|
Travel &
Tourism Taxes: A Reference Guide
A potential barrier to understanding both the theory
and application of tax policy is the jargon and terminology used to convey key concepts.
Much of the terminology has been derived from micro-economic theory, while some of
the concepts have emerged from welfare economics and public finance. In an effort to
clarify common tax terms and their association with Travel & Tourism, we have
developed the following Tax Reference Guide. We have attempted to remove the
formality and rigidity of classic definitions in order to make the concepts more clear and
meaningful for those who don’t have a Ph.D. in economic theory.
Consumption
Tax
A tax imposed on consumable commodities and services.
Most consumptive taxes are flat rate taxes. Sales taxes, excise taxes and
value added taxes are different forms of consumption taxes.
Consumption taxes are common to Travel
& Tourism, and are levied across a wide range of products and services travelers
commonly consume. Residents as well as visitors pay them. Recognizing that
when applied to international travelers, they constitute an export tax, some countries
have enacted rebate policies to entice tourists to shop while visiting. Although
some countries do rebate taxes on Travel & Tourism products, it is often much more
difficult to receive rebates on Travel & Tourism services such as hotels and
restaurants.
Demand Elasticity
A measure of the percent change in quantity demanded
resulting from a one- percent change in price. Elasticities are used to measure how demand
responds to change in price. Highly elastic demand indicates that relatively small
changes in price result in relatively large changes in demand.
Travel businesses contend with many demand
variables in establishing pricing strategies (i.e. time until travel, class of service,
weekday or weekend travel, etc.) For this, the industry has a remarkable set of
differential pricing strategies. For example, the airline sector has thousands of
different pricing options, while hotel and car rental companies also offer a plethora of
weekend rates, senior, governmental and educational discounts. Each is designed to
appeal to different market segments.
The marketing efforts of Travel &
Tourism businesses can be easily dampened by government tax policies, which are not
sensitive to variability in demand elasticities.
Direct Taxes
Taxes such as income and real property taxes collected
directly by the tax authority from companies, individuals or households.
Travel & Tourism companies should not
bear a larger or smaller burden than other companies from other industries.
Exceptions to this rule occur when a government decides to make and industry like Travel
& Tourism a strategic development priority, thereby providing certain tax incentives
to encourage growth and job creation.
Efficiency
Efficiency is an economic concept where no further
"improvements" are possible. In the classic sense, economic efficiency
occurs when resources are allocated to their best possible (most efficient) use. The
challenge to society is to balance efficiency objectives (efficient consumption,
production and product mix) with equity objectives or the "fair" distribution of
resources among individuals in society.
In the political and economic context, two schools of
thought prevail. The conservative philosophy holds that government is generally less
efficient than the private sector, hence, conservatives favor the smallest possible role
for government in the overall economy and low taxes. The liberal philosophy is more
concerned with redressing perceived inequities and failures in competitive markets, hence
liberals are supportive of larger government and see taxes as a necessary evil for
achieving a more even distribution of economic benefits and costs.
Both schools of thought support efficiency in tax
collection systems, as administrative costs per dollar of tax collected should be held to
a minimum. Tax policy that costs government and taxpayers more to collect than taxes
generated is inherently flawed.
Governments often view Travel &
Tourism as a vehicle for tax revenue generation while ignoring the resource allocation
challenges the industry faces. They frequently have the misconception that the taxes
imposed on Travel & Tourism companies or travelers can be passed on entirely to the
traveling public. This is generally not the case. Frequently some portion of
the tax and the administrative costs associated with collecting the tax are forced into
the cost structure of the Travel & Tourism enterprise. This requires the
industry to shift resources to recover the added costs associated with the tax.
Equity
Equity is the socially optimal distribution of
resources in an economy. In a classic sense, equity is achieved in a competitive
market when resources are allocated efficiently.
In the tax arena, equity is far from a singular concept.
Tax equity is a function of weighing several often non-compatible philosophies
including ability to pay; user pays; pay your own way and equal pay. Value
judgment
is important in arriving at the ultimate weighting scheme for assessing the equity
dimension of a tax policy.
In light of this fact, the equity of a
Travel & Tourism tax cannot be judged via a universal standard. Equity in Travel
& Tourism taxes should be approached employing the same criteria applied to other
sectors.
Tax Base Erosion
Tax base erosion occurs when traditional taxable
components of the tax base are no longer representative of the economy at large.
This may result from demographic changes, relative changes in the factors of production,
stagnation or inflationary effects, along with other shifts in the structure and character
of an economy.
As the relative tax
shares of other sectors are reduced (from demographic shifts or because taxing a sector
more is politically sensitive), policymakers frequently target Travel & Tourism to
make up the loss. Ironically, this may be a result of Travel & Tourism’s
success and visibility. Instituting a Travel & Tourism tax due to perceived
inequality in the tax base must be balanced with the tax principles outlined in this
report.
Tax Exporting
Tax exporting is the shifting of a tax burden to
non-residents of a given jurisdiction. Exporting can be achieved indirectly by
taxing imports or through intergovernmental transfer mechanisms.
In general, tax exporting can be achieved
directly, as is often the case for travelers, by taxes which are paid explicitly or
predominantly by non-residents. Hotel room taxes, car rental taxes and surcharges
are appealing to policymakers due to the fact that they are paid predominantly by
non-residents.
Horizontal Equity
Horizontal equity is a concept that refers to the fair
treatment of taxpayers with like ability to pay. If two taxpayers are equivalent in
their ability to pay, but one pays substantially higher taxes, the tax structure is not
horizontally equitable.
