Failure of ad valorem and specific tax equivalence under uncertainty

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Applying a framework of perfect competition under uncertainty, we contribute to the discussion of whether or not ad valorem taxes and specific taxes are equivalent. While this equivalence holds without price uncertainty, we show that ad valorem taxes and specific taxes are "almost never" equivalent in the presence of uncertainty if we demand equivalence to hold pathwise. Since we obtain this result under perfect competition, our analysis also provides a further rationale for why the equivalence must fail under imperfect competition. Terms of use: Documents in EconStor mayJEL-Code: H200, H210, H610.

Certain Effects of Uncertain Taxes

“…The profits of the representative firm    , arising from the presence of some fixed factor(s), are therefore given by 9 Specific and ad valorem taxes have equivalent effects in competitive markets in the absence of uncertainty in the tax-exclusive price of the taxed input, as noted by Suits and Musgrave (1953). The effects of (non-stochastic) specific and ad valorem taxes will, however, differ in competitive markets with price uncertainty (Goerke, 2011;Kotsogiannis and Serfes, 2014;Goerke, Herzberg, and Upmann, 2014) and in imperfectly competitive markets (Delipalla and Keen, 1992;Weyl and Fabinger, 2013). When, for either of these reasons, equivalence fails, the distinction between specific and ad valorem taxes will be material for the impact of tax uncertainty; this paper's analysis, however, abstracts from these issues.…”

The Generalized Alchian–allen Theorem: A Slutsky Equation for Relative Demand

“…Subsequently, this insight has been refined in various ways. (A list of references for these refinements is provided, for example, by Goerke, Herzberg, and Upmann , fn. 1.…”

Indirect Taxation in Vertical Oligopoly

“…Goerke et al . [] also consider uncertainty and demonstrate in a dynamic framework that the two taxes are no longer equivalent even with perfect competition. This non‐equivalence under perfect competition was also shown by Liu [] and Delipalla and Keen [] in a deterministic framework but allowing for endogenous quality.…”

“…Asker [2008] compares 10 Keeping the number of firms constant, Kotsogiannis and Serfes [2012] show that with cost uncertainty the result can be reversed, that is, the specific tax can then be more efficient than the ad valorem tax. Goerke et al [2012] also consider uncertainty and demonstrate in a dynamic framework that the two taxes are no longer equivalent even with perfect competition. This non-equivalence under perfect competition was also shown by Liu [2003] and Delipalla and Keen [2006] in a deterministic framework but allowing for endogenous quality.…”