"The petroleum taxation system is intended to be neutral, so that an investment project that is profitable for an investor before tax is also profitable after tax. "
Do you know the specifics of how this is implemented?
Just being profitable (i.e. >$0 profit) wouldn't be sufficient because companies tend to analyse investments in terms of payback period (or maybe IRR).
Does Norway give subsidies up front so that the payback period is the same? If the investment profile is still the same for investors then how does the government make any money through tax? The statement seems to imply that the government keeps the investment profile the same, but that would seem to contradict that taxes are being charged. If taxes balance out the subsidy then how would Norway make money?
About half of their revenue is from SDØE and Equinor (which are SOEs), so this problem doesn't apply to them. The other ~half is from taxes. Most of it, now, from 2022, is from a cashflow tax. So if a firm invests $100, in say exploration, and makes no revenue that year, the company would be reimbursed 78% of that, i.e. $78, that year by the government. This makes that year's cashflow to calculate their IRR -$22 instead of -$100. https://www.norskpetroleum.no/en/economy/petroleum-tax/
This may still affect investment decisions but much less than an ordinary corporate income tax.
In 2022, they made ~NOR 535.2 billion from the cashflow tax. I've disaggregated their net cashflows (by ordinary corporate tax, special cashflow tax, cashflows from SDØE, dividends from Equinor and other taxes/fees) here: https://docs.google.com/spreadsheets/d/1ndnVzCq5X58OeqnfmHAfyPakbNAp2reBET-97uZV89s/ (based on the data from the first link).
In general, you can make severance taxes more systematic and less arbitrary by taxing the change in land value from resource extraction. See, instead of something like "we'll tax 30% of profits off of resource extraction" which has no basis quite honestly, a true Georgist approach would approach it from the land value POV. If a plot of land is worth $1 billion due to its oil reserve, and after extraction, it is worth $100 million, we know that the tax has to be $900 million.
This has other benefits such as having an inherent incentive to reduce pollution and environmental degradation as you will be taxed if you do something in such a manner that it lowers land values.
Interestingly, this also works backwards; governments should subsidies work that increases land values including exploration and methods of extraction. If a plot of land could potentially be worth $1B if oil reserves are discovered but is currently worth $100 million, the government should then spend up to $900 million in exploring.
Of course, this relies heavily on how well and accurately you can value land (and not just location value, but also value from natural resources), but there are lots of methods, and I believe you Lars are developing a model yourself.
Actually, as I explained in another comment, you do not want to combine the LVT and the severance taxes due to the nature of what is being taxed. Location is valuable over time, which is why LVT is assessed in time-units, but resources are valuable for their material substance, so the tax would be assessed on that value and not a flow of value over time. Doing so would incentivize massive resource overextraction and environmental degradation in the process, because you would be charged for each unit of time in which you were extracting the resource.
Both location and mineral resources are economic land, but they are different kinds of economic land and valuable in different ways, and they must be treated accordingly.
Well, what I am saying is that you only get taxed when you extract the resource. If the resource is not extracted, you are not taxed. Effectively, it becomes a severance tax tied to the value of the resources.
There will obviously be the regular location value tax that should still be charged to discourage speculation and encourage development.
That is the idea, but it's probably simpler and more accurate to auction off extraction rights as the method of assessing the severance tax. Norway's model is obviously not perfect, but it captures for the commons the majority of the resource rents and allows for profit off of extraction, transportation, refining etc. which are properly returns on labor and capital. The ideal system separates those perfectly, but this world being what it is we'll probably only get various approximations of the ideal, never quite achieving it.
LVT and severance taxes are not the same thing. Generally speaking, these are taxes on rights- in the case of LVT, the right to use a particular location, and for a severance tax the right to extract a natural resource. This means that the form of the taxes is different: an LVT is levied per time-unit, while a severance tax is levied per resource-unit. In this way, while a location may be more valuable due to its proximity to the oil beneath it say, the LVT does not encompass the actual value of the oil, which is only taxed at point of extraction. This is already common practice in many places- you may own a piece of land but not the mineral rights to it, which are a different form of property that must be purchased separately from the state.
