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The Comparison of ad Valorem and Specific Taxation under Uncertainty

Authors


  • Christos Kotsogiannis, Department of Economics, University of Exeter Business School, Streatham Court, Rennes Drive, Exeter EX4 4PU, England, UK, and CESIfo, Munich, Germany (c.kotsogiannis@exeter.ac.uk). Konstantinos Serfes, Department of Economics, LeBow College of Business, Drexel University, Philadelphia, PA 19104, USA (ks346@drexel.edu).

  • We thank a coeditor and two anonymous referees for many insightful comments. We also thank Michael Keen and Markus Reisinger and seminar participants at Athens University of Economics and Business and conference participants at the 2011 American Economic Association meeting in Denver for comments and advice. Any remaining errors are, of course, ours. This research was initiated while Serfes was visiting the University of Exeter Business School and completed while Kotsogiannis was visiting LeBow College of Business, Drexel University. The hospitality of both institutions is gratefully acknowledged. Financial support from the Catalan Government Science Network (SGR2005-177 and XREPP) and the Spanish Ministry of Education and Science Research Project (SEJ2006-4444) is gratefully acknowledged (Kotsogiannis).

Abstract

The comparison between specific (per unit) and ad valorem (percentage) taxation has been one of the oldest issues in public finance. In Cournot markets, with deterministic costs structures, conventional wisdom has it that ad valorem taxation tax-revenue dominates specific. It is shown that in the presence of uncertainty, regarding firms’ cost structures, and under reasonable conditions, the conventional wisdom might not hold. The implication of this, from a policy perspective, is that the precise evaluation of the two types of taxation requires an explicit consideration of cost uncertainty.

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