Comparing ad valorem and specific taxes with corporate social responsibility

Abstract

This paper examines the welfare ranking of indirect tax systems with corporate social responsibility (CSR) in a duopoly. Findings show that the two firms' cost and CSR asymmetries both play important roles. If the cost‐efficient firm has a higher CSR level, the standard result in traditional tax theory is sustainable. Namely, ad valorem tax (specific subsidy) policies are considered superior to specific tax (ad valorem subsidy) policies. However, if the cost‐inefficient firm has a significantly higher CSR level, the standard result is reversed. This result remains robust in an oligopoly model or under a tax revenue constraint.