Progressive taxation can be an important tool in conserving
natural resources, since it increases the relative present value of future
returns, by reducing the returns to immediate exploitation of the resource. Consider an example: A capital good, a wood lot, say, provides an
income stream of $100,000 in perpetuity.
Now, if the tax is flat, and the resource can be cashed out, for
$2,000,000, and invested at interest for 5%, then the owner would be
indifferent to exploiting or conserving the resource. On the other hand suppose, with a progressive
tax, the $100,000 was taxed at a miniscule rate, and the $2,000,000 at
50%. Then the owner would have to be
able to invest the $1,000,000 that remained after taxes at a 10% rate in order
to be indifferent to preserving or exploiting the resource. If this rate were unavailable, he would be
more interested in conserving, rather than exploiting, this resource.
Indeed, progressive taxation increases the relative present
value of any future income stream, and so encourages investment in the future.
