President's 1963 Tax Message, Part I (revised Mar. 27, 1963) Committee on
Ways and Means, 88 Cong. 1 sess. ( 1963) table 5C, p. 308 and table 8C, p. 317.
U.S. Department of Commerce, Statistical Abstract of the United States, 1973
( 94th edition, Washington, D.C., 1973) no. 1107, p. 658 and no. 1111, p. 660; U.S. Department of Interior, Minerals Yearbook 1972 vol. I ( Washington, D.C., 1974) table 1, p. 910; and assuming a wellhead price of natural gas of 20 cents per
thousand cubic feet.
According to Oppenheimer, percentage depletion is more important to the
major oil companies than it is to the smaller independents. See Bruce Oppenheimer
, Oil and the Congressional Process ( Lexington, Mass., Lexington Books, 1974) pp. 108-109. Oppenheimer discusses at length the political process relating
to percentage depletion.
This is the circumstance that makes percentage depletion easy to analyze.
Unlike other tax provisions, which fall directly on the use of capital, percentage
depletion does not affect the tradeoff between capital and labor except for certain
complications, which are discussed below.
Mancke draws supply and demand curves showing the percentage depletion
allowance having no effect on either price or quantity, presumably because of the
50 percent of net income limitation. However, the marginal firm earning zero
economic profit is still earning a normal profit of perhaps 10-12 percent, which
may be sufficiently high to keep the 50 percent of net income limitation from
binding. See Richard Mancke, The Failure of U.S. Energy Policy ( New York, Columbia University Press, 1974) p. 86.
President's 1963 Tax Message.
Cost depletion, which is analogous to depreciation for other property, is an
alternative to percentage depletion; cost depletion is defined in the following
Phillip Stern, The Rape of the Taxpayer ( New York, Random House, 1973)
For more detail and complication, see General Explanation of the Tax Reform Act of 1969, prepared by the staff of the Joint Committee on Internal
Revenue Taxation, H. Rept. 13270, 91 Cong. ( 1970) PL 91-172, pp. 161-164.
Stephen McDonald, Federal Tax Treatment of Income from Oil and Gas
( Washington, D.C., The Brookings Institution, 1963) p. 10.
Emil Sunley, "The Federal Tax Subsidy of the Timber Industry," in The
Economics of Federal Subsidy Programs, a compendium of papers submitted to
the Joint Economic Committee, 92 Cong. 2 sess. ( 1972) Part 3, July 1972, pp. 317-342.
Sunley, "Tax Subsidy," p. 323.
Another way of thinking about the capital gains treatment of the timber
industry is to think in terms of transfer prices. Sunley quotes a 1971 price for Louisiana southern pine stumpage to be about $7.60 per ton (or $4.70 per cord).
With the value of bleached kraft pulp per ton of pulpwood about $170, it is a
little hard to imagine that all the profits appear at the lowly state of stumpage.
Yet if the total profit is only a few percent of sales value, the unit profit might be
just a couple of dollars per ton of wood. By counting the value of stumpage a
couple of dollars more and the costs of other operations a couple of dollars less,