dynamic scoring alternative financing schemes abstract neoclassical growth models predict that reductions in capital or labor income tax rates are expansionary when lump sum transfers are used to balance the government budget this paper explores the consequences of bond financed tax reductions that bring forth a range of possible offsetting policies including future government consumption capital tax rates or labor tax rates through the resulting intertemporal distortions current tax cuts can be expansionary or contractionary the paper also finds that more aggressive responses of offsetting policies to debt engender less debt accumulation and less costly tax cuts

some nonlinear tax effects on asset values and investment decisions under uncertainty abstract tax system nonlinearities are often ignored but with uncertainty may have important implications for the magnitude and direction of tax effects this paper studies a particular nonlinear tax rule the policy subsidizes asset values but may discourage some investments and encourage earlier shutdown of some projects the marginal effective tax rate varies with project risk furthermore a corporate cash flow tax can encourage investment due to interactions with the nonlinear policy the paper also presents a general statement of the stochastic equilibrium valuation method which can be used to analyze other nonlinear taxes numerical examples demonstrate computational feasibility

taxation of uncertain business profits private risk markets and optimal allocation of risk abstract in this paper we explore what happens if the government bears some of the risk through a profit tax when the risk sharing in the venture capital market is incomplete due to non observability of effort and moral hazard if the external equity investors can enforce exclusive contracts with the entrepreneurs the risk relief through a profit tax will lead to too much insurance and too low effort as compared with a second best optimal solution bond and devereux bond s r and devereux m p 1995 on the design of a neutral business tax under uncertainty journal of public economics 58 57 71 show that a proportional profit tax would be neutral in the absence of moral hazard in the presence of moral hazard we demonstrate that the tax may affect the risk shifting through the market in which case the premise for the neutrality result will no longer hold

depreciation rules and value invariance with extractive firms the application of samuelson s theorem on value invariance to the case of intertemporally optimizing firms is shown to require a judiciously chosen economic depreciation formula which depends on both current stock and current flow variables in order to prevent the firms from changing their actions in the face of the tax regime we illustrate by deriving depreciation rules which achieve non distortingness of actions and value invariance for resource extracting firms

neutral taxation under uncertainty abstract the analogs under uncertainty of two well known certainty results are derived first if there are timing differences between tax payments and accruals neutrality is preserved if the resulting tax credits or liabilities are carried forward at the risk free interest rate provided that tax credits and liabilities are sure to be redeemed eventually second the invariance of asset valuations with respect to the rate of income tax at a given pre tax interest rate proved by johansson and samuelson under certainty can be extended to cover the case of uncertainty given analogous ceteris paribus conditions

irreversible investment and endogenous financing abstract we evaluate the effects of corporate taxation on firms investment and financing choices we focus on how the asymmetry of the corporate tax imperfect loss carry overs endogenous financing with credit constraints and different degrees of investment irreversibility affect both incremental investment and entry decisions we find that as long as capital can be financed with debt at the margin the tax distortions on the marginal investment decision are small this is particularly so if the technology is flexible in contrast the tax distortions on the entry decision are substantial the ability of firms to carry over their losses and choose their financial structure endogenously are important for reducing both types of distortions

evaluating natural resource investments notwithstanding impressive advances in the theory of finance over the past 2 decades practical procedures for capital budgeting have evolved only slowly the standard technique which has remained unchanged in essentials since it was originally proposed see dean 1951 bierman and smidt 1960 derives from a simple adaptation of the fisher 1907 model of valuation under certainty under this technique expected cash flows from an investment project are discounted at a rate deemed appropriate to their risk and the resulting present value is compared with the cost of the project this standard textbook technique reflects modern theoretical developments only insofar as estimates of the discount rate may be obtained from crude application of single period asset pricing theory but see brennan 1973 bogue and roll 1974 turnbull 1977 constantinides 1978 the inadequacy of this approach to capital budgeting is widely acknowledged although not widely discussed its obvious deficiency is its the evaluation of mining and other natural resource projects is made particularly difficult by the high degree of uncertainty attaching to output prices it is shown that the techniques of continuous time arbitrage and stochastic control theory may be used not only to value such projects but also to determine the optimal policies for developing managing and abandoning them the approach may be adapted to a wide variety of contexts outside the natural resource sector where uncertainty about future project revenues is a paramount concern

