Are you using psql? What version of PostgreSQL?

I am guessing "{xml}" is the client's way of saying that what you have is
"XML". Try casting the final result to "text" and see what you get.

Otherwise...

version
PostgreSQL 9.3.4 on x86_64-unknown-linux-gnu, compiled by gcc (Ubuntu/Linaro
4.6.3-1ubuntu5) 4.6.3, 64-bit

Since this:

WITH vals (ids) AS (
VALUES ('1'),('2')
)
SELECT xmlagg(xmlelement(name "tag", ids))::text FROM vals;

works probably need to provide a self-contained example for someone to look
at.





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