Taking a piece of the pie: Papua New Guinea's log exports and optimal taxation

Abstract

With economic turmoil in East Asia causing a collapse in Papua New Guinea's export market for logs, there has been an announcement of yet another change in the export tax regime. The wisdom of the large reduction in rates is examined in the context of what would be optimal given the various constraints and complexities in the market. Logging contractors are predominantly foreign owned and the use of domestic factors is limited, so in the absence of an appropriate revenue system, resource rents will be lost to Papua New Guinea and transferred abroad. But at the same time, a constraint to designing a revenue system is the need to avoid distorting production. It is considered that an ideal system is likely to be too costly to implement and an export tax regime represents a good second-best alternative.