Failure of Ad Valorem and Specific Tax Equivalence Under Uncertainty
22 Pages Posted: 3 Oct 2012
Date Written: September 28, 2012
Applying a framework of perfect competition under uncertainty, we contribute to the discussion of whether or not ad valorem taxes and specific taxes are equivalent. While this equivalence holds without price uncertainty, we show that ad valorem taxes and specific taxes are “almost never” equivalent in the presence of uncertainty if we demand equivalence to hold pathwise. Since we obtain this result under perfect competition, our analysis also provides a further rationale for why the equivalence must fail under imperfect competition.
Keywords: ad valorem taxes and specific taxes, revenue neutrality, price uncertainty, concept of pathwise neutrality
JEL Classification: H200, H210, H610
Suggested Citation: Suggested Citation