The Economics of Taxation in Casino Tourism with Cross‐border Market Power

• Published date: 01 February 2016
• Author: Chun Kwok Lei,Xinhua Gu,Pui Sun Tam,Xiao Chang
• DOI: http://doi.org/10.1111/rode.12217
• Date: 01 February 2016

The Economics of Taxation in Casino Tourism with

Cross-border Market Power

Xinhua Gu, Pui Sun Tam, Chun Kwok Lei, and Xiao Chang*

Abstract

This paper provides a theoretical proof that casino taxation may have great potential as a contributor to

tourism efficiency under sufficient market power. We also examine empirical evidence for the economic

efficiency of casino tourism in Macao even with a “high” tax owing to geographic market power. Both

theory and evidence point to such power as a key factor that affects the ability of a tourism resort to

pass along local taxes to gambling visitors. This ability makes all the difference between the good or bad

effect of casino taxes on tourism development. The policy implication is that a gaming tax should be

lowered to support casino businesses if it is inefficient, but can be raised to extract public revenues if it is

efficient.

1. Introduction

Commercial gaming has experienced a rapid expansion worldwide since the

nineties. Inspired by the impressive success of Las Vegas, many other US

jurisdictions have turned to gambling legalization as a quick way to deal with high

unemployment and budget deficits, even in places that are not traditional tourist

destinations (Eadington, 1999a). Aroused by the phenomenal growth of Macao,

Asian countries are also legalizing casinos for tourism development and economic

growth. Singapore is a typical example of dramatic transition in casino gaming from

its opposition and prohibition to its legalization and promotion.

Casino taxation is also proliferating along with the spread of gaming operations

among travel destinations. In Macao, for example, gambling taxes accounted for

87.6% of its fiscal revenue and 32.6% of its GDP in 2012. Such taxation is supposed

to prevent compulsive gambling while providing public revenue. However,

lawmakers in many jurisdictions are increasingly interested in revenue generation to

cover fiscal shortfalls rather than in economic growth to create job positions

(Christiansen, 2005). Obviously, governments’ predilection for gambling dollars

stems from their strong belief in casino super-profitability.

The economic analysis of casino tourism and associated taxation appears to be

very limited (Benar and Jenkins, 2008). Existing studies recognize the role of

casinos for local growth (Walker and Jackson, 2007), discuss whether gaming is a

reliable source of tax revenue by looking at alternative taxes and demand elasticity

(Landers, 2008), and provide various forecasts of the demand for casino services

that cannot be stockpiled as inventory for later sale (Chu, 2011). However, there

*Tam: Faculty of Business Administration, University of Macau, E22, Avenida da Universidade, Taipa,

Macao. Corresponding Author. Tel: +853-8822-4756; Fax: +853-2883-2377; E-mail: pstam@umac.mo. Gu,

Lei and Chang: Faculty of Business Administration, University of Macau, Macao. The authors are

grateful to the Research Committee of the University of Macau for financial support (under grant

MYRG081–FBA11–GXH and grant MYRG014-FBA13-TPS).

Review of Development Economics, 20(1), 113–125, 2016

DOI:10.1111/rode.12217

©2016 John Wiley & Sons Ltd