TESTING THE IMPACT OF TAXATION ON CAPACITY CHOICE - A PUTTY CLAY APPROACH

We investigate the impact of taxation on a sample of Canadian copper mines based on a 'putty clay' model, i.e. focusing on plant creations and major capacity changes. Our theoretical analysis shows that the cost of capital differs in such an instance from its counterpart under a flexible neoclassical technology, particularly in the way the resource rent component enters the formula. Besides the influence of geological variables, our econometric results establish the effect of (net of federal, provincial, and mining taxes) expected prices on capacity choice. We complement these results by identifying a significant influence of tax characteristics, as distinct from the influence of gross prices per se.