Specific vs. ad valorem taxation and social welfare in mixed duopoly with foreign ownership

Abstract

In this paper, we set up a mixed duopoly competition model between state-owned and private firms in order to compare specific and ad valorem taxes. Assuming that the total output under specific and ad valorem taxation remains unchanged, we find that if the public firm is completely privatised, the output of the private firm under the two tax schemes will be the same. If the public firm is not completely privatised, the output of the the private firm under specific taxation will be greater than that under ad valorem taxation. If the private firm is a pure local one, the social benefits will be the same under the two tax schemes. However, if the private firm is a joint venture that involves domestic and foreign entities, social welfare under ad valorem taxation will be greater than that under specific taxation.

Keywords:

• Specific taxation
• ad valorem taxation
• mixed duopoly
• imperfect competition
• privatisation
• foreign ownership

Acknowledgements

The authors thank the editor and the referees of Economic and Political Studies for their constructive suggestions. Leonard F. S. Wang would like to thank the Tiger Fund for sponsoring the research.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 See Hamilton (1999), Delipalla and Keen (1992), and Skeath and Trandel (1994).

2 See Yang, Zhang, and Wang (2022), Denicolo and Matteuzzi (2000), Anderson, Palma, and Kreider (2001a; 2001b), Wang and Zhao (2009), Lapan and Hennessy (2011), Häckner and Herzing (2016), Vetter (2017), and Wang, Chou, and Liang (2018).

3 See Tian and Xia (2017), which investigates the influence of China’s WTO membership on the reform of SOEs.

4 See Wang and Chen (2011), Cato and Matsumura (2012), Lin and Matsumura (2012), Wang and Tomaru (2015), and Wu, Chang, and Chen (2016).

5 See Bárcena-Ruiz (2012) and Wang and Han (2015).

6 For example, see Etro (2006).

7 Suits and Musgrave (1953), Yang (1993), Denicolo and Matteuzzi (2000), Anderson, de Palma, and Kreider (2001a; 2001b), Collie (2006), Lapan and Hennessy (2011), Vetter (2017), Azacis and Collie (2018), Wang, Chou, and Liang (2018) also assume that the total output under the two tax schemes equals to each other.

8 Proof: see Appendix A.

9 Proof: see Appendix B.

10 Proof: see Appendix C.

11 Proof: see Appendix D.

12 In the study presented by Lin and Matsumura (2012), foreign investors are also allowed to purchase the share of public enterprises. Therefore, in future studies, we can consider this scenario and explore the advantages of indirect taxation in a mixed oligopoly market with foreign ownership.

Additional information

Funding

This research is supported by the Social Science Foundation of Shaanxi Province of China [Grant No. 2019D037] and the Fundamental Research Funds for the Central Universities of China [Grant No. 310823153013].