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Ad Valorem Taxation on Intermediate Goods in Oligopoly
Authors:Giuseppe Colangelo  Umberto Galmarini
Institution:(1) Università dell'Insubria, Faculty of Law, Como, and Cranec, Università Cattolica del Sacro Cuore, Milano, Italy;(2) Istituto di Economia e Finanza, Università Cattolica del Sacro Cuore, Largo Gemelli 1, 20123 Milano, Italy
Abstract:Thepaper compares the efficiency of value added taxation (VAT),in which intermediate goods are not taxed, with that of cascadetaxation, in which they are, when levied on imperfectly-competitivevertically-related industries. One type of commodity taxationis not always superior to the other in terms of welfare. Indeed,when intermediate-goods have close substitutes, VAT is the optimalcommodity tax system. But when input substitutability is weakor absent and input producers have market power, they shouldbe taxed. In fact, in the absence of lump sum taxes and withno input substitutability, it is optimal to tax, not to subsidize,the most monopolistic industry. True cascading, in which bothupstream and downstream industries are taxed, is thus betterthan VAT when, besides no input substitutability and both intermediateand final good producers with market power, the needed revenuerequirement is not small. We therefore submit a rationale forthe coexistence of VAT and cascade taxation.
Keywords:Optimal commodity taxation  Value added taxation  Cascade taxation
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