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Show $ B s H 2 1 ! \ ^ Ql units Figure F- 7. Perfect competition equal initial burden. Figure F- 8. Monopoly- equal final output and price. tax is HRMPj, while the unit tax yields only KLMPj. From a revenue generating viewpoint, the ad valorem tax appears the more efficient. All of the above comments in some way depend upon the underlying shapes of the demand and cost ( or supply) schedules. TAX BASE Several major problems arise with respect to the tax base. By base, in this instance, we mean the group of commodities to which the tax applies. Hatch ( 1964) indicates that many problems incurred in current excise tax structures could be corrected if administrators would see a broader base. That is, if a tax is to be imposed on recreational equipment as luxury items it would be better to levy the tax on all recreational equipment rather than a more narrow base, say boats only. Shoup ( 1964) further justifies this policy, arguing that supply of a narrowly defined commodity will be relatively inelastic while close substitutes will cause a relatively more elastic demand schedule. If the factors of production of the specific commodity are specialized, a narrow based tax can be shifted back almost entirely on the factors of production when the purpose is usually to tax the user ( consumer) of the taxed item. A broader base alleviates, or at least reduces, the problem. The other problem related to base, relates to base defined not as the commodity to be taxed, but rather the group upon which the tax will fall. The problems are referred to by Due ( 1971) as the " border city" and " border state" problems. The essence of the problem in either case is that when a tax is levied in any particular state ( city), the surrounding states ( cities) may not follow suit. If the tax increase is substantial and the transportation costs are minimal or at least less in comparison, then we will see a substantial shift of purchases to the states ( cities) taxing at a lower rate. Hamovitch ( 1966) found that when New York City raised its sales tax, the loss in sales was significantly more than the expected loss due to the substitution or income effects. However, in Alabama where there was little opportunity to substitute for untaxed items, there was no significant loss in sales beyond the income and substitution effects. These results would indicate that a federal excise tax would probably result in better tax control. Another problem closely related to base is the definitions to be employed. For example, how much fur must a coat have before it is fur coat? In formulating a tax policy there is a tradeoff between the relative ease of defining under a narrow base, and the definitional difficulties of a broad base ( but with its other tax advantages). 92 |