The Effects of Ad Valorem and Specific Taxes on Prices: Comment
In teaching that old game, valorem versus specific it is a temptation to introduce the new rules recently proposed by Paul Taubman in this Journal.' The play seems faster because Taubman uses the assumption of constant elasticity of demand to derive results simultaneously for firms which follow percentage markup pricing and those which seek profit maximization. Taubman also announces that he has checkmated an old pro. To provide this excitement, unfortunately, Taubman has to invoke some unorthodox assumptions and ignore a conventional criterion. The focus of Taubman's attack is on statements from John F. Due's Sales Taxation volume, although similar conclusions are found elsewhere.2 The central question is whether the burden of placed on commodities at the manufacturer's level will be pyramided by retailers using price markup methods. Pyramiding, simply speaking, is an increase in the price of a taxed commodity in excess of the amount of the tax collected by the government; it results from the application by merchants of constant percentage markups to purchase prices which include the tax, and thus indirectly to the tax itself.3 concludes, in general, that pyramiding will occur.4 Taubman claims that Due is incorrect for ad valorem taxes and correct for specific only if retailers cannot substitute something for the manufacturer's product. For specific taxes, Taubman's exception hinges upon the retailer's ability to reduce his other costs to compensate for the rise in the price of the taxed input. Since this is a partial equilibrium game, we are not allowed to chase resources released by the taxed manufacturer around to augment the supply and lower the price of the other inputs of the retailer. So we have to make do with constant
- DOI
- 10.2307/1879680
- Volume
- 81 (1)
- Pages
- 158
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