"The petroleum taxation system is intended to be neutral, so that an investment project that is profitable for an investor before tax is also profitable after tax. "
Do you know the specifics of how this is implemented?
Just being profitable (i.e. >$0 profit) wouldn't be sufficient because companies tend to analyse investments in terms of payback period (or maybe IRR).
Does Norway give subsidies up front so that the payback period is the same? If the investment profile is still the same for investors then how does the government make any money through tax? The statement seems to imply that the government keeps the investment profile the same, but that would seem to contradict that taxes are being charged. If taxes balance out the subsidy then how would Norway make money?
Thanks
About half of their revenue is from SDØE and Equinor (which are SOEs), so this problem doesn't apply to them. The other ~half is from taxes. Most of it, now, from 2022, is from a cashflow tax. So if a firm invests $100, in say exploration, and makes no revenue that year, the company would be reimbursed 78% of that, i.e. $78, that year by the government. This makes that year's cashflow to calculate their IRR -$22 instead of -$100. https://www.norskpetroleum.no/en/economy/petroleum-tax/
This may still affect investment decisions but much less than an ordinary corporate income tax.
In 2022, they made ~NOR 535.2 billion from the cashflow tax. I've disaggregated their net cashflows (by ordinary corporate tax, special cashflow tax, cashflows from SDØE, dividends from Equinor and other taxes/fees) here: https://docs.google.com/spreadsheets/d/1ndnVzCq5X58OeqnfmHAfyPakbNAp2reBET-97uZV89s/ (based on the data from the first link).
In general, you can make severance taxes more systematic and less arbitrary by taxing the change in land value from resource extraction. See, instead of something like "we'll tax 30% of profits off of resource extraction" which has no basis quite honestly, a true Georgist approach would approach it from the land value POV. If a plot of land is worth $1 billion due to its oil reserve, and after extraction, it is worth $100 million, we know that the tax has to be $900 million.
This has other benefits such as having an inherent incentive to reduce pollution and environmental degradation as you will be taxed if you do something in such a manner that it lowers land values.
Interestingly, this also works backwards; governments should subsidies work that increases land values including exploration and methods of extraction. If a plot of land could potentially be worth $1B if oil reserves are discovered but is currently worth $100 million, the government should then spend up to $900 million in exploring.
Of course, this relies heavily on how well and accurately you can value land (and not just location value, but also value from natural resources), but there are lots of methods, and I believe you Lars are developing a model yourself.
Actually, as I explained in another comment, you do not want to combine the LVT and the severance taxes due to the nature of what is being taxed. Location is valuable over time, which is why LVT is assessed in time-units, but resources are valuable for their material substance, so the tax would be assessed on that value and not a flow of value over time. Doing so would incentivize massive resource overextraction and environmental degradation in the process, because you would be charged for each unit of time in which you were extracting the resource.
Both location and mineral resources are economic land, but they are different kinds of economic land and valuable in different ways, and they must be treated accordingly.
Well, what I am saying is that you only get taxed when you extract the resource. If the resource is not extracted, you are not taxed. Effectively, it becomes a severance tax tied to the value of the resources.
There will obviously be the regular location value tax that should still be charged to discourage speculation and encourage development.
That is the idea, but it's probably simpler and more accurate to auction off extraction rights as the method of assessing the severance tax. Norway's model is obviously not perfect, but it captures for the commons the majority of the resource rents and allows for profit off of extraction, transportation, refining etc. which are properly returns on labor and capital. The ideal system separates those perfectly, but this world being what it is we'll probably only get various approximations of the ideal, never quite achieving it.
LVT and severance taxes are not the same thing. Generally speaking, these are taxes on rights- in the case of LVT, the right to use a particular location, and for a severance tax the right to extract a natural resource. This means that the form of the taxes is different: an LVT is levied per time-unit, while a severance tax is levied per resource-unit. In this way, while a location may be more valuable due to its proximity to the oil beneath it say, the LVT does not encompass the actual value of the oil, which is only taxed at point of extraction. This is already common practice in many places- you may own a piece of land but not the mineral rights to it, which are a different form of property that must be purchased separately from the state.
Thank you (: