for any given unit tax on a non-uniform pricing monopoly (1) there exists an output-neutral ad valorem tax rate that gives rise to a higher tax yield than the unit tax, and (2) there exists an ad valorem tax rate that welfare dominates the unit tax not only in the aggregate sense but also in the Pareto sense. Taxes d'accise dans le cas d'un monopole qui n'a pas une tarification unique: comparaison des taxes ad valorem et unitaire. Ce memoire compare la taxe ad valorem et la taxe par

Design of an Antidumping Rule with Incomplete Information about Material Injury

This paper deals with the inability of an administering authority to directly observe the level of material injury in antidumping petitions. We focus on the use, by the domestic firm, of private information about injury in order to obtain higher protection. By using an incentive framework, we show that asym - metric information about the level of injury can be resolved by using a mix of lump-sum compensation, domestic unit taxes and antidumping duties rather than just import duties. Surprisingly, the lump-sum transfer decreases and the domestic unit tax increases with the level of material injury. This efficient antidumping rule will induce the domestic firm to tell the truth about the level of material injury.