<i>The Balance between Specific and</i> Ad Valorem <i>Taxation</i>

TLDR

The balance between specific and ad valorem taxation is a longstanding issue in indirect tax design, especially for heavily excised goods, and recent research offers new perspectives. The paper offers a non‑technical overview of key considerations in selecting the balance between specific and ad valorem taxes, extending theoretical and empirical lessons. It reviews and extends theoretical and empirical lessons on the trade‑offs between specific and ad valorem taxes. The socially optimal balance is highly sensitive to market characteristics. JEL codes: h21, H22.

Abstract

Abstract A recurring issue in indirect tax design — most obviously, but not only, for goods traditionally subject to heavy excises — is the appropriate balance between specific and ad valorem taxation. Recent work has developed new perspectives on the issue, which is also one of the oldest in the formal study of public finance. This paper provides a broadly non‐technical account of the central considerations that arise in choosing the balance between specific and ad valorem taxation, reviewing and somewhat extending the lessons of theory and experience. There emerge clear presumptions as to the relative effects of the two kinds of tax on such attributes as price, profits, product quality and variety. But the socially optimal balance between them is likely to be quite sensitive to the characteristics of the market at issue. JEL classification : h21, H22.