Ronald Johnson: Implications of Taxing Quota Value in Individual Transferable Quota Fishery

1. Ronald Johnson: Implications of Taxing Quota Value in Individual Transferable Quota Fishery Frequently mentioned regulatory device in fishing economics literature is use of corrective tax to reduce fishing effort. In contrast to efficiency-enhancing aspects of a corrective tax under open access conditions, main objective of taxation under a resource managed by an ITQ is a wealth transfer from quota owners to government. Argument: a resource rental charge on fisheries managed by ITQs do not constitute a pure wealth transfer. A tax on quota value will alter the industry’s TAC, shifting it back toward the open access level. Question: If government can set the TAC, then is Johnson’s argument relevant?

2. New Zealand example: Why not to tax a fishery managed by an ITQ. ASIDE Open Access Problem: Entry will occur to the point where economic profits are zero. Correct this by issuing explicit property rights or by some sort of government regulation.’ • Taxing to reduce effort. Imposition of the tax actually generates the very rent that is subsequently collected by the taxing authority. (e.g. It alters the equilibrium stock level of the fish population.) Assumed that the fishery is not already ITQ managed. • Corrective taxes not usually regulatory instrument of choice because taxation does not benefit fishers, and there may be political power against taxation.

3. Question: Can the government tax away market value of quota without altering resource use? If yes, market value of quota would be “neutral”. Standard Policy: Tax net returns so as not to distort extraction profiles. But this requires information on 1) output price and 2) Marginal cost of production. They usually do not have information on 2), but once ITQ is in place, they do have information on the market value of quota. Argument : IF fisheries taxed on the basis of the lease value of the quota, fishers will have the incentive to alter their behavior and thus change the market value of the quota. Mathematical argument skipped. For interested reader equation 9 and equation 16 show the different effect of a tax on net returns versus tax on a lease value of a quota. Incentive to change effort in the latter.

4. C(E) is cost of effort, C’(E) is MC of effort. C”>0. If C”=0, then equation 9 = equation 16. Johnson calls this C” the factor price effect. When returns to quota ownership are confiscated by tax, there's an incentive to shift the relative use of stock/effort such that net returns to effort increase. Logical argument: When rents are earned on factors of production other than the stock, the tax induces the industry to emphasize those other factors of production. (note: in deriving this result, it is assumed that the industry is capable of influencing the determination of the TAC.) Question: If the industry is capable of influencing the TAC so as to maximize profits, wouldn’t the management regime under the quota system have been directly defeated?

5. Summary: Imposition of resource rentals under an ITQ managed system will cause the industry to seek harvest rates that do not maximize aggregate rents. This lowers the tax bases and thus there is not a pure wealth transfer to the government. Instead, the government should charge quota owners a tax based on the percentage of the share of the TAC they hold.