Unit tax versus ad valorem tax: A tax competition model with cross-border shopping

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. Terms of use: Documents in EconStor may AbstractWithin the framework of spatial tax competition with cross-border shopping, we examine the choice of tax method between ad valorem tax and unit (specific) tax. The paper shows that governments endogenously choose ad valorem tax not because of a classic welfare reason, but because it is a good strategy in competing for mobile customers. Another key finding is that while governments are committed to the ad valorem tax method, the choice is not efficient; Tax-cutting competition becomes more serious when countries adopt ad valorem tax, and competition in ad valorem tax yields smaller payoffs than competition in unit tax.

The Welfare Comparison of Ad-Valorem Tax and Specific Tax with Both Quality and Quantity Choice of a Consumer

“…The author shows that an ad-valorem tax is superior to a specific tax. Some works that approach the comparison under Theoretical Economics Letters imperfect competition support the conclusion (see [2]- [7]). …”

Efficiency comparison of unit and ad valorem taxation in mixed duopoly

“…2 The authors provide a simple proof that ad valorem taxes are welfaresuperior to unit taxes in the short run when production costs are identical across firms. 3 The proof covers differentiated products and a wide range of market product. Cost asymmetries strengthen the case for ad valorem taxation under Cournot competition, but unit taxation may be welfare-superior under Bertrand competition with product differentiation.…”

“…Additionally, by employing a standard partial equilibrium welfare analysis, we show that the Marshallian social surpluses resulting from the two tax structures are identical when the government can implement unrestricted transfers. Aiura and Ogawa (2013) examine the choice of tax method between ad valorem tax and unit tax within the framework of spatial tax competition with cross-border shopping, and they show that the ad valorem tax method is a good strategy to compete for mobile consumers and consider that this choice leads to inferior outcome. The welfare dominance of ad valorem taxes over unit taxes in a single-market Cournot oligopoly is well-known.…”

Cross-Border or Online - Tax Competition with Mobile Consumers Under Destination and Origin Principle

“…In the non-cooperative Nash equilibrium, the tax rate of the smaller country is lower than the tax rate in the larger country, with the tax revenue being higher in the larger country. Subsequent studies have also focused on di¤erences between countries, in population size (Trandel 1994;Wang 1999) or geographical size (Ohsawa 1999;Nielsen 2001Nielsen , 2002 1 . Aiura & Ogawa (2013) examine the choice between ad valorem tax and unit tax.…”

“…Subsequent studies have also focused on di¤erences between countries, in population size (Trandel 1994;Wang 1999) or geographical size (Ohsawa 1999;Nielsen 2001Nielsen , 2002 1 . Aiura & Ogawa (2013) examine the choice between ad valorem tax and unit tax. They show that governments endogenously choose the ad valorem tax method to compete for mobile consumers, which leads to stronger tax competition with lower tax rates and smaller tax revenue.…”