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Commodity taxes and rent extraction

Author

Listed:
  • Kuang-Cheng Andy Wang

    (Chang Gung University
    Ming Chi University of Technology)

  • Ping-Yao Chou

    (Chang Gung University)

  • Wen-Jung Liang

    (National Dong Hwa University)

Abstract

It is difficult for WTO member countries to raise tariffs unilaterally under current WTO regulations. Therefore, given a constant tariff rate, we examine the impacts of two commodity taxes, an ad valorem tax and a specific tax, on the rent-extracting effect regarding the foreign firm and on the protection effect regarding the domestic firm. We obtain two main results. First, the government can extract more profits from the foreign firm by imposing an ad valorem (a specific) tax, when the tariff rate is low (high); and second, when the tariff rate is low, an ad valorem tax is welfare superior to a specific tax while the reverse may occur when the tariff rate is high. This demonstrates that the magnitude of the tariff rate is crucial when the government chooses the commodity tax scheme.

Suggested Citation

  • Kuang-Cheng Andy Wang & Ping-Yao Chou & Wen-Jung Liang, 2022. "Commodity taxes and rent extraction," Journal of Economics, Springer, vol. 135(3), pages 285-297, April.
    • Handle: RePEc:kap:jeczfn:v:135:y:2022:i:3:d:10.1007_s00712-021-00758-4
    DOI: 10.1007/s00712-021-00758-4
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    References listed on IDEAS

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    1. Delipalla, Sofia & Keen, Michael, 1992. "The comparison between ad valorem and specific taxation under imperfect competition," Journal of Public Economics, Elsevier, vol. 49(3), pages 351-367, December.
    2. Charles Blackorby & Sushama Murty, 2013. "Unit Versus Ad Valorem Taxes: The Private Ownership of Monopoly in General Equilibrium," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 15(4), pages 547-579, August.
    3. Anderson, Simon P. & de Palma, Andre & Kreider, Brent, 2001. "The efficiency of indirect taxes under imperfect competition," Journal of Public Economics, Elsevier, vol. 81(2), pages 231-251, August.
    4. Brander, James A. & Spencer, Barbara J., 1984. "Trade warfare: Tariffs and cartels," Journal of International Economics, Elsevier, vol. 16(3-4), pages 227-242, May.
    5. Lisa Grazzini, 2006. "A Note on Ad Valorem and Per Unit Taxation in an Oligopoly Model," Journal of Economics, Springer, vol. 89(1), pages 59-74, October.
    6. Hamilton, Stephen F., 1999. "The comparative efficiency of ad valorem and specific taxes under monopoly and monopsony," Economics Letters, Elsevier, vol. 63(2), pages 235-238, May.
    7. Kuang-Cheng Andy Wang & Ping-Yao Chou & Wen-Jung Liang, 2018. "Specific versus ad valorem taxes in the presence of cost and quality differences," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(5), pages 1197-1214, October.
    8. Helmuts Azacis & David R Collie, 2018. "Taxation and the sustainability of collusion: ad valorem versus specific taxes," Journal of Economics, Springer, vol. 125(2), pages 173-188, October.
    9. Susanne Dröge & Philipp Schröder, 2009. "The welfare comparison of corrective ad valorem and unit taxes under monopolistic competition," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(2), pages 164-175, April.
    10. Wen-Jung Liang & Kuang Cheng Andy Wang & Ping-Yao Chou, 2018. "The superiority among specific, demand ad valorem and cost ad valorem subsidy regimes," Journal of Economics, Springer, vol. 123(1), pages 1-21, January.
    11. Jukka Pirttilä, 2002. "Specific versus ad valorem Taxation and Externalities," Journal of Economics, Springer, vol. 76(2), pages 177-187, June.
    12. D. B. Suits & R. A. Musgrave, 1953. "Ad Valorem and Unit Taxes Compared," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 67(4), pages 598-604.
    13. Skeath, Susan E. & Trandel, Gregory A., 1994. "A Pareto comparison of ad valorem and unit taxes in noncompetitive environments," Journal of Public Economics, Elsevier, vol. 53(1), pages 53-71, January.
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    Cited by:

    1. Chia-Jen Chang & Chih-Ta Yen & Yu-Zhen Lin, 2024. "Commodity taxation principle, heterogeneous goods, and endogenous choice between price and quantity contracts," Journal of Economics, Springer, vol. 143(2), pages 111-140, October.

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    More about this item

    Keywords

    Specific tax; Ad valorem tax; Rent-extracting effect; Protection effect;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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