Abstract.
This paper shows that the welfare dominance of ad valorem over unit taxes under imperfect competition, extends to a Dixit-Stiglitz-type monopolistic competition framework with differentiated products, increasing returns to scale, entry/exit and love of variety. This result is obtained, even though ad valorem taxation leads to increased firm exit compared to the equal-yield unit tax. Yet the smaller tax over-shift, occurring under ad valorem taxation, more than compensates this disadvantage.
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Acknowledgement Comments and suggestions from Anthony Atkinson, Jürgen Bitzer, Rainald Borck, David Collie, Jan G. Jørgensen and two anonymous referees are gratefully acknowledged.
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Schröder, P. The Comparison between Ad Valorem and Unit Taxes under Monopolistic Competition. JEcon 83, 281–292 (2004). https://doi.org/10.1007/s00712-004-0096-y
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DOI: https://doi.org/10.1007/s00712-004-0096-y