Incidence of Russian log export tax: A vertical log-lumber model

In 2007, Russia imposed an ad valorem tax on its log exports that lasted until 2012. In this paper, weuse a Muth-type equilibrium displacement model to investigate the market and welfare impacts of thistax, utilizing a vertical linkage between log and lumber markets and considering factor substitution. Our theoretical analysis indicates that, without considering the vertical linkage, the negative effectsof log export tax on equilibrium price for log producers is underestimated when logs and processingservices are gross substitutes, and the direction of bias is uncertain when they are gross complements. Empirical simulations show that the burden of Russian log export tax is shared almost equally betweenforeign log buyers and domestic log producers and that the tax increases domestic lumber production. Further, the marginal effect of the log export tax on domestic lumber production decreases as Russiandomestic demand share of logs increases. Overall, the welfare gains for Russian lumber consumers, lumberproducers in the form of quasi-rents to processing services, and tax revenue exceed the loss in its loggingsector.