Forest Taxation and Timber Supply under Uncertainty and Credit Rationing

Working Papers 75 Koskela Erkki

This paper provides a theoretical analysis of the relationship between timber supply – in the sense of whether to bring harves to the market now or in the future – and various forest taxes by using an intertemporal consumption-savins model extended to allow for harvesting decisions as the vehicle for discussion. In the presence of perfect capital market and certainty the Fisherian separation theorem holds and harvesting decisions of non-industrial forest owners are independent from their consumption preferences. Introducing uncertainty e.g. about future timber price with risk aversion and/or capital market `imperfections` imply that the Fisherian separation theorem no longer holds so that harvesting decisions depend on consumption preferences of forest owners. In the paper the implications of this non-separability are developed for various individual forest taxes and for various changes in the structure of forest taxes, which will keep govenment tax revenue constant.