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Modelling the Excess Burden of Royalties (2012)
BibTeX
@MISC{Ergas12modellingthe,
author = {Henry Ergas and Jonathan Pincus Abstract and Henry Ergas and Jonathan Pincus},
title = {Modelling the Excess Burden of Royalties},
year = {2012}
}
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Abstract
estimate the efficiencies of Australian taxes, using MM900. The resultant report, endorsed by Treasury, was a major input into the Henry report into Australia’s Future Tax System (AFTS 2010); and into the policy decisions that ensued. KPMG Econtech (2010a) found a marginal excess burden (MEB) of 70%, making royalties the second most inefficient major tax, after gambling taxes. Subsequently, AFTS recommended that royalties be replaced by an excess profits tax. The modelling of royalties presents some puzzles. KPMG Econtech found that the existing import tariffs improved economic welfare. It is surprising, therefore, that the modelling found that royalties severely damaged national efficiency: a tailored export tax is the first best trade policy, and the 2009-10 royalty and the tax regime was arguably a closer substitute than is the existing tariff. Within a partial equilibrium framework that accounts for other taxes and for demand and supply effects, unbelievably high tax rates are required to generate MEB of 70%. The MEB depends crucially on the assumptions about supply, which was modeled by KPMG Econtech using a CES production function that does not seem well suited to an industry using essential but exhaustible resources. Unfortunately, the report is unclear as to how an apportionment was made between a reduction in resource rents, and a reduction in the returns to financial capital in mining: the incidence table for royalties suggests a very low excess burden. 1
Keyphrases
excess burden kpmg econtech excess profit tax resultant report australian tax policy decision henry report inefficient major tax economic welfare supply effect low excess burden marginal excess burden incidence table import tariff partial equilibrium framework exhaustible resource financial capital australia future tax system national efficiency major input ce production function trade policy royalty present 2009-10 royalty high tax rate tax regime resource rent tailored export tax
