Commodity taxes and rent extraction

Kuang-Cheng Andy Wang, Ping-Yao Chou and Wen-Jung Liang ()
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Kuang-Cheng Andy Wang: Chang Gung University
Ping-Yao Chou: Chang Gung University
Wen-Jung Liang: National Dong Hwa University

Journal of Economics, 2022, vol. 135, issue 3, No 3, 285-297

Abstract: Abstract It is difficult for WTO member countries to raise tariffs unilaterally under current WTO regulations. Therefore, given a constant tariff rate, we examine the impacts of two commodity taxes, an ad valorem tax and a specific tax, on the rent-extracting effect regarding the foreign firm and on the protection effect regarding the domestic firm. We obtain two main results. First, the government can extract more profits from the foreign firm by imposing an ad valorem (a specific) tax, when the tariff rate is low (high); and second, when the tariff rate is low, an ad valorem tax is welfare superior to a specific tax while the reverse may occur when the tariff rate is high. This demonstrates that the magnitude of the tariff rate is crucial when the government chooses the commodity tax scheme.

Keywords: Specific tax; Ad valorem tax; Rent-extracting effect; Protection effect (search for similar items in EconPapers)
JEL-codes: F12 H21 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:kap:jeczfn:v:135:y:2022:i:3:d:10.1007_s00712-021-00758-4

DOI: 10.1007/s00712-021-00758-4

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