Alice Chiocchetti, Paris School of Economics

Hotelling Meets Laffer - Taxation and the Discovery of Exhaustible Resources

Many resource-rich countries have raised tax rates on mining activity over the past two decades, amid surging demand for minerals. Using a global firm-level panel of mining exploration and production from 1997 to 2024, combined with a newly compiled dataset of statutory tax rates, I find that higher taxes leave production from existing mines unchanged but sharply reduce exploration: a one-percentage-point increase in sales royalties lowers exploration expenditures by 8 to 9 percent, with no significant effect on short-run output. Event studies around the four largest mining tax reforms of the past two decades - South Africa (2010), Ghana (2012), Mexico (2014), and the DRC (2018) - confirm this result. Affected firms gradually relocate exploration abroad, leaving global exploration unchanged in the long run. A dynamic model of exploration, development, and extraction, disciplined by these estimates, quantifies the resulting trade-off between revenue from existing mines and future discoveries. For new projects, taxing profits yields more revenue than taxing gross revenue. Revenue-maximizing rates are higher when reforms also cover existing mines, whose output does not respond to taxes.