29 somewhat lower than 49 percent. This leads to an upward bias in the<sup>estimates</sup> for revenue gains but also overstates the decline in retentions.

There is, however, an important offsetting influence. The calculations refer to 1986, the latest year for which data were available.<sup>Inasmuch as</sup> borrowing from the banking system has been higher in 1987 and<sup>1988 compared to</sup> previous years, the calculations probably underestimate the proportionate<sup>gain</sup> in revenue and decline in retentiun-z by State enterprises that would occur were the calculations to be done fo, those later years.

In summary, these calculations show that the disallowance of amortization payments as an expense against the enterprise income<sup>tax is</sup> likely to result in significant change in income tax revenue and<sup>enterprise</sup> profitability. Also, the removal of tax-deductibility of amortization<sup>would</sup> make it easier to introduce a VAT of the consumption type without<sup>stimulating</sup> excessive investment in enterprises.

# 3.5 Resource Tax

The controlled price system and state provision of assets are<sup>not the</sup> only factors that could potentially give rise to inter-enterprise inequality. Some inequality is caused by unequal access to natural resources, particularly in the production of coal, oil, gas and minerals. This was partly alleviated by introducing the Resource Tax in 1984 which, while it can in principle be applied to all of these products, applies in practice only to the<sup>first three.</sup> The tax rules require the Resource Tax to be levied on profit (relative<sup>to</sup> enterprise sales) as follows. Enterprise with profit rates up to 12 percent are exempt; those earnings between 12 to 20 percent of sales are<sup>taxed at 50</sup> percent; those between 20 to 25 percent at 60 percent; while profits in excess of 25 percent of gross sales are taxed at 70 percent. However, frequent changes in profitability cause the tax to be levied in practice<sup>at</sup> enterprise-specific rates related to the amount of extraction<sup>of the resource</sup> and its quality.

The fact that it is levied on profit relativ( to sales means that the use of some exhaustible resources (e.g., coal, oil and gas)<sup>are indeed</sup> discouraged by it. However, the rates of taxation are not calculated to reflect such exhaustibility. Also, it is levied in a way that<sup>reduces the</sup> efficiency with which those resources are extracted. Efficiency in nationwide resource extraction requires that, for each resource, the marginal<sup>cost of</sup> extraction (including transport costs) be equal for all enterprises<sup>engaged in</sup> extraction. This condition would be satisfied if producers<sup>were</sup> profit-maximizing and faced the same producer price for output. However, since, the Resource Tax is enterprise-specific, being levied<sup>at a higher rate</sup> on more profitable enterprises, it can offer more efficient producers<sup>a lower</sup> producer price. The tax system can, therefore perversely encourage less profitable producers to expand activity even if their marginal<sup>cost is higher</sup> than that of more profitable enterprises.

Finally, the effectiveness of taxes/charges on resource use<sup>is reduced</sup> in the presence of price controls. In a market economy, a<sup>tax on resource use</sup> will discourage production, raise the market price and therefore discourage