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Countervailing Taxationn
by Mason Gaffney, 1967
Countervailing Taxation. In spite of the above, there remains some tendency for property taxes on in situ values to accelerate depletion. This tendency can be offset, if desired, by a perfectly countervailing tax on depletion (on Scott's user cost). By that device any desired percentage of the rent may be socialized without excess burden either in the form of accelerated or retarded depletion. The taxes simply replace certain prices and costs in the economy of the producer. The property tax replaces interest (explicit or implicit), and the depletion tax replaces private user cost. In either case, socialization may be partial or total, as desired. The two kinds of charges together exhaust the rent.[19]
Such a tax couplet would shift over time as life expectancy shortens, from primary emphasis on the property-tax component, the function of time, to primary emphasis on the depletion charge, a function of use. It shouldn't be a difficult trick to combine the two charges in such a way as optimally to constrain and motivate the operator of a mine. The suggested tax couplet is an alternative to the neutral annuity tax proposed above (pp. 364—67) and not a supplement. But the two approaches might be used simultaneously by different taxing authorities, provided the two together did not absorb more than the full tax base.
In fact, it is likely that the mild purgative effect of the property tax is in practice more than offset by the drop in the effective discount rate occasioned by general taxation of capital and its income in all industries and jurisdictions. The discount rate is the most powerful determinant of rates of use, and if this is artificially dropped, by a system of taxes that lowers the overall rate of return after taxes on new investments, the tax system as a whole operates to retard depletion of superior ores.
[19] For simplicity, assume a mine which yields a steady rent for L years and stops abruptly. Carrying costs (interest and property taxes) on the capitalized value of each dollar of rent are equal to:
( i + t ) 1 - ( 1 + i + t )-L = (1 + i + t)-L i + t Depletion under our assumptions is equal to:
(1 + i + t)-L The sum of carrying costs and depletion is, therefore, equal to 1. That is the entire rent (23, p. 170).
Adding a tax on depletion will complicate the above expression but without changing the basic principle that carrying costs plus depletion exhaust the rent income.
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