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Distortions Created by Taxes Which are Options on Value Creation: The Australian Resources Rent Tax Proposal

Author

Listed:
  • Ray Ball

    (Australian Graduate School of Management, University of New South Wales.)

  • John Bowers

    (Australian Graduate School of Management, University of New South Wales.)

Abstract

The proposed tax on economic rents earned from Australian resources investments is examined from the viewpoint of the economist's neutrality criterion. Proposed by Garnaut and Clunies-Ross (1975, 1977), the Resources Rent Tax is alleged to be neutral in that it is alleged not to inhibit or distort investment behaviour. We show that the proposed tax effectively is a call option on the value created by every individual resources project. By adapting the Black-Scholes (1973) call option valuation formula, we then demonstrate that the effective incidence of the tax depends upon each project's risks, life and viability. Hence, under conditions of risk, the Resources Rent Tax fails the neutrality criterion.

Suggested Citation

  • Ray Ball & John Bowers, 1983. "Distortions Created by Taxes Which are Options on Value Creation: The Australian Resources Rent Tax Proposal," Australian Journal of Management, Australian School of Business, vol. 8(2), pages 1-14, December.
    • Handle: RePEc:sae:ausman:v:8:y:1983:i:2:p:1-14
    DOI: 10.1177/031289628300800201
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    Citations

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    Cited by:

    1. 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.
    2. Saman Majd & Stewart C. Myers, 1986. "Tax Asymmetries and Corporate Income Tax Reform," NBER Working Papers 1924, National Bureau of Economic Research, Inc.
    3. Paolo M. Panteghini, 2002. "Corporate Tax Asymmetries under Investment Irreversibility," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 58(3), pages 207-226, July.
    4. Lund, Diderik, 2006. "Taxation and systematic risk under decreasing returns to scale," Working Papers 02-2003, Copenhagen Business School, Department of Economics.
    5. Diderik Lund, 2002. "Taxation, Uncertainty, and the Cost of Equity," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 9(4), pages 483-503, August.
    6. Saman Majd & Stewart C. Myers, 1987. "Tax Asymmetries and Corporate Tax Reform," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 343-376, National Bureau of Economic Research, Inc.
    7. Paolo Panteghini, 2001. "On Corporate Tax Asymmetries and Neutrality," German Economic Review, Verein für Socialpolitik, vol. 2(3), pages 269-286, August.
    8. Robin Boadway & Michael Keen, 2009. "Theoretical Perspectives On Resource Tax Design," Working Paper 1206, Economics Department, Queen's University.
    9. Diderik Lund, 2009. "Rent Taxation for Nonrenewable Resources," Annual Review of Resource Economics, Annual Reviews, vol. 1(1), pages 287-307, September.
    10. Lund, Diderik, 2005. "An analytical model of required returns to equity under taxation with imperfect loss offset," Memorandum 13/2005, Oslo University, Department of Economics.
    11. Lund, Diderik, 2006. "Valuation, leverage and the cost of capital in the case of depreciable assets," Working Papers 03-2003, Copenhagen Business School, Department of Economics.
    12. 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.
    13. Lund, Diderik, 2009. "Marginal versus Average Beta of Equity under Corporate Taxation," Memorandum 12/2009, Oslo University, Department of Economics.
    14. Vesa Kanniainen & Paolo M. Panteghini, 2013. "Tax Neutrality: Illusion or Reality? The Case of Entrepreneurship," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 69(2), pages 167-193, June.
    15. Joseph K. Cheung, 1989. "On the nature of deferred income taxes," Contemporary Accounting Research, John Wiley & Sons, vol. 5(2), pages 625-641, March.
    16. Halvorsen, H.E. & Lund, D., 1998. "Rent Taxation when Cost Tranfers are Possible, but Costly," Memorandum 20/1998, Oslo University, Department of Economics.
    17. Bobylev, Yuri & Rasenko, Olesya, 2017. "Comparative Analysis of Tax Regimes in the Oil Sector," Working Papers 041723, Russian Presidential Academy of National Economy and Public Administration.
    18. Boyd Blackwell & Brian Dollery, 2013. "Resource Taxation and Remote Aboriginal Expenditure," Economic Papers, The Economic Society of Australia, vol. 32(3), pages 360-382, September.

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