TY - JOUR
T1 - The welfare comparison of corrective ad valorem and unit taxes under monopolistic competition
AU - Dröge, Susanne
AU - Schröder, Philipp J.H.
PY - 2009
Y1 - 2009
N2 - The ad valorem versus unit tax debate has traditionally emphasized tax yield. On 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. However, in a number of policy fields such as environmental, health, and trade economics, policy makers use taxes to reduce the production/consumption volume in an industry, i.e., to correct an externality rather than to improve 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.
AB - The ad valorem versus unit tax debate has traditionally emphasized tax yield. On 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. However, in a number of policy fields such as environmental, health, and trade economics, policy makers use taxes to reduce the production/consumption volume in an industry, i.e., to correct an externality rather than to improve 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.
KW - Regulation
KW - Environment
KW - Regulation
U2 - 10.1007/s10797-007-9061-9
DO - 10.1007/s10797-007-9061-9
M3 - Journal article
SN - 0927-5940
VL - 16
SP - 164
EP - 175
JO - International Tax and Public Finance
JF - International Tax and Public Finance
IS - 2
ER -