Effects of forest taxation and amenity preferences on nonindustrial private forest owners

Abstract

The effects of profit and land value tax on harvesting decisions of nonindustrial private forest owners are investigated. We use a model of a utility-maximizing forest owner with amenity preferences for timber, which extends the basic two-period harvesting model to include both thinning and clear-cutting harvests. It is demonstrated that with no amenity preference, the profit and land value taxes are neutral to clear-cutting and thinning decisions. Under small to medium amenity preferences, the profit tax decreases the optimal clear-cutting volumes. However, the effect on thinning may be positive or negative, depending on the amenity preference level. The total effect of the profit tax on the short-run timber supply is negative. The effects of the land value tax contrast with those of the profit tax. Also, a tax regime with a lowered profit tax rate combined with a land value tax is analysed. It is shown to be able to bring Pareto-improvement to a regime that uses a higher profit tax but no land value tax.