Neutrality and Efficiency of Petroleum Revenue Tax: A Theoretical Assessment.

The author uses an investment model of oil development to show how a fiscal regime can be both neutral with respect to development decisions and efficient in recouping economic rents. The author finds that there is a unique rate for calculating the tax deductibility of capital costs which ensures economic neutrality; while tax efficiency involves high rates of tax on profits after these deductions. Using parameters of the U.K. Petroleum Revenue Tax, numerical calculations in the author's simplified model suggest that tax was both neutral and relatively efficient. In conclusion the tax efficiency of the Petroleum Revenue Tax is compared with that of a neutral resource rent tax. Copyright 1997 by Royal Economic Society.