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International Tax and Public Finance

, Volume 23, Issue 1, pp 140–157 | Cite as

A welfare comparison of ad valorem and unit tax regimes

  • Magnus Hoffmann
  • Marco Runkel
Article

Abstract

This paper strives to merge two strands of the literature. The first group of papers compares ad valorem and unit taxes in a tax competition framework in terms of welfare. The second group of papers regards capital income taxes as a conjunction of taxes on pure profits and taxes on capital income. We find that, given decreasing returns to scale, there always exists a level of the share of deductible capital costs strictly smaller than one, such that for all values larger than this threshold, an ad valorem tax regime unambiguously Pareto-dominates a unit tax regime.

Keywords

Tax competition Unit taxes Ad valorem taxes 

JEL Classification

H20 H21 H77 

Notes

Acknowledgments

We would like to thank Johannes Becker, Thiess Büttner, Laszlo Goerke, Marko Köthenbürger, Christos Kotsogiannis, Pascalis Raimondos-Møller, Johannes Rincke, Robert Schwager and Matthias Wrede for their helpful comments. We also thank two anonymous referees and the editor of the journal for their detailed and very helpful comments.

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Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  1. 1.Institute of EconomicsUniversity of St. GallenSt. GallenSwitzerland
  2. 2.School of Economics and ManagementTechnische Universität BerlinBerlinGermany

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