Slowing resource extraction for export: A role for taxes in a small open economy

Abstract

This paper develops model of a small open economy with installation costs of capital to analyze how taxes could slow extraction of resources for export. The overseas combustion of depleted resource stocks contributes to global warming, which impedes productivity growth in the small open economy. We find that the optimal resource depletion rate is independent of the social welfare function and discount rate. An export revenue tax rate need not fall over time to curb depletion if capital gains are taxed at a lower rate than interest income. The analysis is robust to installation costs of capital and transitional dynamics. The findings challenge conventional wisdom and suggest an array of tax policies for a small open economy seeking to curb extraction of resources for export. Show more