The Comparison between Ad Valorem and Specific Taxation under Two-Part Tariffs
30 Pages Posted: 20 Feb 2010
Date Written: June 22, 2009
In this paper, we compare ad valorem and specific taxation under heterogeneous demand when a monopolist offers a menu of two-part tariffs. An increase in either tax rate leads to a higher usage fee for all consumers, whereas the fixed fee under reasonable assumptions will fall. If the government changes the mix of taxes in such a way that the firm’s behavior is unchanged, a system of wholly ad valorem taxation generates higher tax revenue than does a system of wholly specific taxes. Tax reform designed to leave tax revenue constant leads to a lower per usage fee and a higher fixed fee for all consumers. It also increases market coverage, profits, tax revenue, and the consumer surplus.
Keywords: Two-part tariffs, Indirect taxation
JEL Classification: D42, D82, H21
Suggested Citation: Suggested Citation