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Neutrality and Efficiency of Petroleum Revenue Tax: A Theoretical Assessment

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  • Zhang, Lei

Abstract

The author uses an investment model of oil development to show how a fiscal regime can be both neutral with respect to development decisions and efficient in recouping economic rents. The author finds that there is a unique rate for calculating the tax deductibility of capital costs which ensures economic neutrality; while tax efficiency involves high rates of tax on profits after these deductions. Using parameters of the U.K. Petroleum Revenue Tax, numerical calculations in the author's simplified model suggest that tax was both neutral and relatively efficient. In conclusion the tax efficiency of the Petroleum Revenue Tax is compared with that of a neutral resource rent tax. Copyright 1997 by Royal Economic Society.

Suggested Citation

  • Zhang, Lei, 1997. "Neutrality and Efficiency of Petroleum Revenue Tax: A Theoretical Assessment," Economic Journal, Royal Economic Society, vol. 107(443), pages 1106-1120, July.
    • Handle: RePEc:ecj:econjl:v:107:y:1997:i:443:p:1106-20
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    Cited by:

    1. Osmel Manzano & Francisco Monaldi, 2008. "The Political Economy of Oil Production in Latin America," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2008), pages 59-103, August.
    2. Abdul Manaf, Nor Aziah & Mas'ud, Abdulsalam & Ishak, Zuaini & Saad, Natrah & Russell, Alex, 2016. "Towards establishing a scale for assessing the attractiveness of petroleum fiscal regimes – Evidence from Malaysia," Energy Policy, Elsevier, vol. 88(C), pages 253-261.
    3. Abdo, Hafez, 2010. "The taxation of UK oil and gas production: Why the windfalls got away," Energy Policy, Elsevier, vol. 38(10), pages 5625-5635, October.
    4. Paolo Panteghini, 2001. "On Corporate Tax Asymmetries and Neutrality," German Economic Review, Verein für Socialpolitik, vol. 2(3), pages 269-286, August.
    5. Jia-Yue Huang & Yun-Fei Cao & Hui-Ling Zhou & Hong Cao & Bao-Jun Tang & Nan Wang, 2018. "Optimal Investment Timing and Scale Choice of Overseas Oil Projects: A Real Option Approach," Energies, MDPI, vol. 11(11), pages 1-22, October.
    6. Banda, Webby, 2023. "A system dynamics model for assessing the impact of fiscal regimes on mining projects," Resources Policy, Elsevier, vol. 81(C).
    7. Mr. Jon Strand, 2008. "Importer and Producer Petroleum Taxation: A Geo-Political Model," IMF Working Papers 2008/035, International Monetary Fund.
    8. Diderik Lund, 2009. "Rent Taxation for Nonrenewable Resources," Annual Review of Resource Economics, Annual Reviews, vol. 1(1), pages 287-307, September.
    9. Mr. James L. Smith, 2012. "Modeling the Impact of Taxes on Petroleum Exploration and Development," IMF Working Papers 2012/278, International Monetary Fund.
    10. Berg, Magnus & Bøhren, Øyvind & Vassnes, Erik, 2018. "Modeling the response to exogenous shocks: The capital uplift rate in petroleum taxation," Energy Economics, Elsevier, vol. 69(C), pages 442-455.
    11. Paolo M. Panteghini, 2005. "Asymmetric Taxation under Incremental and Sequential Investment," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(5), pages 761-779, December.
    12. Smith, James L., 2014. "A parsimonious model of tax avoidance and distortions in petroleum exploration and development," Energy Economics, Elsevier, vol. 43(C), pages 140-157.
    13. Abdo, Hafez, 2014. "Investigating the effectiveness of different forms of mineral resources governance in meeting the objectives of the UK petroleum fiscal regime," Energy Policy, Elsevier, vol. 65(C), pages 48-56.
    14. Smith, James L., 2013. "Issues in extractive resource taxation: A review of research methods and models," Resources Policy, Elsevier, vol. 38(3), pages 320-331.
    15. Strand, Jon, 2010. "Optimal fossil-fuel taxation with backstop technologies and tenure risk," Energy Economics, Elsevier, vol. 32(2), pages 418-422, March.
    16. Postali, Fernando A.S. & Picchetti, Paulo, 2006. "Geometric Brownian Motion and structural breaks in oil prices: A quantitative analysis," Energy Economics, Elsevier, vol. 28(4), pages 506-522, July.

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