some additional results on investment risk taking and full loss offset corporate taxation with interest deductibility it is argued that a full loss offset corporate tax with interest deductibility may reduce risk taking in that entrepreneurs might decrease the amount of investment made in risky projects with higher corporate tax rates unlike previous results in the literature production functions with decreasing returns to scale and the possibility of equity financing of capital investment are allowed a corporate tax that falls in part on the returns of equity owners or entrepreneurs can under certain conditions reduce risk taking if the government taxes only risk then a corporate tax with a full loss offset can encourage investment in risky projects

a general proposition on the design of a neutral business tax abstract a simple and general means of levying a business tax that is neutral in the sense that it does not affect the firm s decisions at the margin is discussed in particular we analyze the effect of a business tax of our design on the investment decision of the firm the well known imputed income and immediate write off methods of levying a neutral business tax are found to be special cases of our general tax design the implication of our results is that a neutral pure profits tax can be levied without the informational difficulties of the imputed income method or the cash flow disadvantages of the immediate write off method

on the design of a neutral business tax under uncertainty this paper extends the results of boadway and bruce journal of public economics 1984 24 231 239 and fane journal of public economics 1987 33 95 105 to describe a tax on business profits which is neutral with respect to investment and wind up decisions and default outcomes under uncertainty and bankruptcy risk the tax base allows deductions for depreciation and the cost of finance but requires knowledge of neither true economic depreciation nor the firm s required rate of return we show that the tax must treat taxable profits and losses symmetrically and that the tax rate must be a known constant even in the special case when the tax base coincides with the economic rent earned in each period

resource allocation in a general equilibrium model of production under uncertainty the case of variable supply of labor abstract this paper examines the effects of a marginal change in uncertainty on resource allocation and factor rewards by relaxing the assumption of factor inelasticity we demonstrate that integrating a variable labor supply into batra s two sector uncertainty model can mitigate or reverse many of the earlier results specifically a marginal increase in uncertainty may trigger the resource to move from the certainty sector to the uncertainty sector in the presence of a backward bending labor supply curve

fishing down the value chain biodiversity and access regimes in freshwater fisheries the case of malawi abstract this paper considers the connection between the diversity of catch in a multi species fishery and the productivity of the fishery under different access regimes a modified gordon schaefer model is used to analyse the importance of the level of diversity in a fishery in open access and profit maximising regimes the modified model which includes both environmental and bioeconomic variables is fitted to data from a gillnet fishery in lake malawi pressure on stocks is shown to be greater at all levels of biodiversity in open access than it is in profit maximising regimes however in a profit maximising regime both catch and the productivity of fishing effort is highest when there is a single marketed species by contrast in an open access regime catches are maximised at higher levels of bioeconomic diversity than in profit maximising regimes implications for policy are discussed

an option pricing approach to evaluating petroleum projects abstract option pricing applications in capital budgeting decisions are still in the development stage this paper uses concepts and methods from option pricing theory to evaluate real projects rather than financial ones within a petroleum projects context such real options include development and operations of satellite fields break even values of incremental capacity and flexibility value with compound development and operations options the option pricing results may be quite different from those obtained by traditional capital budgeting and decision tree approaches some related papers on real options are also briefly noted

dynamic revenue estimation this paper considers the question of adopting dynamic revenue estimation methods which would incorporate the predicted macroeconomic effects of policies it describes the current revenue estimation process and how these estimates are used in the formation of policy it then evaluates this process as an exercise in forecasting considering not only its methodology but also its performance this evaluation illustrates some of the difficulties that would accompany attempts to use dynamic methods finally the paper relates the choice among different revenue estimation procedures to the political process and the use to which the revenue estimates are put

is the tragedy of the commons likely factors preventing the dissipation of fuelwood rents in zimbabwe although village rules classify fuelwood resources in rural zimbabwe as being open access theory suggests that social norms and or heterogeneity among users prevents rents from being dissipated results from a random utility model suggest that social norms and heterogeneous travel costs significantly influence site choice welfare measures suggest that there are positive site rents and that these rents vary because social norms and or heterogeneity are preventing rent dissipation at some sites more than others given the prevalence of social norms and heterogeneity in costs the tragedy of thecommons is unlikely

exploration and scarcity noting that a suggested measure of natural resource scarcity resource rent is unobservable we show that rent is linked to observable marginal exploration cost a two period model of extraction and exploration reveals that rent is equal to this cost when discovery is certain under risky exploration cost data can be used to bound rent the model also indicates how exploration uncertainty affects the competitive firm s extraction and exploration decisions finally the behavior of u s oil and gas exploration costs suggests that these costs were rising in the postwar era which has different implications for scarcity than indicated by other measures of scarcity

