# Section 1: Dispelling Resource Rent Myths

## A. Resource Rents and Surplus Can Be Measured and Taxed

Rent has many meanings and uses in economics (Rothbard, 1977). At its simplest, rent is a stock concept, a present value of the expected future flow of pre-tax surplus from a firm’s operations that can be removed via either flow taxation during operations or stock taxation at project inception without affecting the firm’s investment and operating decisions. Other terms for rent are project net present value (NPV) or project value. Other terms for the flow of surpluses are excess profits or windfall profits. In mining, it is useful to think about rent and surplus at the project level; for the purposes of this report, the definition can be amended to the rent and surplus arising from a mining firm’s investment and operational decisions at a project that can be fully removed either as a stock rent tax or flow surplus tax without affecting those decisions. This concept is of interest because if only rent is taxed away, mining project investment and output remains at its natural, or pre-tax, level while governments enjoy the benefits of taxing away some

### _Box 1: Quasi-Rent, Other Rent, and Pure Rent_

Total rent can be divided into three components: quasi-rent, other rent, and pure rent, although the three are typically joint and cannot be separately measured. _Quasi-rent_ reflects the mine’s return on invested capital. In the short run, i.e., post investment, it will appear as excess profit. Any promise to tax away _quasi-rent_ will cause capital not to be invested in the first place. _Other rent_ encompasses monopoly rent, rent due to ability, and rent due to public policy. Only monopoly rent and public policy rent may be taxed away without distorting investment and operating decisions. _Pure rent_ arises because the quality of the mineral deposit that a mine is exploiting is superior to that of the marginal mine or the highest cost mine in operation. Mine quality depends on the grade of the ore, the nature of its mineralization, the depth of the deposit, access to ocean shipping, and numerous other factors affecting production costs.

Those who advocate taxing resource rent usually have in mind the _pure rents_ associated with mining. They reflect benefits created by the country’s geologic legacy. No operating mine should close because the government taxes away the _pure rent_ . This argument, while true, overlooks an important consideration. Creating _pure rent_ from mineral deposits requires not only mining these superior deposits but also either their discovery through exploration or purchase from other landholders who have discovered them or their creation by innovation and technology from previously known but uneconomic deposits. It is the quest to create and capture _pure rent_ that provides the incentives for exploration and technological advance. A country that taxes the _pure rent_ associated with mining must be prepared to subsidize new exploration or conduct exploration itself.

_Other rent_ and _pure rent_ , both stock concepts, may in part be contained in a flow of operating surplus that can be taxed away without distorting operating or investment decisions at a mine. The challenge is in identifying that flow when practical application involves information asymmetries and accounting practices that further confound identification of the surplus.

_Durlauf, S. N., and L. E. Blume, eds. (2008) - The New Palgrave Dictionary of Economics._ _<mark>Thomas, C.R. and W.F. Shughart, (2018) - Quasi-Rent in Augier, M., D.J Teece, eds. The Palgrave Encyclopedia of Strategic Management. Palgrave Macmillan.</mark>_ _<u><mark>h</mark> ttps://doi.org/10.1057/978-1-137-00772-8_591.</u>_ of or all the surplus created by these activities, an apparent win-win situation. While there are many sources of rent, the focus in mining tends to be on resource rent, the rent allegedly derived from the qualities of the mineral resource donated to the project by the sovereign.

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