EDWARDS. MASON 165 



substitution of percentage depletion which permitted oil and gas com- 

 panies to charge to depletion annually 27 V2 per cent of gross revenue 

 but not to exceed 50 per cent of net revenue. This advantage was ex- 

 tended in 1932 to metal mines at a rate of 15 per cent, to sulfur at 23 

 per cent, and to coal at 5 per cent. The privilege was further extended 

 in 1942; and, in the Revenue Act of 1951, a large number of addi- 

 tional minerals were brought in, including sand, gravel, shale, granite, 

 and oyster and clam shells. 



It should be noted that the direct impact of percentage depletion is 

 on production rather than discovery. The tax advantage accrues when 

 an income-producing property has been established. But, of course, 

 incentives to discovery are incidentally enhanced by reason of the in- 

 creased value that percentage depletion bestows on producing proper- 

 ties. The "expensing" of discovery and development costs, on the 

 other hand, constitutes a direct incentive to discovery. 



In assessing the character and magnitude of the subsidy three as- 

 pects of the concept must be borne in mind. There is no recovery of 

 costs unless an income-producing property is established; there are no 

 cost or value limits to the amount of "recovery," if an income-pro- 

 ducing property is established; the extent of the advantage is depend- 

 ent on the tax obligations of other than mineral producers. If the 

 advantage was moderate when the corporate income tax was 13 per 

 cent, it must be judged to be large with a corporate tax of 52 per cent. 

 In 1948, with the combined corporate normal and surtax rates of 38 

 per cent in effect, the Treasury figures indicate that percentage deple- 

 tion was worth $530 millions to the minerals industries. ^^ Since then, 

 of course, both the income tax and the earnings of these industries 

 have greatly increased. 



There is, of course, a tremendous literature, pro and con, concern- 

 ing percentage depletion. But I have not been able to discover a satis- 

 factory discussion of what seem to me the two central problems : ( 1 ) 

 whether the discovery and replacement of mineral assets presents, for 

 a going concern, an essentially different problem than the acquisition 

 and replacement of manufacturing assets; and (2) if it does, whether 



^1 Oakes, op. cit., p. 14. See also Douglas H. Eldridge, "Tax Incentives for 

 Mineral Enterprise," Journal of Political Economy, June 1950. 



