Policy Forum: Editor's Introduction-Resource Taxation Kevin Milligan ~ Vancouver School of Economics ~ University of British Columbia

Policy Forum: Editor's Introduction-Resource Taxation

Canadian Tax Journal, Vol. 63, No. 2 (2015)
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Abstract:

The taxation of natural resource industries requires consideration of the proper taxation of economic rents. Consider a situation in which the fair value of a resource under the ground is $100, the full cost of extracting and marketing the resource (including compensation for all economic costs, including risk and return to capital) is $20, and the revenue from sales is $120. If a firm could acquire the right to extract at no charge, it would earn an economic profit (revenue minus all costs) of $100. On the other hand, if the firm had to pay $100 for the right to extract, its total costs and its revenue would be equal ($120), and it would earn only the normal rate of return. Under standard assumptions, the firm would go ahead with the project whether the price for extraction rights were zero or $100, because any revenue in excess of costs represents "economic rent"-a return that exceeds what is necessary to keep economic decisions unchanged. Whether and how much to tax this economic rent presents a vexing challenge for governments of economies with significant resource industries.

Versions:

Published version, 2015: link.


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