Introducing Supply and Demand

Taxes

Ad Valorem vs Excise Tax

Ad Valorem (or Value Added) and Excise Taxes are types of indirect taxes. Both are generally assessed on the sale of goods. These two taxes differ in three ways:

  1. An excise tax typically applies to a narrower range of products, such as gasoline, tobacco, and alcohol.
  2. An excise tax is typically heavier than an ad valorem, accounting for a higher fraction of a product's retail price.
  3. Excise taxes are typically a fixed fee per unit, meaning that the government earns its revenue based on volume sold. Ad valorem taxes are proportional to the price of the good, so the government earns revenue based on the value of the good or service being sold.