Can expected tax revenue be increased by an investment-preserving switch from ad valorem royalties to a resource rent tax

This paper considers the question of whether a government can switch tax regimes from an ad valorem royalty to a resource rent tax (RRT) in a manner which preserves a company's optimal investment level but which also increases expected tax revenue, A model of optimal investment to extract a resource of unknown size is developed which specifies the conditions required for such a switch of tax regimes to be investment-preserving. However, a comparison of expected tax revenues under the two regimes is analytically ambiguous, Consequently the model is analysed numerically, which produces the conclusion that expected tax revenue can be increased by an investment-preserving RRT in the situation where extracting the resource deposit is expected to be relatively profitable, Moreover, in this situation the increase in expected tax revenue appears to be positively related to the level of the threshold rate of return under the RRT, However, in the situation where extracting the resource deposit is expected to be relatively unprofitable and relatively uncertain, the expected tax revenues from the two tax regimes are less divergent. (C) 1997 Elsevier Science Ltd. All rights reserved.