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- Title
THE EFFECTS OF AD VALOREM AND SPECIFIC TAXES ON PRICES.
- Authors
Taubman, Paul
- Abstract
This article explores the impact of two proposals to alter the U.S. federal excise tax structure on prices. When percentage markup pricing is used pyramiding of excise taxes only occurs for specific taxes. For profit-maximizing prices, substantially different results are obtained if constant elasticity rather than constant slope demand curves are assumed. Prices will go down if excises are reduced, and if all prices are set by markup methods, cuts in specific taxes will reduce prices more than equals cuts in ad valorem taxes. For specific taxes, changes in manufacturers' taxes will have more effect than changes on the retail level, unless retailers previously were able to substitute easily for the manufacturer's product. Since pyramiding occurs if specific taxes are imposed on the manufacturing level in a markup world without too much substitution, prices would rise if specific taxes were changed from the retail to the manufacturing level. For ad valorem taxes pyramiding does not occur, but if U.S. Congress in maintaining revenues were to impose a higher tax rate on the manufacturing level, retail prices may rise. Whether or not prices rise depends on the increase in the tax rate, and the distribution of retailers cost base between the manufacturer's product and other costs.
- Subjects
UNITED States; EXCISE tax; PRICES; AD valorem tax; DEMAND function
- Publication
Quarterly Journal of Economics, 1965, Vol 79, Issue 4, p649
- ISSN
0033-5533
- Publication type
Article
- DOI
10.2307/1880657