Modifying agricultural export taxes to make them less market-distorting

From 2006 to 2014, close to 40 countries levied an export tax on at least one agricultural product. Export taxes impose costs on the global economy by reducing total world welfare compared to free trade, and in particular hurt the tax-imposing country’s own domestic producers of the taxed good. Yet countries with export taxes have objectives that might make it unlikely for them to eliminate, or even reduce, the taxes. This article examines how a conventional export tax could be modified to make it less market-distorting, and thereby less welfare-diminishing, for both the tax-imposing country and the rest of the world. From a total world welfare perspective, the modified policy analyzed here is a “second best” alternative to the first best policy of abolishing the export tax and allowing free trade, but nonetheless it improves global economic welfare compared to the standard export tax. The modified policy discussed here achieves the same economic objectives as the tax, such as reducing the domestic price of the exported good, increasing domestic purchases, and raising revenue, but also generates additional exports beyond the volume that occurs under the tax alone. Also, the tax does not involve any government subsidies to producers or consumers. The main original feature of the modified export tax policy therefore is that it not only increases net economic welfare (compared to the unmodified tax scenario), but does so in a way that does not reduce the welfare of any economic group.