Contracts and leases:
Government Permits
Brent R. Moulton (paper by John Pitzer)
Fourth Meeting of the AEG, Frankfurt, Germany
30 January 2006
Possible Classifications of Permits
 Tax
 Purchase/sale of a service
 Lease of a non-financial asset
• Operating lease
• Financial lease
• Rent
 Purchase/sale of an existing asset
 Creation of a non-produced, non-financial
asset
 Financial asset
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Canberra II Concerns
 Types of non-financial assets.
 Treatment of assets once in the
system.
 Principles to distinguish permits that
are non-financial assets or represent
transactions in non-financial assets
from other permits.
 Definition of a tax necessary to
separate taxes and assets.
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Definition of a Tax
1. Compulsory
2. Unrequited
3. Received by a government unit
What is meant by “compulsory”

A. A transaction occurs or a condition exists.
B. Government learns about the transaction or
condition.
C. Payment becomes compulsory.
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Conditional Taxes
 Taxes become compulsory only if a specified
event occurs or condition exists.
 The specified event/conditions often are
optional to some degree.
• Examples—
• owning property,
• purchasing a luxury good.
 Decision to engage in taxable activity is
based on total benefits and costs of activity.
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Unrestricted Permits
 In the current SNA, distinction
between a tax and a service is based
on:
• Whether the government produces a
service that is delivered to the individual
purchaser, and
• The cost of producing any such service
relative to the price of the permit.
 No reason to change.
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Other Classifications of Permits
 No guidance on permits that involve
use of existing non-financial assets.
 No guidance on prepayments creating
financial assets.
 No guidance on permits that are
themselves intangible non-financial
assets, produced or non-produced.
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Asset-Related Permits
 If a permit gives permanent control of
an existing non-financial asset—treat
as sale of an asset.
 If a permit gives temporary use of an
existing non-financial asset—treat as
lease of an asset.
 Prepayment of a tax or service—create
a financial asset.
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Restricted Permits:
Tax or Non-produced Asset?
 Permits and the definition of a tax:
• Permits allow a transaction or activity to occur.
• Can selling permission to engage in a transaction
or an activity be “requited”?
• Only government permits are being considered,
so payment is to government.
• Permits are compulsory if the transaction or
activity is to occur.
• Permits are unrequited if no service or asset is
received in exchange, or the price is out of all
proportion to the value of the service or asset.
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Permits versus Explicit Taxes
 Explicit taxes are imposed by government units on
non-government units, after a taxable transaction
or activity takes place.
 Permits are imposed by government units before the
transaction or activity takes place.
 Non-government units engage in taxable
transactions or activities because they expect the
benefits from the transaction or activity to be in
excess of total costs (including the tax).
 Non-government units purchase permits because
they expect the benefits from the transaction or
activity be in excess of total costs (including
permit).
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Similarities with Explicit Taxes
 Payment is compulsory because of the sovereign
power of government.
• No unit would pay an explicit tax or purchase a permit
without government’s sovereign power.
 Payment is made because expected benefits are
greater than total cost (including explicit
tax/permit).
 Purchasing a permit is a cost of doing business that
reduces the net return.
 Granting permission is not something of value for
which the unit is willing to pay.
 Some units that otherwise would engage in the
activity do not because of the cost of the permit.
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Setting the Price of a Permit
 Government is a monopoly seller.
 Price can be set to maximize revenues, or to
pursue other policy goals.
 If price set and number of permits is not
limited, then the number sold depends on
price and demand.
 Why might the government limit the number
of permits?
 Market may not clear; government lacks
information on demand
 Need to determine demand before setting price.
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Auctions
 An auction is a means to determine the
market clearing price when the number of
permits is limited.
 Willingness of units to bid does not imply
that services or assets are being obtained.
 Government, using sovereign power, requires the
permit.
 Units willing to bid based on the expected
benefits from engaging in the underlying activity.
 Bidding to purchase permits is consistent
economic behavior, even though the permits
are fundamentally taxes.
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Multi-Year Permits
 Only the first year’s share of the cost is
a tax.
 Remainder is a financial asset.
 Early returns to issuing government are
transactions in financial assets.
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Secondary Sales
 Multi-year permits may be tradable.
 If price can vary from recorded value,
it is necessary to record the creation of
a non-produced, non-financial asset.
• Value is zero when permit is issued.
• Thereafter, value varies with market price
of permit.
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Canberra II Recommendations
1. All government permits that rely on
the exercise of sovereign powers and
are issued on a restricted basis should
be treated as taxes.
2. The method of setting the price of a
restricted government permit is not
relevant for its treatment as a tax or
an asset.
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Canberra II Recommendations
3.
4.
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If permits are valid for several years, only the
portion representing the current year is a tax.
The remainder is a financial asset for the
purchaser and a liability for the government.
Permits that are transferable or that can be
returned to the issuing government for a refund of
the unexpired portion are treated as financial
assets/liabilities. If a multi-year permit is
transferable, a non-produced, non-financial asset
is deemed to be created, with a value that varies
according to market conditions.
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