Conservation and Economic Efficiency: An Approach to Materials Policy

By Talbot Page; African Diaspora Studies Institute | Go to book overview
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This assumes that the hypothetical scrap firm's capital intensity is midway between the intensities of a petroleum and a manufacturing firm. A scrap firm that is also capital intensive, which they are rapidly becoming, may have an income tax price burden considerably worse than the competing virgin material firm. This illustration also assumes that the effective federal tax rate for hard mineral firms is about 20 percent and that these firms are about as capital intensive as petroleum firms.13 With these assumptions and with McDonald's assumption of forward shifting, we arrive at a result quite different from McDonald's: instead of the special tax provisions leading to neutrality in the product market, they lead to a rather strong inefficiency in the product market between primary and secondary industries. This inefficiency is roughly measured by the difference in the illustration between 17 and 4 percent, the price effects for scrap and petroleum, or 17 and 8 percent, the price effects for scrap and hard minerals. These numbers are for illustrative purposes; they are too imprecise for firm conclusions. Nonetheless, they suggest that we may have both types of inefficiencies at once. We have Harberger's inefficiency in the factor market because of the special provisions lightening the taxation of capital for extractive industries. And we may have McDonald's inefficiency in the product market because of the price effects. From an efficiency point of view, one might tolerate these two distortions--if one distortion worked in favor of the extractive industries and one against--as a kind of least bad compromise justified by the need for a corporate income tax. But when both misallocations work in favor of the extractive industries there is no such justification.14


Notes
1.
Arnold Harberger, "The Taxation of Mineral Industries," Federal Tax Policy for Economic Growth and Stability, 84 Cong. 1 sess. ( November 1955) pp. 439-49. The analysis was refined by Peter Steiner in "Percentage Depletion and Resource Allocation," Tax Revision Compendium, U.S. Congress, House Committee on Ways and Means, Nov. 16, 1959, vol. 2 ( Washington, U.S. Government Printing Office, 1959) pp. 949-966. It was extended by Agria, "Special Tax Treatment of Mineral Industries," pp. 77-122.
2.
The following recasts Harberger's argument to conform with the previous algebra.
3.
In this example Harberger assumed that the mineral investor can expense all his costs. Steiner and Agria take into account that not everything is expensed and that more liberal depreciation than the straight-line form is allowed in manufacturing.
4.
Any increase in profits is competed away by assumption in Harberger's analysis.
5.
Stephen McDonald, "Percentage Depletion and the Allocation of Resources: The Case of Oil and Gas," National Tax Journal vol. XIV, no. 4 ( 1961) pp. 323-336.

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