1.8 According to the government's strategy for economic growth, the "aim of tax reform is not to collect more taxes and thereby solve the problem of the budget crisis, but ... (1) to reduce the size of the tax burden as the state's obligations ... decrease; (2) to make Russian tax policy fairer toward taxpayers whose economic conditions differ; (3) to raise the level of neutrality of the tax system toward the economic decisions of firms and consumers." (GOR 2000, 146) Other problems associated with the Russian tax system include non-compliance and non-cash payments, both of which have been the topic of a growing literature (see, _e.g._ Alexeev 1998; Aslund 1998; Herzog 1997; OECD 1999; Pinto _et al._ 2000; Pirttila 1999).

1.9 These problems, and others associated with them, in particular capital flight, would be alleviated if natural resource rents were taxed appropriately, especially if the collected revenues served to finance a partial and gradual tax shift occurred from capital and labor to natural resources. Specifically, using natural resource rents as tax base facilitates tax assessment (calculating rent is easier than defining and assessing "income"), legitimizes taxation (rent is unearned income), and is less distortionary than income taxes.

# **Natural Resource Rent and Its Measurement**

1.10 One way of ensuring that benefits for the nation continue to flow from its natural resource is to capture and reinvest resource "rents". In this report, "rent" is defined as follows:

"Rent is a surplus - the difference between the price of a good produced using a natural resource and the unit costs of turning that natural resource into the good. The unit costs include the value of the labor, capital, materials, and energy inputs used to convert the natural resource into a product. What remains after these factor inputs are netted out is the value of the natural resource itself - the land, water, . . ., fish, minerals, forests, and environmental resources such as air and water." (Hartwick and Olewiler 1998, 59)

1.11 Consider the following hypothetical example: the market price of a resource-based commodity is US$ 100, its production cost _(ie._ the operating cost of production<sup>plus</sup> depreciation) is US$ 50, and a norrnal (competitive) profit needed to remunerate capital is US$ 10. The residual value, or economic rent, is $40. If the raw resource (say round wood) is not exchanged as such, the reference market price may be that of a processed commodity based upon the resource (say sawn goods or plywood).

1.12 Production cost can be either marginal or average. Using average production costs overestinates the real rent, however, since average costs are usually lower than marginal costs, given that marginal costs tend to increase as a function of quantity. Nevertheless, average cost data are more readily available, so average costs are often used in calculations of rent.

1.13 Theoretically, rent should be estimated in an intertemporal framework (Boadway and Flatters 1993) but the data necessary to carry out such an analysis, in particular reliable discount and inflation rates and marginal cost and revenue stream estimates, are not always available.

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