(a) the ad valorem tax is higher than the specific tax in terms of consumer welfare, with the exception of the elasticity of substitution 1 1 + σ = 0; where γ a is the Lagrange multiplier under tax ad valorem, ρ ≡ − v y y y y y is the curvature of the marginal utility to the set y, v θ y is the cross-derivation of v and ε y v θ ≡ v θ y v θ y is the elasticity of the demand of v θ. For example, we guarantee that your city will impose an annual tax of 1% on the value of all cars. The tax rate remains constant, everyone pays the same 1%, but the amount due fluctuates depending on the value of the cars concerned. Someone who has an $11,000 vehicle owes less tax than someone who has a $50,000 car. For example, suppose a municipality charges a 5% sales tax on all products sold. If you buy a dresser for $100, you will pay a sales tax of $5 on that purchase. This would be an ad valorem tax because it is a fixed rate, but the amount you pay depends on the value of the product you bought. The unresolved question in our paper is whether an ad valorem tax is higher than a specific tax for many taxable goods. In this situation, the government faces an additional problem, namely the choice between a uniform or differentiated tax on goods from the point of view of efficiency. If the government applies a uniform tax to all goods, we suspect that our main conclusion is correct because an ad valorem tax always acts as a flat tax, while a specific tax distorts the consumer`s choice between the quality and quantity of taxable goods. However, when the government applies differentiated indirect taxes, an ad valorem tax distorts the consumer`s choice over the model of a taxable product, meaning that a full ad valorem tax may not be optimal.
[14] is an important study that resolves the issue, as the article shows that a flat tax on exogenous income is desirable. If the results also apply in the situation where consumers can choose quantity and quality, a total value tax would also be desirable among many taxable goods if the income is reported as is the case in our environment. To clarify whether the desirability of an ad valorem tax depends crucially on the assumption of exogenous income, we will expand the model by allowing consumers to choose the level of labour supply. This topic remains for future research. Equation (9) and equation (10) show that ∂ y ∂ t s (t s, I s) is negative, while the sign of ∂ θ ∂ t s (t s, I s) is ambiguous. In other words, the application of a particular tax results in a municipality introducing a specific tax of $1 per unit on all grocery purchases, for example. While this would have relatively little impact on high-quality purchases like a $20 steak, it would double the price of a bag of chips or a candy bar. Grocers could expect their operations to continue uninterrupted, but convenience stores would practically close. the CES utility function is given by v ( y , θ ) = ( α y − σ + β θ − σ ) − 1 σ where α > 0 , β > 0 , α + β = 1 and σ ≥ 1. As mentioned in Section 3, the assumptions about the price function and the utility function ensure the second-order conditions for the maximization problem. In addition, the elasticity of substitution 1 1 + σ is between 0 and 1 2.
σ is a component of the elasticity of substitution and can be interpreted as a degree of complementarity. In the parameter, we can specify the following. In this model, there is a single representative consumer with an initial wealth I. He consumes only one type of good and can choose both quantity and quality. Be y ∈ R++ a quantity and θ ∈ R++ a quality. The price of unit consumption is determined by quality via a strictly increasing and differentiable function p ( θ ). The consumer reaps the benefits of quantity and quality, which is defined by v ( y , θ ). To ensure an inner solution with respect to each input, it is assumed that v is doubly differentiable, strictly ascending and strictly concave in ( y , θ ). An ad valorem tax represents a more comparable burden for both companies.
However, ad valorem taxes have the disadvantage that taxes are levied regardless of the cost to the taxpayer. where v k is the derivation of v with respect to k = y, θ , the index a is the choice of an ad valorem tax and s is the choice of a particular tax. For initial assets I, the tax rate t and the tax regime i = s , a , their quantity selection function, their quality selection function and their indirect utility function are defined as follows: y ( t i , I ) , θ ( t i , I ) and V ( t i , I ). In the context of the ad valorem tax, the problem of the individual is formulated as follows. There are many types of taxes. An ad valorem tax is any tax levied on the basis of the value of an underlying property or transaction. Property taxes and sales taxes are common examples. Ad valorem taxes, which are based on ownership of a real asset, can be considered sales taxes, as opposed to transaction taxes. While ad valorem taxes are set and levied annually, transaction taxes are only collected at the time of a transaction. The Latin expression ad valorem means “by value”. All ad valorem taxes are levied on the basis of the determined value of the taxable element.
In the most common application of ad valorem taxes, which are municipal property taxes, landowners` property is regularly assessed by a public tax assessor to determine its current value. The estimated value of the property is used to calculate a tax levied annually on the owner by a municipality or other government agency. Whereas when the consumer chooses a particular tax, the restriction of households in the United States rarely has to apply ad valorem taxes. If this is the case, they are most often applied as tariffs. (In practice, customs duties are a form of excise duty. Importers pay customs duties as a percentage of the price of all goods they bring into the country. You can then pass on the cost of these taxes to customers as needed.) Here we present a special case in which the second-order condition is met, and the following example is also used in the next section. We assume that the price function is linear p (θ) = a θ, where a > 0 and the preference of individuals is the constant elasticity of the surrogate benefit function (CES), and most ad valorem tax laws set the upper percentage or limit of the amount of tax that a county, state or other relevant administrative unit can levy, and take inflation into account. Population increase, etc.