petroleum taxation the effect on recovery rates abstract petroleum tax design analysis usually abstracts from the fact that taxation affects not only project selection but also concept design and drainage strategy and thereby the extraction and recovery rate the implicit assumption is that oil companies are unresponsive to tax changes where concept selection and production decisions are concerned in his novel approach smith 2014 develops a broader model which accounts for the additional effects this provides a consistent framework which permits analysis of specific settings berg et al 2018 apply the model to establish the effect of a reduction in uplift on the norwegian continental shelf ncs and find for this case that the traditional assumption of an unresponsive company still holds analysing field data from the ncs we find that the actual production profiles do not resemble the mathematically tractable theoretical model of a constant decline in production used in smith 2014 and berg et al 2018 and we explain why this is the case for offshore fields we propose a novel theoretical resource model which fits the data from the 92 largest fields on the ncs it is a general resource model that allows for injection from start of production and where the model of a constant decline in production is a special case our model is also a mathematically tractable model of constant decline but where the decline is at the level of the individual well rather than the field the recovery rate is thus responsive to the number of wells and tax design affects the recovery rate our findings suggest that companies are responsive and that tax design should take account of distortions in the selection of development concepts

corporate income tax incidence in the presence of sector specific unemployment abstract this paper explores the implications of sector specific unemployment in the analysis of the corporate income tax incidence the analysis builds on a modified harris todaro framework in which the corporate wage is indexed to commodity prices while the noncorporate wage is flexible we present the sufficient conditions under which a tax burden falls more heavily upon capital and contrast them with the original harberger results also examined in this paper is the incidence of unemployment benefits and their effects on the unemployment rate

in search of optimal stocking regimes in semi arid grazing lands one size does not fit all we discuss the search for optimal stocking regimes in semi arid grazing lands we argue that one size does not fit all and that different stocking regimes are appropriate under different conditions this paper is an attempt to move beyond polarization of the current debate towards a more integrative and flexible approach to grazing management we propose five different conditions as major influences on grazing regimes environmental variability and predictability degradation and thresholds property right regimes discount rates and market stability and prices we suggest a lack of connection between the micro economics literature and natural science and social anthropological literature it is timely to achieve greater integration around some key questions and hypotheses and recognize that policy prescriptions at national or even regional levels are likely to have limited value due to context specificity

generalised r based and s based taxes under uncertainty this paper considers the relationship between two general neutral business tax structures which we label the firm tax and the shareholder tax the well known r based and s based cash flow taxes analysed by meade 1978 are special cases of these two taxes we demonstrate the neutrality of both taxes in the presence of uncertainty and characterise the tax rules required in the event of default and wind up our analysis provides the first proof of the neutrality of the s based cash flow tax and the allowance for corporate equity ace corporation tax under uncertainty we also discuss implementation and tax avoidance issues

option pricing when the underlying asset earns a below equilibrium rate of return a note in their classic paper black and scholes 2 present two derivations of the european call option pricing formula the first which we will refer to as the replication derivation relies on the fact that the returns from the option can be replicated by holding a continuously revised position in the underlying asset and bonds this implies that if an option is not priced according to the blackscholes formula there is a sure profit to be made by some combination of either short or long sales of the option and underlying asset this argument is seemingly independent of considerations relating to capital market equilibrium the second derivation which we will call the equilibrium derivation evolves from the requirement that the option earn an expected rate of return commensurate with the risk involved in holding the option as an asset this note considers the pricing of a call option on an asset which earns an expected rate of return lower than that necessary to induce investors to hold it we show in this case that even if the replication strategy is feasible it is inefficient a consequence of this is that the correct option pricing formula is different than the black scholes formula unlike the black scholes formula our formula requires as an input the difference between the expected rate of return on the underlying asset and that expected rate of return which would be required to induce holding of the asset other papers have made a similar point constantinides 3 and cox et al 4 have argued that in equilibrium the prices of traded contingent claims must satisfy a partial differential equation which is identical to the black scholes partial differential equation only when the underlying asset pays no dividends and earns a rate of return sufficient to induce holding of the asset more recently ingersoll 5 has noted that commodities often pay a nonpecuniary service yield the value of which must be taken into account in deriving the option price none of these authors however explain why the black scholes formula is sometimes inappropriate the purpose of this note is to demonstrate why the black scholes formula needs modification even if replication is feasible we provide an intuitive derivation of the correct formula and discuss why divergences of the equilibrium price from the black scholes formula do not result in arbitrage opportunities

