12.10 Ad valorem taxes Throughout this chapter’s analysis of taxes we have used per-unit taxes—that is, a tax of a fixed amount for each unit traded in the market. A similar analysis would hold for ad valorem taxes—that is, taxes on the value of the transaction (or, what amounts to the same thing, proportional taxes on price). Given an ad valorem tax rate of t (t ¼ 0.05 for a 5 percent tax), the gap between the price demanders pay and what suppliers receive is given by PD ¼ (1 þ t)PS.