The Effect of Tourism Taxation on International Arrivals to a Small Tourism-Dependent Economy

Abstract

This paper examines the effects of tax policies on international tourist arrivals to the Maldives using the fully modified ordinary least squares (FMOLS) panel data method. The Maldives is chosen as a case study because the nation is heavily dependent on tourism and earn up to 70% of total government revenue in tourism tax. As expected, the estimated tax elasticities show that tourism tax adversely influences inbound travel, but significant differences across source markets are observed. Specifically, a 10% increase in tourism tax reduces demand by 5.4%. The degree of responsiveness of tourism demand to changes in taxes is essential for tourism policy since a change in the cost of visiting a destination resulting from a change in tourism tax policies affects inbound tourism demand. Consequently, the effectiveness of current fiscal policies is a matter of concern for attracting international tourists to the Maldives.