Market Power and the Taxation of Domestic and International Tourism

Abstract

Tourism services around the world are subject to general and specific taxes. There is evidence that tourism is relatively heavily taxed and that rates of taxation are increasing, although the implicit taxation of aviation is lessening. Leaving aside issues of international rent extraction, or the passing of taxes on to foreign visitors, there do not seem to be strong reasons for taxing tourism differently from other goods and services, although specific levies to correct for related unpriced services or externalities may be called for. There has been a growth in specific tourism taxes, many of which are earmarked for spending on tourism-related projects or promotion. While this may appear efficient, it can lead to the squandering of revenues through the funding of inefficient projects. This is especially the case when different jurisdictions fund promotion to attract the same group of tourists. International tourism poses specific problems that make it difficult to tax it on a comparable basis to other goods and services. However, the most serious problem arises from the market power that countries possess over their tourism services; countries can, and do, impose taxes on tourism services and pass them on to foreign tourists. The scope for doing this is substantial and it is individually rational for countries to tax tourism services. However, this constitutes a barrier to trade in tourism services, and what is rational for an individual country is inefficient for the world as a whole. Excessive taxation of international tourism will be the result, and this taxation will be very difficult to negotiate away. Since this market power is unevenly distributed across countries, and there is some gain from tourism taxation, even after the taxation of their own travellers is taken into account, it would not be feasible to obtain agreement to reduce or eliminate such taxation if negotiations are confined to tourism and aviation issues. Agreement is more likely if there are broader negotiations, but even these may well not be enough. In the absence of side payments to bribe countries not to use their market power, the globally efficient solution of low tourism taxes is unlikely to come about. Ultimately, tourism growth is likely to suffer relative to other sectors in the global economy.