On the Theory of Cash Flow Taxes on "Rents"

Textbook explanations of the theory of rent seem so clear and simple that an outsider might be surprised to discover that economists have muddled into controversy over this subject. Experienced readers of the public finance literature will be less surprised. In fact, on closer examination, we find that the theory of rental taxation is sufficiently subtle to allow numerous opportunities for fallacy and that these opportunities have not gone unexploited. Taxation of "rents " to minerals deposits has been a subject of debate in many countries in recent years. Australia, for example, is considering the possibility of replacing some of its current royalties on mineral extraction by a "resource rent tax". Particularly interesting contributions to the discussion have been made by Swan (1976) and by Garnaut and Clunies-Ross (1975). In this paper, I attempt to sort out a number of issues that I have found puzzling in my own thinking and reading on the subject. Particular attention will be paid to the cash-flow tax on "rents" proposed by E. Cary Brown (1948) and to variants of this tax which have bee