In the Tuesday Wall Street Journal, Professor Alan Blinder wrote of his puzzlement at the very slow growth of productivity in the last three years. There is really no mystery. The rate of growth of investment in...
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- Norway’s Addiction to Taxes on Oil
Norway’s Addiction to Taxes on Oil
Norway is an outlier among the 34 Member countries of the Organization for Economic Co-operation and Development (OECD) in one, interesting respect. Norway collects an equivalent of 10 percent of their GDP in corporate taxes, relying on these taxes for 25 percent of the country’s total revenue. This is compared to the OECD average corporate tax revenue of 3 percent of GDP and just under 9 percent of total tax revenue. Norway’s striking revenue statistic has one explanation: a heavy reliance on fossil fuels.
Norway is unique, among its OECD counterparts, in its ability to exploit oil production to fund its government. The 11th largest oil exporter in 2012, Norway both supports the oil industry by incentivizing exploration and development of new resources, while also heavily taxing any profits. On top of its 27 percent corporation income tax, Norway levies an additional 51 percent resource extraction tax on the exploration, development, and production of petroleum, a 78 percent total tax rate.
It is no surprise then that it raises far more from the corporate income tax than other countries. It raises about twice as much as Australia, with the second highest corporate income tax collections at 5.2 percent of GDP. The U.S. raises just over 2 percent of GDP from the corporate income tax.
In total, over 32 percent of Norway’s total revenues come from taxes, excise duties and other revenues from petroleum activities.
While the revenue from oil extraction has been a boon for Norway, it won’t last forever. For more than a decade, Norwegian petroleum exports have declined. The government places a large share of the oil revenue into a government run investment fund to prepare for a post-oil future. Norway recognizes that temporary revenues can create short-lived booms that are followed by difficult adjustment periods when revenues decline. The 2014 national budget projects revenues from their petroleum fund will peak in the next 15 years. If petroleum as a revenue source continues to decline, Norway’s generous welfare state will need to find different revenue sources.
It is not sustainable to tax just one industry at significantly higher rates than the rest of the economy and rely on that revenue to support over 30 percent of the government. Sound tax policy should have a broad base, low rates and be neutral between industries, activities, and products. Such a policy keeps tax revenue relatively constant over time and distorts individual economic decisions as little as possible.
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