Tax efficiency in a model of endogenous markups

Artikel

Efficiency comparison of ad valorem and unit taxes has been traditionally based on consumer welfare. However, if the tax instrument also affects the distribution of firms over their productivities, the policy maker may be concerned about the implications on aggregate productivity as well. This paper makes an efficiency comparison of ad valorem and unit taxes by allowing the distribution of firms to respond to changes in policy. First, I make an efficiency comparison in a model with monopolistically competitive firms that are homogenous with respect to their productivity levels. Consumer preferences exhibit love for variety and allow firms to adjust their markups. I find that ad valorem tax is more efficient. Allowing for firm heterogeneity overturns this result at high revenue requirements. As the tax rate increases, ad valorem tax causes excessive exit of firms which makes the market more competitive. Hence, few surviving firms price lower by decreasing their markups. Lower prices decrease the tax revenue collected. As a result under ad valorem tax regime, higher consumer surplus is dominated by lower tax revenue. On the other hand, production is concentrated among relatively more productive firms. Thus, aggregate productivity is higher under ad valorem tax regime.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: SERIEs - Journal of the Spanish Economic Association ; ISSN: 1869-4195 ; Volume: 10 ; Year: 2019 ; Issue: 3/4 ; Pages: 401-418

Classification and Topics

• Classification: Wirtschaft ; Production, Pricing, and Market Structure; Size Distribution of Firms ; Taxation and Subsidies: Efficiency; Optimal Taxation ; Business Taxes and Subsidies including sales and value-added (VAT)
• Subject: Unit tax ; Ad valorem tax ; Efficiency ; Monopolistic competition ; Heterogenous firms

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Durceylan, Esra
• Event: Veröffentlichung
• (who): Springer
• (where): Heidelberg
• (when): 2019

Further information

• DOI: doi:10.1007/s13209-019-00209-w
• Last update: 10.03.2025, 11:42 AM CET