What does the term ad valorem typically refer to?

The term ad valorem refers specifically to a type of tax that is based on the value of an asset, usually property. Property taxes are calculated as a percentage of the assessed value of real estate, meaning that the higher the value of the property, the more tax the owner is liable to pay. This is a fundamental principle in property taxation, where the tax is directly proportional to the property's value, thus aligning with the meaning of ad valorem, which is Latin for "according to value."

Other forms of taxation, such as capital gains taxes, income taxes, and sales taxes, do not typically use the ad valorem method. Capital gains taxes are based on the profit from the sale of an asset rather than its value. Income taxes are levied on an individual's or entity's earnings, and sales taxes are a flat percentage of the sales price of goods or services, rather than being directly assessed based on the value of the property itself. Therefore, property taxes stand out as the clear representation of ad valorem taxation.