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The Comparison between Ad Valorem and Unit Taxes under Monopolistic Competition

Philipp Schröder

Journal of Economics, 2004, vol. 83, issue 3, 281-292

Abstract: This paper shows that the welfare dominance of ad valorem over unit taxes under imperfect competition, extends to a Dixit-Stiglitz-type monopolistic competition framework with differentiated products, increasing returns to scale, entry/exit and love of variety. This result is obtained, even though ad valorem taxation leads to increased firm exit compared to the equal-yield unit tax. Yet the smaller tax over-shift, occurring under ad valorem taxation, more than compensates this disadvantage. Copyright Springer-Verlag Wien 2004

Keywords: unit tax; specific tax; ad valorem tax; welfare; D43; H21; H22; L13 (search for similar items in EconPapers)
Date: 2004
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