Commodity Taxation in the Presence of Tourists

This paper investigates the welfare effect of commodity taxation on the presence of tourists. Higher demand from tourists increases tax revenue, and hence welfare, but on the other hand, the reduction in their consumer surplus is not accounted for in domestic welfare. Hence, the presence of tourists causes a lower deadweight cost of taxation. Two main scenarios are investigated. In the first, the authors raise the tax rate on commodities with a tourism demand component. It is found that the welfare level can increase if tourism demand is high enough and/or tourism demand is more inelastic than domestic demand. In the second scenario, tourism demand is increased for commodities which are already taxed and it is found that welfare always increases. Both scenarios are investigated under the fixed and the variable producer price assumption and, in the latter case, a high price elasticity of supply tends to generate positive welfare change.