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Progressive Taxation of Extractive Resources as Second-Best Optimal Policy

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  • Jean-François Wen

Abstract

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.

Suggested Citation

  • Jean-François Wen, 2018. "Progressive Taxation of Extractive Resources as Second-Best Optimal Policy," IMF Working Papers 2018/130, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2018/130
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    References listed on IDEAS

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    1. Ms. Oana Luca & Diego Mesa Puyo, 2016. "Fiscal Analysis of Resource Industries: (FARI Methodology)," IMF Technical Notes and Manuals 2016/001, International Monetary Fund.
    2. Sumner, M T, 1978. "Progressive Taxation of Natural Resource Rents," The Manchester School of Economic & Social Studies, University of Manchester, vol. 46(1), pages 1-16, March.
    3. Oana Luca & Diego Mesa Puyo, 2016. "Fiscal Analysis of Resource Industries; (FARI Methodology)," IMF Technical Notes and Manuals 16/01, International Monetary Fund.
    4. Kemp, Alexander G, 1975. "Fiscal Policy and the Profitability of North Sea Oil Exploitation," Scottish Journal of Political Economy, Scottish Economic Society, vol. 22(3), pages 237-260, November.
    5. Danny Hann & Chris Rowland, 1986. "UK Oil Taxation: Failings and Reform," Surrey Energy Economics Centre (SEEC), School of Economics Discussion Papers (SEEDS) 32, Surrey Energy Economics Centre (SEEC), School of Economics, University of Surrey.
    6. Diderik Lund, 2009. "Rent Taxation for Nonrenewable Resources," Annual Review of Resource Economics, Annual Reviews, vol. 1(1), pages 287-307, September.
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    Cited by:

    1. Bertrand Laporte & Céline de Quatrebarbes & Yannick Bouterige, 2019. "Rent sharing and progressivity of tax regimes in the mining sector: An analysis of 21 African gold-producing countries [Partage de la rente et progressivité des régimes fiscaux dans le secteur mini," CERDI Working papers halshs-02103047, HAL.
    2. Bertrand Laporte & Celine de Quatrebarbes & Yannick Bouterige, 2022. "Tax design and rent sharing in mining sector: Evidence from African gold‐producing countries," Journal of International Development, John Wiley & Sons, Ltd., vol. 34(6), pages 1176-1196, August.
    3. Banda, Webby & Kabwe, Eugie, 2019. "An integrated multiple criteria decision making framework for application in the evaluation of mineral taxation regimes," Resources Policy, Elsevier, vol. 62(C), pages 635-650.

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