The Depletion Allowance Revisited

  • Paul Davidson


The scholarly defenders of the depletion allowance1 have based their exoneration of this special tax privilege primarily on two economic points: (1) percentage depletion is an offset to the non-neutrality of the corporate income tax; and (2) the tax handling of the oil and gas industry is an important stimulus to exploration of new domestic oil fields; i.e. in the absence of the depletion allowance, exploration of many wildcat fields in time period t0 would be negligible because at existing market prices in period t0 (and expected prices in the near future) the prospects of future revenues are not sufficient to encourage profit maximizing entrepreneurs to explore these fields with existing technology. Implicit in this view is the belief that the commitment of additional resources in exploration and development of new fields in time period t0 is in the public interest.


Petroleum Industry Extensive Margin Economic Rent Supply Price Royalty Payment 
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  1. 2.
    P. Davidson, ‘Public Policy Problems of the Domestic Crude Oil Industry’, American Economic Review, 53 (1963) p. 101.Google Scholar
  2. 3.
    R. F. Kahn, ‘The Depletion Allowance in the Context of Cartelization’, American Economic Review, 54 (1964) pp. 296–97.Google Scholar
  3. 4.
    Gaffney suggests that because of the time disruption of leasehold and royalty payments, the one-third estimate is an undervaluation of the importance of economic rents in the petroleum industry. M. Gaffney (ed.), Extractive Resources and Taxation,: Minnesota: University of Wisconsin Press, (1967) p. 410.Google Scholar
  4. 7.
    K. Lancaster and R. Lipsey, ‘The General Theory of Second Best’, Review of Economic Studies, 24 (1958) p. 11.Google Scholar
  5. 9.
    K. Boulding, The Impact of the Social Sciences, (1966) p. 43.Google Scholar

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© Paul Davidson 1991

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  • Paul Davidson

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