Taxes and the Extraction of Exhaustible Resources: Evidence from California Oil Production
NYU Wagner Research Paper No. 2211681. Jan 2013

Rao, Nirupama.

Rapid oil price increases frequently bring calls for special oil industry taxes. This paper uses new well-level production data and price variation induced by federal oil taxes and price controls to estimate how taxes affect production. Theory suggests temporary taxes create strong incentives for retiming productioneven well shutting. Empirical estimates suggest little shut-in in response to taxes, but substantial production retiming with an estimated elasticity between 0.208 and 0.261. The estimates are used to calibrate a simple model of the efficiency cost of tax-induced distortions, implying that a 15% tax reduces social efficiency by between 3% and 25% of the revenue raised.

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