CAN EXPECTED TAX-REVENUE BE INCREASED BY AN INVESTMENT-PRESERVING SWITCH FROM AD-VALOREM ROYALTIES TO A RESOURCE RENT TAX

This paper considers the question of whether a government can switch t ax regimes from an ad valorem royalty to a resource rent tax (RRT) in a manner which preserves a company's optimal investment level but whic h also increases expected tax revenue, A model of optimal investment t o extract a resource of unknown size is developed which specifies the conditions required for such a switch of tax regimes to be investment- preserving. However, a comparison of expected tax revenues under the t wo regimes is analytically ambiguous, Consequently the model is analys ed numerically, which produces the conclusion that expected tax revenu e can be increased by an investment-preserving RRT in the situation wh ere extracting the resource deposit is expected to be relatively profi table, Moreover, in this situation the increase in expected tax revenu e appears to be positively related to the level of the threshold rate of return under the RRT, However, in the situation where extracting th e resource deposit is expected to be relatively unprofitable and relat ively uncertain, the expected tax revenues from the two tax regimes ar e less divergent. (C) 1997 Elsevier Science Ltd. All rights reserved.