International Tax and Public Finance

, Volume 8, Issue 1, pp 53–73 | Cite as

Ad Valorem Taxation on Intermediate Goods in Oligopoly

  • Giuseppe Colangelo
  • Umberto Galmarini


Thepaper compares the efficiency of value added taxation (VAT),in which intermediate goods are not taxed, with that of cascadetaxation, in which they are, when levied on imperfectly-competitivevertically-related industries. One type of commodity taxationis not always superior to the other in terms of welfare. Indeed,when intermediate-goods have close substitutes, VAT is the optimalcommodity tax system. But when input substitutability is weakor absent and input producers have market power, they shouldbe taxed. In fact, in the absence of lump sum taxes and withno input substitutability, it is optimal to tax, not to subsidize,the most monopolistic industry. True cascading, in which bothupstream and downstream industries are taxed, is thus betterthan VAT when, besides no input substitutability and both intermediateand final good producers with market power, the needed revenuerequirement is not small. We therefore submit a rationale forthe coexistence of VAT and cascade taxation.

Optimal commodity taxation Value added taxation Cascade taxation 


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Copyright information

© Kluwer Academic Publishers 2001

Authors and Affiliations

  • Giuseppe Colangelo
    • 1
  • Umberto Galmarini
    • 2
  1. 1.Università dell'Insubria, Faculty of Law, Como, and CranecUniversità Cattolica del Sacro CuoreMilanoItaly
  2. 2.Istituto di Economia e FinanzaUniversità Cattolica del Sacro CuoreMilanoItaly

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