Governments rely on an array of taxes and other fees to generate funds, or to modify behavior.  Taxation, depending on its design and application, can also act to stimulate or dampen economic activity in specific sectors.  Although sector-specific taxes are normally created with good intent as a means to create revenue and possibly stimulate economic activity, the total effects of these taxes are often not felt in the short-term, and negative repercussions can result.

Travel & Tourism is a willing contributor to the public welfare in general, and a major supporter of government services and infrastructure that enable the industry to thrive in particular.  It has become clear, however, that Travel & Tourism is vulnerable to nonproductive taxation.  This vulnerability is based on the lack of quality information and knowledge of taxation and the industry as a whole.  The first report from the World Travel & Tourism Tax Policy Center (TPC) will introduce crucial concepts to fill this void.  It will also discuss practical implications of tax policy as it relates to Travel & Tourism and outline the Center’s research agenda designed to provide a basis for sound analysis and decision making by policymakers.
 

GENERATING REVENUE

There are a number of ways, including taxation, by which governments can secure resources.  Most of these alternatives have political and economic consequences which are unacceptable in most peace time free market economies.  However, these alternatives to taxes have been, and continue to be, employed by many countries:

• Direct commandeering of resources
• Printing more money
• Borrowing from the private sector
• Direct competition with the private sector

Most free market economies employ a mix of borrowing, direct competition and taxation to secure the resources needed to fund government operations.  Taxation weighs more heavily in the mix as it is preferred both by government and the private sector; it is essentially the least disruptive means of securing government funds.

Given that taxes are a fundamental reality in modern economies, the question becomes "How and what to tax?" This question is often at the core of any political debate on taxation.  To answer the question requires an understanding of the socio-political and economic dimensions of the item to be taxed.

The socio-political and economic dimensions outlined in this report serve to guide policymakers in the process of formulating fiscal policy relative to Travel & Tourism.  In considering the costs and benefits of taxing Travel & Tourism, policymakers will be able to achieve their objectives of raising revenues with minimal disruption to the workings of the economy.
 

TRAVEL & TOURISM'S GLOBAL TAX CONTRIBUTION

In general, governments can raise revenue from taxes on consumption, income and/or wealth.  Travel & Tourism contributes to the tax base primarily through taxes on consumption and corporate and personal income.   Based on research by the WEFA Group, the World Travel & Tourism Council recently released a report on the economic contribution of Travel & Tourism to the global economy.

The WTTC Research Report shows that, by 1998, Travel & Tourism will:

• Generate $4.4 trillion in total demand
• Produce 11.6% of direct and indirect GDP
• Generate employment for 230.8 million direct and indirect employees, or 1 in every 10.7 workers
• Invest $779 billion (11.8% of total investment) in new facilities and equipment
• Account for 10.5% of all consumer expenditures and 6.8% of all government spending

The WTTC Research Report has also projected that Travel & Tourism’s global direct, indirect and personal tax contribution will exceed $802.6 billion in 1998. This contribution is projected to grow to $1,765.3 billion by 2010.

The industry’s indirect tax contribution has been estimated at 10.6% of total collections worldwide.  Estimates for each of the 24 OECD counties put the Travel & Tourism indirect contribution between 9% and 24%.

The largest Travel & Tourism contributors are the United States at $187.4 billion, Japan at $63.0 billion and Germany at $57.5 billion.

The industry and the traveling public are increasingly called upon to contribute more to the global tax base.  The fundamental question that must be addressed by both the industry and policymakers is "What are the impacts of a growing tax burden on the world’s largest industry?"
 

REASONS FOR CONCERN

The imposition of any tax distorts the "normal" workings of a market, because the tax acts as wedge between the price consumers are willing to pay and the price at which suppliers are willing to provide goods and services. Taxes essentially shift the price curve upward resulting in a reduction of the quantity demanded.  In Travel & Tourism, the reduction in demand may have the effect of reversing many of the economic benefits generally associated with a strong Travel & Tourism industry.  These benefits include foreign exchange generation, job creation, economic multiplier effect, new business start up and service economy stimulus.
 

Foreign Exchange Generation

International travelers inject hard currency directly into the economy, boosting export income.  Any tax-induced reduction in travel has the effect to reducing export income and direct monetary exchange.
 

Job Creation

A thriving Travel & Tourism industry directly and indirectly employs large numbers of people.  A tax that directly affects Travel & Tourism volume will be felt across the economy as reductions in demand slow down employment growth in Travel & Tourism services and in the sectors which support and supply the industry.

The Travel & Tourism industry generated jobs across a broad spectrum of economic activities:

• Creating direct employment for Travel & Tourism consumer services like airlines, hotels, car rental companies, tour operators, travel agents, restaurants and retail shops.
• Creating indirect employment in agriculture, mining, manufacturing, utilities, construction, communications, finance and business services, and personal service sectors, which supply Travel & Tourism with infrastructure, equipment, supplies, and services.
• Creating indirect employment for public service employees who provide government Travel & Tourism services.
   

Economic Multiplier Effect

Travel & Tourism can stimulate economic activity across a wide range of related sectors, generating an indirect contribution equal to 100% of direct output.  However, when money is removed from the economy by taxes, the effectiveness of Travel & Tourism’s multiplier is reduced.  On the other hand, if tax revenues generated by Travel & Tourism are used to develop Travel & Tourism infrastructure and promote the industry, the multiplier effect can actually be enhanced.
 

New Business Start Up

It is well known that small and medium-sized firms are one of the fastest growing and important sectors of the global economy.  This is important because, by its very nature, Travel & Tourism is very effective in activating small and medium-sized businesses.

However, small firms thrive when regulatory and tax barriers are minimal, so even the smallest reduction in demand or the slightest increase in cost structure can drastically effect their profitability and longevity.
 

Service Economy Stimulus

Because Travel & Tourism enterprises purchase business services from other sectors like finance, insurance and communications, the industry stimulates activity across the entire service sector.  In addition, the act of Travel & Tourism itself serves to facilitate international technology transfer, again helping to stimulate the service sector.  In this regard, fiscal policy plays an important role in determining how much people travel and, therefore, how much the Travel & Tourism industry can influence the creation of a vibrant service economy accompanied by high skill, high paying jobs.

Travel & Tourism is an important and powerful economic catalyst.  It is an industry which, when taxed and regulated intelligently, can create twice as many jobs as the average industry.
 

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Issues in Tax Policy 

• Foreword/Preface
• Economics of Travel & Tourism Taxes
• Tax Theory
• Principles of Intelligent Taxation
• Key Issues in Travel & Tourism Development
• Tax Policy Guidelines
• Global Forces Shaping International Tax Policies
• Travel & Tourism Taxes: A Reference Guide
• References

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