The Trade and Welfare Consequences of U.S. Export-Enhancing Tax Provisions

IMF Working Papers, May 1, 1994

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The Trade and Welfare Consequences of U.S. Export-Enhancing Tax Provisions

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Bibliographic details

• Authors: Stephen Tokarick, Don Rousslang
• Published: May 1, 1994
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451846904.001

Summary and main findings

• The U.S. tax code contains two provisions that encourage exports by reducing the U.S. corporate income tax on export profits.
• An applied general equilibrium model of the U.S. economy is used to estimate the trade and welfare consequences of eliminating both tax provisions.
• The provisions ameliorate the trade-discouraging effects of U.S. tariffs.
• The provisions adversely affect the U.S. terms of trade to such an extent that eliminating them is likely to improve U.S. domestic welfare.
• While it is possible to find an “equivalent” tariff rate that replicates the effects on trade flows of removing the tax provisions, the welfare effects of a tariff differ importantly because a tariff interacts differently than the tax provisions with other distortions in the model.

Methodology

• Approach: Applied general equilibrium model of the U.S. economy.
• Policy experiment: Elimination of both U.S. tax provisions that reduce corporate income tax on export profits.
• Comparative exercise: Identification of an “equivalent” tariff rate that replicates trade-flow effects of removing the tax provisions, followed by comparison of welfare outcomes.

Policy implications and interpretation

• Export-enhancing tax provisions can offset trade-discouraging effects of tariffs but can deteriorate terms of trade.
• Eliminating export tax breaks may improve domestic welfare despite potential negative effects on trade flows, due to adverse terms-of-trade impacts of the provisions.
• Tariffs and tax provisions are not welfare-equivalent even when calibrated to produce similar trade-flow outcomes because they interact differently with other distortions in the economy.

Subject coverage and keywords

• Subjects: Consumption, Exports, Imports, International trade, National accounts, Tariffs, Taxes, Terms of trade
• Keywords: Consumption, demand curve, export profits, export tax breaks, Exports, Global, import tariff, Imports, Tariffs, tax provision, tax provisions, Terms of trade, traded good, WP