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Indirect taxation of monopolists: A tax on price

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  • Vetter, Henrik

Abstract

A digressive tax like a variable rate sales tax or a tax on price gives firms an incentive for expanding output. Thus, unlike unit and ad valorem taxes which amplify the harm from monopoly, a digressive tax lessens the harm. We analyse a tax on price with respect to efficiency and practical policy appeal. Using a tax on price in combination with ad valorem taxation it is possible to achieve the Ramsey solution. That is, the combination of the two taxes secures tax revenue in the least distortive way. We also show how tax reforms based only on observation of price and quantity can make use of a tax on price in order to improve welfare. That is, it is practical to use a tax on price.

Suggested Citation

  • Vetter, Henrik, 2012. "Indirect taxation of monopolists: A tax on price," Economics Discussion Papers 2012-60, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwedp:201260
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    References listed on IDEAS

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    3. Gareth Myles, 1996. "Imperfect competition and the optimal combination of ad valorem and specific taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 3(1), pages 29-44, January.
    4. 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.
    5. Glaister, Stephen, 1987. "Regulation through Output Related Profits Tax," Journal of Industrial Economics, Wiley Blackwell, vol. 35(3), pages 281-296, March.
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    More about this item

    Keywords

    tax on price; ad valorem tax; tax incidence;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship

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