Principles of Intelligent Taxation

A WTTC study of taxation policy by the London School of Economics has produced five basic economic principles that should be applied to the design of taxes and user charges for all industries, including Travel & Tourism.
 

Equity

All economies should be treated fairly in regards to taxation.  Evenhanded treatment reduces imbalances that can result in political, social and economic difficulties.

Efficiency

Taxes must generate revenue without a significant impact on the demand for a good or service (unless the tax is designed to modify behavior).  At a certain threshold, the revenue gained from a tax increase can be lost because of reduced demand.  Even more, the decrease in demand sends a debilitating wave throughout the economy as suppliers are affected.  The negative impact swells, because of the subsequent loss of tax revenue in many sectors.

Simplicity

Complicated taxing schemes eat up revenues through administrative costs.  These costs include both those borne by government in the process of collecting and enforcing taxes, and those borne by taxpayers.  One objective of good tax policy is to achieve the highest possible ratio of revenues generated per dollar invested in collecting the tax.  Special note should be made to consider the taxpayers’ costs of compliance in calculating this ratio.   Simplicity in taxing also dictates that governments should make it clear what the tax rates are, and how the revenues are to be used.


Fair Revenue Generation

Fair revenue generation arises from the concept of equity.  In the evenhanded capturing of tax revenue, it is unreasonable to assess special fees or levies on specific goods or services.  These types of taxes are often cloaked by language and terminology to hide their real intent.  Although special charges and fees may appear on face value to be modest, they can quickly accumulate and become an unreasonable burden to a sector.


Effective Stimulus to Growth

Tax incentives and disincentives should be imposed with the underlying goal of stimulating growth.  Taxes that support infrastructure will ideally result in the attraction of investment and new employment.  However, when taxes become excessive, economic growth often grinds to a halt.

Many taxes on Travel & Tourism violate some or all of the Principles of Intelligent Taxation.  The practical reality is that taxes can be imposed to generate revenue, increase competitiveness or change consumptive behavior.   However, if taxes follow these principles, they will result in both increased revenues for governments and strong competitive economies.

Travel & Tourism is the world’s largest industry, the world’s largest employer and a major generator of tax revenue.  As such, the industry is a vital component of the global economy.  Some governments have recognized the impact and potential of Travel & Tourism, and have worked cooperatively with the industry to develop fiscal policies that enhance competitiveness, encourage employment growth, and result in positive net fiscal proceeds to their treasuries.  Unfortunately, many policymakers have taken a more shortsighted approach to taxing Travel & Tourism.

In many cities throughout the world, tax policies have been adopted which not only slow the revenue generating capacity of Travel & Tourism, but also slow or completely stifle job creation. In some cities, such as New York, the failure of policymakers to thoroughly consider the implications of increasing hotel room tax rates has actually resulted in a net loss of tax proceeds and jobs to the city and state.  It is estimated that New York State lost $962 million in taxes on visitor spending to collect $463.2 million from a 5% room tax.  A portion of this reduction in tax proceeds is attributed to fewer payroll taxes collected from the Travel & Tourism sector.
 

<--Prev | Next-->
 

Issues in Tax Policy 

Home | About | Intro | Guide | News | Tax Barometer | Task Force | VAT | Contact | Search | Links