Economic Effects of Tourism Tax Changes in Australia: Empirical Evidence from a Computable General Equilibrium Model

• Published in: Tourism economics : the business and finance of tourism and recreation Vol. 18; no. 1; pp. 181 - 202
• Main Author: Ihalanayake, Ranjith
• Format: Journal Article
• Language: English
• Published: London, England SAGE Publications 01.02.2012; Sage Publications Ltd
• Subjects: Australia; Economic equilibrium models; Economic impact analysis; Empirical research; Fiscal policy; GDP; General economic equilibrium; Gross Domestic Product; GST; Leisure economics; Studies; Supply & demand; Taxes; Tourism; Australia; CGE; Australian tourism; tourism taxation
• ISSN: 1354-8166; 2044-0375
• DOI: 10.5367/te.2012.0105

This paper analyses the economic effects of tourism tax changes in Australia. To this end, a tourism tax model (TTM), a computable general equilibrium (CGE) model of the Australian economy, is developed explicitly incorporating two tourism sectors. This is an important improvement in modelling tourism in a CGE context. The tourism sectors are incorporated using the ‘tourism dummy sector approach’, in which both the demand and supply sides of tourism sectors are modelled adequately to reflect the true nature of tourism. This model is used to carry out simulations of abolishing tourism taxes which are financed by an increase in the GST (goods and services tax). The simulation results suggest that the tourism sector expands as a result of tax abolition, while the other sectors contract. The increase in the GST, on the other hand, leads to an increase in commodity prices and thus the economy suffers, as reflected in a reduction in GDP. Overall, the results show that these tax changes are contractionary, as reflected in real consumption and GDP.