Analysing the effect of taxation on consumer behaviour in the tourism industry.

Abstract

This research explores the impact of tourism taxes on tourist behaviour. Research to date has tended to focus on the impact of tourism taxes on consumer behaviour only in terms of willingness to pay and the nature of the demand curve (Seetaram et al. 2018). Also, the impact of air passenger duties on outbound tourism has been assessed (Seetaram et al. 2014). However, these studies present different arguments for or against the use of tourism taxes, hence, the need to investigate more thoroughly the link between tourist expenditure and tourism taxation at both micro and macroeconomic levels cannot be overemphasized. This thesis argues that, at the household level in the European Union (EU), the impact of tourism taxes on household decision to spend on domestic tourism is different across regions within the EU. Additionally, specific socio-demographic features of the household moderate the impact of tourism taxes. One of the elements of the household budget is expenditure on tourism and the research uses household budget survey data from The European Commission Statistics Division, together with further statistics on macroeconomic variables from the World Bank Development Indicator, to evaluate participation and spending of households across EU member states. Households are divided within the EU, with key conditional variables based on the Heckman model, with the decision to participate and spend on domestic tourism. The analysis is conducted on the full sample and disaggregated into different EU macro-regions. For the macroeconomic analysis, this research argues that tourism tax negatively affects international tourist arrivals. The Fully Modified OLS technique is used on data from 1996 to 2017 on determinants of tourism demand, tourism tax, and international tourist arrivals from 20 top source markets which makes up to 81% of total arrivals to the Maldives. Data are collected from the World Bank, UNWTO, and the Ministry of Tourism in the Maldives to evaluate the study objectives. The choice of the Maldives is motivated by the lack of sufficient studies on small Island economies. Thus, given the availability of tourism tax data and it has been a small Island economy dependent on tourism, it becomes imperative to test the impact of tourism taxes on the Maldivian economy. The results indicate that higher tax rates on tourism services may dissuade tourists from participating in domestic tourism services, although higher tourism tax corresponds to higher household spending on tourism in the second stage. Also, for households above the median income with children and households with female head, the positive direct impact of tourism tax becomes negative which suggests that these categories of tourists respond negatively to an increase in tourism tax. However, single household heads decrease domestic tourism spending as tourism tax rises. Additionally, a higher tourism tax constrains tourists to pay for the expanded costs by diminishing the share of total household budget allocated to domestic tourism in a subsequent holiday. The findings show that a high tourism tax can discourage households from participating in domestic tourism activities, although those who do participate may spend more as tourism tax rises. However, when households are classified into certain sociodemographic groups, higher tourism tax leads to lower domestic tourism spending. A sum of the macroeconomic impact of tourism taxation in small Island economies dependent on tourism shows that amending tax policies by increasing existing rates or introducing new ones had negative influences on five tourist source markets (China, the UK, Italy, Russia, and France), which accounts for up to 44% of the total international tourist arrivals to the Maldives. This implies that, for destinations dependent on tourism, tax policy has a direct effect on the volume of international tourist arrivals. Also, in absolute terms, inbound tourism demand in the Maldives is inelastic for changes in the tourism tax revenue. However, the magnitude and sensitivity to the level of tourism tax elasticity vary across source markets. Inbound tourists from 10 source markets, which accounts for 22% of the total arrivals, seem prepared to pay more for the most part and disregard the broader impact of tourism tax. The findings from both streams of the analysis show that tourism taxes have had a detrimental effect on tourist spending on tourism, which, allied to the need by the government for additional revenue sources adversely affect the tourism industry. Consequently, tourism marketers should diversify market base and focus more on targeted marketing strategies. In addition, Island destinations should reduce overreliance on markets with homogenous features.