Progressive Taxation of Extractive Resources as Second-Best Optimal Policy
IMF Working Papers, June 13, 2018
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- Progressive Taxation of Extractive Resources as Second-Best Optimal Policy
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Bibliographic details
- Published: June 13, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484361627.001
Main findings
- Regressive taxes, such as royalties, exist to satisfy policy objectives other than revenue maximization, such as achieving early revenues.
- Rent-based or profit-sensitive fiscal instruments must be designed with progressive marginal rates to maximize government revenues.
- Emphasis should be placed on tax rate progression of the direct taxation of profit or rent, rather than progressivity in the overall government take.
- Because 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 paper offers a fresh perspective on the purpose and measurement of progressivity in the taxation of petroleum and mineral resources.
Analytical approach
- Provides a critical review of the literature on the concept of progressivity in the taxation of petroleum and mineral resources.
- Illustrates central ideas 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.
- Focuses on the tax rate progression of direct taxation of profit or rent and the interaction between regressive instruments and profit-sensitive instruments.
Policy implications and recommendations
- Design rent- or profit-sensitive fiscal instruments with progressive marginal rates to increase government capture of economic rent.
- Recognize and account for the distortionary effects of regressive taxes (for example, royalties) when setting the optimal degree of progression in profit-tax rates.
- Use regressive taxes where justified by non-revenue objectives (for example, achieving early revenues), but balance their use against the efficiency costs they introduce into the tax system.
- Prioritize clarity in measuring progressivity: measure and target progression in marginal rates on profit/rent rather than focusing solely on overall government take.
Key concepts and terminology emphasized
- Average effective tax rate
- Marginal effective tax rate
- Progressive taxation
- Rent tax / rent capture
- Profit tax and rate schedule
- Regressive taxes (royalties)
- Second-best optimality and tax distortions
- Capture mechanism, economic rent, production function, input choice
Progressive Taxation of Extractive Resources as Second-Best Optimal Policy — https://www.imf.org/en/publications/wp/issues/2018/06/13/progressive-taxation-of-extractive-resources-as-second-best-optimal-policy-45923
Content in this bundle
- Progressive Taxation of Extractive Resources as Second-Best Optimal Policy, WP/18/130, June 2018