Export taxes with heterogeneous production costs: Why taxing exports can reduce both welfare and government revenue

Abstract

Export taxes on commodities are frequently proposed to lower domestic prices and generate government revenue. However, commodity production typically features stepped cost structures in which different production methods have sharply different breakeven prices and finite capacity. We develop a partial-equilibrium model with piecewise linear supply and capacity plateaus to analyze the welfare and fiscal effects of an ad valorem export tax, including through its impact on corporate income tax. We show that the tax can trigger a regime switch to autarky: when the tax-adjusted price falls below the marginal tier's breakeven, that tier exits entirely and domestic demand absorbs all remaining supply. The export tax then generates zero revenue while reducing corporate tax receipts. We highlight that an export tax can create a fiscal Laffer curve, even at apparently low export tax rates. Using parameters calibrated to petroleum cost structures, we find that the net fiscal position turns negative at tax rates as low as 4%, well below rates typically proposed in policy debates.

Keywords: Export Taxes, Trade JEL Codes: F1, F38, H21, H25, Q41

JEL Classification: F1, F38, H21, H25, Q41