Which option describes ad valorem taxes, such as sales tax?

Which option describes ad valorem taxes, such as sales tax?

• A. A fixed amount per unit sold
• B. A tax charged as a percentage of the price of a good or service
• C. A tax on capital gains
• D. A tax on rent

Answer: (B)

Ad valorem taxes are based on the value of what is being taxed. The amount owed is fixed as a percentage of the price, so the tax rises or falls with the price of the good or service. This is why sales tax is a classic example: you pay a rate applied to the sale price, yielding a tax proportional to what you buy. It differs from a fixed amount per unit, where each unit incurs the same tax regardless of price. It also isn’t a tax on capital gains, which targets profit from selling an asset, nor a tax on rent, which taxes rental income or property value rather than the purchase price of goods.

Ad valorem taxes are based on the value of what is being taxed. The amount owed is fixed as a percentage of the price, so the tax rises or falls with the price of the good or service. This is why sales tax is a classic example: you pay a rate applied to the sale price, yielding a tax proportional to what you buy. It differs from a fixed amount per unit, where each unit incurs the same tax regardless of price. It also isn’t a tax on capital gains, which targets profit from selling an asset, nor a tax on rent, which taxes rental income or property value rather than the purchase price of goods.