SPECIFIC VERSUS AD VALOREM TAXATION WITH TAX EVASION IN IMPERFECTLY COMPETITIVE MARKETS

This paper calls into question the equivalence between specificand ad valorem taxation in the presence of tax evasion under imperfect competition. Once there is evasion, evading specific taxes has to take place via concealing quantities sold, whereas evading ad valorem taxes can take place via concealing selling prices as well as quantities sold. With this difference, we show that in imperfectly competitive markets (i) if per-unit taxes are the same, output will be larger under ad valorem taxation, and (ii) specifictaxation may be superior to ad valorem taxation if it causes firms to channel fewer resources into tax evasion.