Unit vs. Ad Valorem Taxes under Revenue Maximization

24 Pages Posted: 24 May 2014 Last revised: 27 Nov 2014

See all articles by Germain Gaudin

Germain Gaudin

University of Freiburg - College of Economics and Behavioral Sciences

Alexander White

Tsinghua University - School of Economics & Management

Date Written: November 26, 2014

Abstract

We compare unit and ad valorem commodity tax regimes under the "Leviathan hypothesis" that the government seeks to maximize tax revenue. We show that the ad valorem tax regime welfare-dominates the unit tax regime if and only if the economy exhibits "ad valorem under-shifting" in response to a change in the tax level. Under Cournot competition, the level of shifting depends entirely on whether demand is not too convex so that elasticity of demand is increasing in price. In a more general framework, with differentiated goods, the threshold level of convexity such that unit taxes welfare dominate ad valorem ones can be lower.

Keywords: Commodity Taxation, Unit Tax, Ad Valorem Tax, Tax Shifting, Pass-Through, Revenue-Maximizing Government, Imperfect Competition

JEL Classification: D40, H20, H21, H71

Suggested Citation

Gaudin, Germain and White, Alexander, Unit vs. Ad Valorem Taxes under Revenue Maximization (November 26, 2014). Available at SSRN: https://ssrn.com/abstract=2440708 or http://dx.doi.org/10.2139/ssrn.2440708

Germain Gaudin

University of Freiburg - College of Economics and Behavioral Sciences

Freiburg, D-79085
Germany

Alexander White (Contact Author)

Tsinghua University - School of Economics & Management ( email )

Mailbox A-44
Weilun Building
Beijing, 100084
China

HOME PAGE: http://alex-white.net

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