Impact
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The theory of the firm shows that taxes on transfers can encourage firms to internalise costs and grow, whereas the absence of such transactions may result in a larger number of individually smaller firms. For example, a sales tax – unlike a VAT – would realign the incentives of a steel mill in favor of operating its own coal mine, as opposed to simply buying coal in a transaction subject to taxation; the theory of the firm's model suggests that this would be less economically efficient as it results in a decline in specialization.
Read more about this topic: Ad Valorem Tax
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