What Is an Ad Valorem Tax?

A-level Economics

What Is an Ad Valorem Tax?

An ad valorem tax is based on the assessed value of of a product. Therefore, the amount of tax that you pay is based on how much it is worth.

For example, if a good is worth £100 and the ad valorem tax is 20%, then the tax added would be £20.

If the product went up in price to £120, the ad valorem tax is still 20%. Therefore the added tax would now be £24.

You could argue that an ad valorem tax a percentage-based or proportional tax.

Such examples would be VAT (Value Added Tax) or sales tax. One of the most common ad valorem taxes are property taxes, as the tax is based off the property’s value.

Ad Valorem Tax Diagram

Some more facts about Ad Valorem Tax

Calculate according to a product’s or asset’s value
VAT and property taxes are both common ad valorem taxes
Ad valorem comes from Latin - it means ‘according to value’
Taxes on property are sometimes levied by local councils and other jurisdictions