Non-equivalence of specific and ad valorem taxation in the competitive marketwith tax evasion

Thewell-known equivalencebetweenspecific and ad valorem taxation in competitive marketsmay not holdin the presence of tax evasion. Evading specific taxes has to take placevia concealing quantities sold, whereas evading ad valorem taxes can take place via concealing selling prices as well as quantities sold. We show thatin the competitive market (i) this difference couldmaketheequivalenceof these two taxesbreak down,and (ii) specifictaxationmay be superiorto ad valorem taxationif it causes firms to channel fewerresourcesintotax evasion, given other things being equal.