the effect of marginal tax rates on taxable income a panel study of the 1986 tax reform act this paper uses a treasury department panel of more than 4 000 taxpayers to estimate the sensitivity of taxable income to changes in tax rates on the basis of a comparison of the tax returns of the same individual taxpayers before and after the 1986 tax reform the analysis emphasizes that the response of taxable income involves much more than a change in the traditional measures of labor supply the evidence shows an elasticity of taxable income with respect to the marginal net of tax rate that is at least one and could be substantially higher the implications for recent tax rate changes are discussed

option valuation of claims on real assets the case of offshore petroleum leases this paper extends financial option theory by developing a methodology for the valuation of claims on a real asset an offshore petroleum lease several theoretical and practical problems not present in applying option pricing theory to financial assets are addressed most importantly we show the necessity of combining option pricing techniques with a model of equilibrium in the market for the underlying asset petroleum reserves the advantages of this approach over conventional discounted cash flow techniques are emphasized the methodological development provides important insights for both company behavior and government policy promising empirical results are reported

modeling the response to exogenous shocks the capital uplift rate in petroleum taxation abstract we show how a recent drop in the norwegian capital uplift rate by two percentage points changes optimal field design and reduces field value for shareholders although optimal design changes considerably and value drops by 12 the ability to reoptimize design after the shock is worth only 1 5 of field value this evidence suggests that large behavioral effects of a shock do not necessarily imply large value effects making it less important to always account for the taxpayers response the valuation error in such cases may be moderate if one instead uses the simplifying and widespread assumption of unresponsive taxpayers

a parsimonious model of tax avoidance and distortions in petroleum exploration and development abstract we present a simple model of petroleum exploration and development that can be applied to study the performance of alternative tax systems and identify potential distortions although the model is highly simplified it incorporates many factors and some of the key tradeoffs that would influence an investor s investment behavior the model recognizes the role of enhanced oil recovery and treats the impact of taxation on exploration and development in an integrated manner consistent with an investor s joint optimization of investments at both stages of the process the model is simple and user friendly which facilitates application to a broad range of problems

dynamic scoring an introduction to the issues working together cbo and jct provide two types of revenue and expenditure projections for congress i forecasts of expenditures and revenues based on assumptions about what current policy is and ii forecasts of the changes in expenditures and revenues that would result from proposed legislation the first type of forecast is known as a baseline the second type is called scoring the two types of forecasts are interdependent projected effects of legislation depend on the starting point so the baseline affects scoring updates of the baseline reflect the estimated impact of legislation so scoring affects the baseline on the revenue side where dynamic scoring has received the greatest attention the baseline forecasts are provided to congress by cbo while scoring is done by the jct in a sense the debate over dynamic scoring may be traced to an inconsistency in the way that legislative changes are handled by the two agencies macroeconomic feedback effects are ultimately incorporated in cbo s baseline but are not attributed by jct to any source when the proposals are scored this inconsistency is most easily understood in terms of relative informational requirements one can update a baseline to account for macroeconomic changes without attributing these changes to particular legislation indeed the models used to construct baselines are not specified at the level of detail that would be necessary to do so under standard scoring procedures jct scores proposed legislation taking the macroeconomic forecast underlying the cbo baseline including nominal gdp and other aggregates as given it is misleading to refer to these revenue estimates as static because they do take certain behavioral effects into account for example when jct scores a change in the capitalgains tax rate it includes the revenue offset associated with changes in capital gains realizations but missing is any further impact on revenues or expenditures that might result from induced changes in output interest rates or other elements of the macroeconomic forecast thus current scoring estimates incorporate micro dynamic effects but not macro ones

petroleum taxation under uncertainty contingent claims analysis with an application to norway abstract contingent claims analysis provides a useful tool for analysing the value of tax claims and of companies after tax values under uncertainty the method is presented and applied to the analysis of how norwegian petroleum taxes affect company behaviour few results can be derived analytically a numerical approach is suggested with a stylized description of production possibilities the norwegian taxes are found to have strong distortionary effects the relation to other methods and problems connected with the application are discussed

corporate hedging under a resource rent tax regime in addition to the ordinary corporate income tax special purpose taxes are sometimes levied to extract abnormal profits arising from the use of natural resources such dual tax regimes exist in norway for oil and hydropower where the corresponding special purpose tax bases are unaffected by any derivatives payments dual tax firms with hedging programs therefore face the risk of potentially large discrepancies between the tax bases for corporate income tax and special purpose tax i investigate how this tax base asymmetry influences the extent of hedging of value maximizing firms facing hedgeable as well as unhedgeable risk dual tax firms facing deadweight costs in low profit events generally demand less hedging than ordinary firms but otherwise respond similarly to characteristics of the underlying risk exposures the special purpose tax does not influence firms hedge portfolios in the absence of deadweight cost

