# A welfare comparison of ad valorem and unit tax regimes

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## 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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