Progressive Taxation of Extractive Resources as Second-Best Optimal Policy

June 13, 2018

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Jean-François Wen. Progressive Taxation of Extractive Resources as Second-Best Optimal Policy, (USA: International Monetary Fund, 2018) accessed November 13, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

The paper provides a critical review of the literature on the concept of progressivity in the taxation of petroleum and mineral resources and offers a fresh perspective on its purpose and measurement. Regressive taxes, such as royalties, exist to satisfy policy objectives other than revenue maximization, such as achieving early revenues, while rent-based or profit-sensitive fiscal instruments must be designed with progressive marginal rates to maximize government revenues. Hence, the emphasis should be placed on tax rate progression of the direct taxation of profit or rent, rather than progressivity in the overall government take. However, as regressive taxes, by their very nature, tend to be distortionary, the optimal degree of progression in the rent- or profit-tax rates must take these distortions into account. The central ideas are illustrated with a simple analytical model in which a second-best optimal tax rate schedule on profit is characterized in the presence of the tax distortions caused by the regressive taxes. Some practical implications of the analysis are discussed.

Subject: Average effective tax rate, Marginal effective tax rate, Progressive taxation, Rent tax, Revenue administration, Tax policy, Taxes

Keywords: Average effective tax rate, Capture mechanism, Economic rent, Factor tax, Income tax, Input choice, Marginal effective tax rate, Minerals, Petroleum, Production function, Profit tax, Progressive tax, Progressive taxation, Rate schedule, Rent capture, Rent tax, Revenue tax, Second-best optimality, Tax instrument, Tax rate, WP

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/130
Stock No:

WPIEA2018130
ISBN:

9781484361627
ISSN:

1018-5941

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