Corrective Ad Valorem and Unit Taxes: A Welfare Comparison

Arbeitspapier

The ad valorem versus unit taxes debate has traditionally emphasized tax yield. For this criterion, ad valorem taxes outperform unit taxes in terms of welfare for a wide range of imperfect competition settings, including Dixit-Stiglitz monopolistic competition. Yet, in a number of policy fields, such as environmental, health or trade economics, policy makers apply taxes to target the production/consumption volume in an industry, i.e. aim at a certain corrective effect rather than tax yield. This paper compares the two tax instruments with respect to equal corrective-effect in a Dixit-Stiglitz setting with love of variety, entry, exit, and redistribution of tax revenues. We find that unit taxes lead to more firms in the industry, less output per firm, less tax revenue, but higher welfare compared to ad valorem taxes.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: DIW Discussion Papers ; No. 534

Classification and Topics

• Classification: Wirtschaft ; Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies ; Oligopoly and Other Imperfect Markets
• Subject: Externalities ; Monopolistic competition ; Taxes ; Specific Taxes ; Welfare

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Dröge, Susanne ; Schröder, Philipp J. H.
• Event: Veröffentlichung
• (who): Deutsches Institut für Wirtschaftsforschung (DIW)
• (where): Berlin
• (when): 2005

Further information

• Handle: http://hdl.handle.net/10419/18385
• Last update: 10.03.2025, 11:45 AM CET