Rate of Return Taxation of Minerals

A short run model of a nonrenewable resource firm, the mine, is used to analyze the allocative efficiency of the application of a rate-of-return profits tax which has no distortive effects on input or output decisions of the firm at the margin. The rate-of-return tax is generally found to lead to inefficient use of capital, an increase in firm and industry output, and a decrease in the ore quality of mines operating at the margin compared to the neutral tax. Manitoba's rate-of-return mining tax is evaluated and shown to lead to capital bias.