The Whys and Why Nots of Export Taxation

Abstract

The authors review the arguments for taxing imports, considering two cases: one in which a country has market power in the export commodity, and one in which it does not. They conclude that for countries having market share there are strong analytical and practical arguments for an export tax. While the optimal level of the export tax may depend on the strategic behavior of other exporting and importing countries, on such practical issues as long-run market power, on whether smuggling exists, or on general equilibrium effects, these factors do not reverse the desirability of export taxation for countries with market share. Neither do alternative instruments such as export quotas and cartels, which could potentially yield a better outcome, negate this conclusion. The authors also find that countries without market share are not similarly situated to those with it. To the contrary, for most small, open economies that do not have market power in export markets, taxing imports is harmful not only to imports but also to general economic welfare and growth. Export taxes generate serious economic distortions and disincentives and are a poor instrument for encouraging higher - value - added activities. And in revenue generation, they are likely to be dominated by other tax instruments, and should be viewed as a transitional measure at best, to be replaced as soon as tax administration improves.