Estimating The Optimal Royalty Tax In The Gold Mining Sector Of Ghana

Abstract

Gold is the most important mineral resource in Ghana. It has over the years contributed to Ghana’s foreign exchange earnings, Gross Domestic Product, employment and government revenue through taxes. However, mining of gold brings great destruction to Ghana’s forests and its habitats. These costs are usually not considered in the design of fiscal policies. The question that arises is, what is the optimal royalty tax rate that would internalize the environmental cost of mining, more specifically forest degradation? This study seeks to determine the optimal royalty tax rate that would internalize the environmental cost of forest degradation resulting from gold mining. Specifically, a dynamic optimization model is estimated where the objective functions of both the miner and social planner are optimized given their sets of constraints using the current value Hamiltonian. The results permitted the deduction of the optimal royalty tax rate that would internalize forest degradation resulting from gold mining. The optimal tax rate depended on the shadow price of forest resources, interest rate, time, corporate income tax, gold yield per acre of deforested land and the world market price of gold. Comparative static analysis carried out showed that the optimal royalty tax rate is negatively related to the world market price of gold, positively related to interest rate and increases with time. It recommend that policy makers take these relationships into consideration in designing a royalty tax for the gold mining sector.