In dealing with the effectiveness of forest taxation reform as a means of economic policy, the paper starts by recalling certain objectives of taxation, as well as the effect on aggregate demand of taxation in general. The effect of forest taxation depends on such factors as (1) whether the woodland owner has a regular income from a source other than forestry; (2) the system of taxation (whether taxation of actual stumpage revenue or of area-based yield); (3) the progression of taxation; and (4) the woodland owner’s income level.
The problem is illustrated by an example taken from Finland, where forestry revenue is taxed on the basis of area-based yield. A shift to taxation of actual stumpage revenue, as is proposed, is assumed. The effectiveness of this change is studied in terms of how far the assumed change is consistent with the objectives of the national economy. It is assumed that a shift to taxation of actual stumpage revenue would cause a decline in roundwood supply. A sensitivity analysis is then applied to detect the effect on tax revenue and national income of the tax reform. It is likely that a 10% decrease in fellings would bring about a reduction of tax revenue which would not be compensated for by the more perfect exposure of forestry income to taxation brought by the reform. The effect on investment, production, employment, differences in individual and regional income, and on the international balance of payments also disfavour the suggested change.