petroleum taxes and optimal resource recovery abstract the objective of this paper is to quantify the incentive effects of petroleum taxes this enables us to estimate individual petroleum reservoirs supply functions before and after tax of central importance are the marginal reserves within the petroleum reservoir itself the recovery factor of oil and gas reservoirs is influenced by economic considerations both the rate of return requirement and petroleum taxes play crucial roles the conclusion is that the distorting effects observed in many petroleum taxation systems have serious resource recovery consequences and reduce the recovery factor for individual oil and gas reservoirs

trends in natural resource commodity prices an analysis of the time domain abstract this paper attempts to reconcile the theoretical predictions of increasing real prices for nonrenewable natural resource commodities obtained from hotelling style models with the empirical findings of falling prices for these commodities a theoretical model for relative price movements is derived for the case of exogenous technical change and endogenous change in the grade of ores mined the model suggests a u shaped time path for relative prices the implied price movements are tested for all the major metals and fuels and the model parameters are found to be statistically significant for 11 out of the 12 commodities tested

neutrality and efficiency of petroleum revenue tax a theoretical assessment we use an irreversible 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 we find 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 uk petroleum revenue tax prt numerical calculations in our simplified model suggest that prt was both neutral and relatively efficient in conclusion the tax efficiency of prt is compared with that of a neutral resource rent tax

testing for common versus private property comment abstract conceptual confusion over common property persists in the literature an attempt by clark and carlson to test for common property versus private property is flawed by their misspecification of common property they test instead for private property versus nonproperty open access

property relations and economic development the other land reform abstract continued concern for development has led to the suggestion that private property rights should be created to stimulate economic development this suggestion derives from an incomplete understanding of the property relations on the public domain lands in the arid tropics and from a confusion of cause and effect between property and economic productivity a model of the private public boundary in land is developed that challenges the view that wealth would increase if land at the extensive margin were privatized the various types of property regimes in land are defined and explained

the taxation of risky assets this paper reconsiders the effects of taxation on risky assets recognizing the importance of variations in asset prices we show that earlier analyses that assumed that depreciation rates are constant and that the future price of capital goods is known with certainty are very misleading as guides to the effects of corporate taxes we then examine the concept of economic depreciation in a risky environment and show that depreciation allowances if set ex ante should be adjusted to take account of future asset price risk some empirical calculations suggest that these adjustments are large and have important implications for the burdens of and nonneutralities in the corporation income tax

a test of the hotelling valuation principle time series tests of the hotelling r percent rule for natural resource prices have not been strongly supportive but the tests and the data are subject to serious difficulties we propose here an alternative testing strategy based on another but less widely known implication of the hotelling model we test this implication which we call the hotelling valuation principle by regressing the market values of the reserves of a sample of u s domestic oiland gas producing companies on their estimated hotelling values we find that the estimated hotelling values account for a significant portion of the observed variations in market values and that the hotelling measures are better indicators of the market values of petroleum properties than two widely cited publicly available alternative appraisals

evaluating the effects of ace systems on multinational debt financing and investment abstract theory recommends aligning the tax treatment of debt and equity a few countries notably belgium have introduced an allowance for corporate equity ace to achieve tax neutrality we study the effects of adopting an ace on debt financing passive investment and active investment of multinational firms using high quality administrative data on virtually all german based multinationals we use two main identification strategies based on 1 synthetic control methods and 2 variations across affiliates within the multinational group our results suggest that an ace reduces the corporate debt ratio of multinational affiliates additionally an ace increases intra group lending and other forms of passive investment but has no effects on production investment of multinational affiliates the findings indicate that a unilateral implementation of an ace system generates a tax planning opportunity using a structure combining the benefits from the ace with interest deductions

the effects of discretionary fiscal policy on macroeconomic aggregates a reappraisal fiscal stimuli to recover a cascade of academic and layman articles debate the effectiveness of fiscal policy in stimulating the economy backed up by different economic models and empirical support this essay surveys the theoretical predictions and recent empirical vector autoregression var evidence on the short run effects of discretionary fiscal policy on macroeconomic aggregates

dynamic scoring a back of the envelope guide abstract this paper uses the neoclassical growth model to examine the extent to which a tax cut pays for itself through higher economic growth the model yields simple expressions for the steady state feedback effect of a tax cut the feedback is surprisingly large for standard parameter values half of a capital tax cut is self financing the paper considers various generalizations of the basic model including elastic labor supply general production technologies departures from infinite horizons and non neoclassical production settings it also examines how the steady state results are modified when one considers the transition path to the steady state