Tax Exportability in Tourism Market

Problem statement: Tax incidence is a basic topic in public economics as the tourism industry is an increasingly major contributor to government revenue. Generally, government taxation objectives are for the purpose of financing programs that improve people’s lives and economic prosperity, accelerate economic growth and allow for access to sustainable development. In the first view, tax policy decisions by government are based on their effects on the distribution of economic welfare. Therefore, to provide incentives for governments to select a suitable tax policy, exportability of tax is important. Hotel room tax is one of the main parts of tourism tax. Despite the importance of tax for government, it seems that the exportability of hotel room tax is still not well known. Therefore, understanding the counteraction of foreign visitors with respect to its main factors is important for the Malaysian government and tourism management. To achieve these aims, this study examines tax incidence effects on the tourism market. Approach: We use hotel room as representative of tourism market. Quarterly data from 1995-2009 are used and a dynamic model of simultaneous equation is employed. Results: Our results indicate that in the short run supply is elastic and demand is inelastic.But in the long run both demand and supply are elastic to price. Conclusion: Based the results if the government imposes one ringgit (Malaysian currency) tax on hotel room price, the tourist contribution is more than 89 and 74% in the short run and long run respectively. Hence, we conclude that the Malaysian tourism market is exportable. Our results also indicate that tax on hotel has no negative social effects in the short run.