True, an ad valorem tax on profits is likely to result in the reduction of output in the short run. When taxes rise, the firm is likely to increase its price to cater to the additional expense i.e. extra tax. According to the law of demand and supply, an increase in prices is likely to lower the demand for goods. The firms produce goods depending on demand levels in the market thus when demand is low then the output reduces. In the long run, the equilibrium will shift to accommodate this change thus enabling the company to retain its output levels regardless of the amount of tax imposed.