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Title:Corrective Ad Valorem and Unit Taxes: A Welfare Comparison PDF Logo
Authors:Dröge, Susanne
Schröder, Philipp J. H.
Issue Date:2005
Series/Report no.:DIW-Diskussionspapiere 534
Abstract: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.
Subjects:Externalities
Monopolistic competition
Taxes
Specific Taxes
Welfare
JEL:H23
L13
Document Type:Working Paper
Appears in Collections:Publikationen von Forscherinnen und Forschern des DIW
DIW-Diskussionspapiere

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