DR Congo’s Cobalt Tax Increase Won’t Change iPhone Or Car Battery Prices

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The Democratic Republic of the Congo has just increased the taxes it applies to exports of cobalt, germanium and coltan. As these are used in the production of mobile phones and car batteries this is going to mean a rise in the price of mobile phones and car batteries, isn’t it?

Well, no, not really, as taxation of Ricardian rents doesn’t work that way, not unless they’re excessive.

So, this isn’t right:

Well, but if something is being taxed more the price goes up, right?

The Democratic Republic of Congo (DR Congo)—the world’s largest producer of cobalt—has slammed a three-fold increase on royalties paid for the mineral. A government decree has declared cobalt, coltan and germanium—all used in producing smartphones—as “strategic” mineral resources prompting the royalty increase, despite opposition from leading cobalt mining companies who claim the tax hike will deter further investment.

Well, no, the market price of something doesn’t depend upon the cost of producing it. Rather, the interaction between the supply of and demand for it. So, if we randomly add a cost to production we’re not, in the first iteration, going to change the market price of it. The second and third iterations, well, if people can’t make a profit they’ll stop making it thus there will be less supply and so prices will rise.

Except.

A basic idea is that the profits to be made from the simple existence of something shouldn’t belong to anyone. No human effort went into putting the cobalt into the DRC (rather more volcanic activity contributed to that) therefore there are no human incentives we need to protect over putting the Co into Congo. It’ll be there whoever profits from it or not.

The extraction of cobalt from the Congo is another matter of course. If people can’t profit from the extraction then they’ll not extract and we lose supply thus prices rise.

A tax on Ricardian, or resource, rents is a tax upon that value simply of existence. As it’s there just from serendipity then it should be taxed away. No, not because it’s right and just that government gets the cash. But because we always want to tax where there’s the least damage to incentives. If, as here, there’s simply no human incentive whatsoever then that’s a great, great, place to tax.

No, extraction should not have all its profits taxed away but existence should. Tax resource rents until the pips squeak.

Good, DR Congo is, great. Except we’ve little evidence that they are at the right rate, all we know is that it’s higher than it used to be. Well, OK. Might be the right level then for it was certainly too low before. Except except, they did sign contracts at that old rate and governments not holding to the contracts they’ve signed is a money and development loser over time. Because if you can’t trust the people making the rules then what in the hell are you doing there?

The economic point here being that raising the royalty rate won’t directly alter market prices. That’s just not the way resource rent taxation works. Dependent upon the rate – ignoring that breach of contract bit – it could even be a good idea.