This theoretical paper aims to illustrate that tourism economies differ substantially with respect to market conditions, such as demand elasticity and industrial structure, which have a clear effect on the distribution of the tax burden.
This paper has used partial and general equilibrium frameworks to study the effects of a production tax on the overall welfare of a tourism economy. The two frameworks are linked via the relative price of tourism based on the assumption that it is influenced by a typical tourism economy that is able to enjoy a certain degree of market power in its tourism exports.
We have discovered that the division of the tax burden is significantly affected by local market conditions, such as demand elasticity and industrial structure. Generally, tourism economies differ with respect to those characteristics, which can be crucial in determining the success of a tourism tax. This line of research has enabled us to determine why different tourism tax rates have been adopted in various markets and to provide a justification for government selection of a particular tax in a given market. The rational criterion for tax choices is to maximize the likelihood of enhancing welfare or to minimize the risk of reducing efficiency.
This paper argues that those conditions are crucial to determining the success or failure of a tourism tax and may thus be able to explain why each tourism economy has adopted a different tax.
