Agricultural Policies in the Presence of Distorting Taxes

This article analyzes how distortionary factor taxes affect the welfare impacts of production subsidies, production quotas, acreage controls, subsidies for acreage reductions, and cash transfers to farmers. Pre-existing taxes substantially raise the costs of all these policies. These additional costs reflect the welfare losses from financing certain policies by distortionary taxes. They also reflect interactions with factor markets caused by changes in the costs of producing agricultural output. Previous studies ignore the latter types of effect. Consequently they significantly overstate the costs of production subsidies and understate the costs of production quotas, acreage controls, and subsidies for acreage reductions. Copyright 1999, Oxford University Press.