The Comparison between Ad Valorem and Specific Taxation under Two-Part Tariffs

30 Pages Posted: 20 Feb 2010

See all articles by Sissel Jensen

Sissel Jensen

Norwegian School of Economics (NHH) - Department of Economics

Guttorm Schjelderup

Norwegian School of Economics (NHH) - Department of Business and Management Science

Date Written: June 22, 2009

Abstract

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

Jensen, Sissel and Schjelderup, Guttorm, The Comparison between Ad Valorem and Specific Taxation under Two-Part Tariffs (June 22, 2009). NHH Dept. of Economics Discussion Paper No. 5/2009, Available at SSRN: https://ssrn.com/abstract=1554826 or http://dx.doi.org/10.2139/ssrn.1554826

Sissel Jensen (Contact Author)

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway

Guttorm Schjelderup

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

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