Tourism VAT relief: a behavioural cost-benefit analysis with off-peak targeting.

Abstract

Purpose This paper aims to test whether tourism value added tax (VAT) relief delivers welfare gains once fiscal costs and behavioural responses are included, and whether policy design (timing/targeting) matters more than rate depth. It compares uniform year-round VAT cuts with off-peak targeted VAT relief, modelling incomplete pass-through, seasonal demand elasticity and discounted welfare. Design/methodology/approach A regionally calibrated behavioural cost-benefit simulation is applied to Dorset (UK). Scenarios reduce VAT to 12.5% or 5%, either year-round or only in off-peak months, over a 10-year horizon. The model integrates consumer/producer surplus, employment and fiscal feedbacks; robustness is tested via sensitivity analysis and Monte Carlo simulation. Findings VAT cuts increase turnover and employment, but uniform year-round relief does not reach welfare breakeven after discounting fiscal losses. The key contribution is showing that off-peak targeting markedly improves welfare efficiency, producing benefit-cost ratios close to one while cutting fiscal exposure by more than two-thirds versus uniform cuts. Deeper cuts generate larger absolute gains but lower proportional efficiency unless pass-through and demand responsiveness are exceptionally high; overall, timing and targeting dominate rate depth. Practical implications VAT relief is most defensible as a time-bound, off-peak tool. Effectiveness increases when paired with price transparency, coordinated off-peak marketing and shoulder-season product development to strengthen consumer price signals and incremental demand. Originality/value The paper advances tourism taxation research by identifying which VAT design maximises welfare efficiency under realistic behaviour, integrating seasonality, incomplete incidence and discounted welfare appraisal in a transferable regional framework.