Final answer:
Ad valorem taxes are based on the value of property or goods and vary according to that value, with property taxes being a common example. These taxes fund local services and are considered progressive but can be problematic due to their visibility and the fluctuations in property values.
Step-by-step explanation:
Ad valorem taxes are taxes that are based on the assessed value of an item, such as property or goods. The term "ad valorem" is Latin for "according to value," which means that the tax imposed will vary with the value of the property. Property taxes, often imposed by local governments, are a common example of ad valorem taxes. They are calculated by assessing the value of real estate property and applying a tax rate to that value. Property taxes contribute significantly to local revenues, funding essential services like schools, police, and fire departments.
Property ownership is generally concentrated among those with higher incomes, leading to the view that property taxes are progressive in nature. However, reliance on property tax revenue can be problematic, given that it is usually collected in large lump sums, making it unpopular and subject to legal limits in some states. Also, property values can fluctuate based on the economic health of an area and its amenities, such as school districts, affecting the amount of tax revenue generated.