Match the Travel & Tourism industry
with a similar one in the same region (for example, a service based sector of roughly the
same size), and compare the relative tax burden, including spurious fees. If there
is horizontal equity, the marginal tax rates and the complexity of the taxes should be
similar.
Indirect Taxes
Taxes such as general and special excise taxes, sales
taxes and value added taxes. Generally, indirect taxes are taxes on consumption
collected at the retail or intermediate wholesale level. The cost of collecting
these taxes is borne by the seller and/or passed on to the consumer in the form of higher
prices.
In evaluating the impact of indirect taxes,
both the tax an its cost to collect should be considered, because regardless of whether
they are passed on to consumers, absorbed by business or shared, collection costs must be
paid, which removes spending power form economies. When an increase in taxes on
Travel & Tourism is justified, it is often preferable to increase the level of an
existing tax rather than introduce a new tax that requires businesses to develop costly
new procedures for collection, accounting and payment.
Marginal Tax Rate
The percent levied on each additional dollar of
taxable income. Under a progressive tax policy, the marginal tax rate rises as
income increases.
For example, in the Travel & Tourism
industry, some cities have imposed a luxury rate on top of existing room taxes when the
price of the room exceeds a certain level. The applied assumption is that someone
willing to pay for a higher price room should be able to pay a higher tax. This type
of tax tends to distort the market, and it singles out upscale or luxury properties,
forcing them to bear an even higher tax burden then value-oriented properties.
Neutrality
A standard for evaluating sales tax structures which
holds that a tax should not disrupt the competitive forces of an economic system or alter
the way in which distribution channel members interact.
Excessive room tax rates may stimulate
consumers, especially convention groups, to negotiate room rates and services on the basis
of the tax rather than on the value added dimensions of service. The hotelier is put
in a position of negotiating trade-offs between services and prices on the basis on the
tax and its increased cost to the guests. In this sense the competitive forces that
normally shape the interaction between meeting planner and hoteliers are distorted.
Progressive Tax
These are taxes with effective rates that are higher
for affluent taxpayers (individuals or households). It is important to understand
that "progressive," in this context, is not associated with a value judgement.
The term implies that the tax rate progresses (increases) as affluence (income)
increases.
Progressive taxation of wealthy tourists is
especially appealing to taxing authorities, because the tax burden falls upon the
"other guy," and the authority can be seen as a modern day "Robin
Hood." However, this too can prove to be an unwise strategy, because while it
may be true that wealthy tourists can afford to pay higher taxes, they are also an
especially astute group at avoiding taxes.
They can easily avoid high taxes in this
instance by taking their business to another destination. In the process, the
destination with high taxes loses a most desirable market segment, that being tourists
with the highest per day expenditure pattern of any tourist market segment.
Pyramiding
Tax pyramiding occurs when sales taxes are applied to
both inputs and outputs, thus shifting the tax burden to the ultimate consumer. In
this situation, some or all of the stages of production are taxed, with the accumulation
borne by the consumer at the point of sale. Tax pyramiding violates the uniformity
and neutrality principles of taxation.
In addition to the overt taxes on airline
tickets and car rentals, the traveler also pays a portion of the taxes imposed on fuel for
each mode of transportation. These taxes are embedded in the ticket prices to which
the overt taxes are then applied.
Regressive Tax
A tax with effective rates that are lower for affluent
taxpayers (individuals or households) than for less affluent taxpayers. In this
context "regressive" should not be associated with a value judgement. The
term implies that the tax rate regresses (decreases) as affluence (income) increases.
Flat fees/taxes such as passenger facility
charges at U.S. airports are an example of regressive taxes, because as the ticket price
rises (i.e. affluence) the percentage of tax to the total price decreases. Those
buying inexpensive tickets carry a higher tax rate.
Sales Tax
Sales tax is an indirect consumption tax applied at the
retail level. Sales taxes are calculated by multiplying the retail price of a good
or service by the tax rate. State and local governments use sales taxes extensively
in the United States.
In the United States (where sales taxes are
an institution), most consumers pay a sales tax on hotel rooms, car rentals, and airline
and cruise tickets. In some instances a portion of the tax is used to finance Travel
& Tourism development or promotion by channeling revenue through a convention and
visitors bureau or other economic development agency.
Tax Incidence
An indicator of whom bears the ultimate burden of a
tax. The initial taxpayer may respond such that the tax is shifted to others.
Analysis of tax incidence is usually done between buyers and sellers or between high
income and lower income groups. Analysis of an economic agent’s tax shifting
capability requires insight into the price and/or income elasticities of supply and
demand.
In Travel & Tourism markets where
demand is price sensitive, the incidence of a tax on Travel & Tourism products and
services will be shifted to suppliers. In markets where demand is less sensitive to
price, the incidence of the Travel & Tourism tax is shifted to travelers and tourists.
Uniformity
A standard by which to evaluate sales tax structures.
Uniformity suggests a tax structure where a uniform rate is applied to the
consumption expenditures of the ultimate customer.
Differential tax rates applied to hotel
rooms with higher prices or to car rental prices for larger cars may constitute a
violation of the uniformity standard.
Value Added Tax
A form of indirect tax that is applied to the value
added at each stage of production (primary, manufacturing, wholesale and retail).
The value-added tax (VAT) may be calculated by the subtraction method or credit
method. The subtraction method applies the tax to the difference between the value
of the purchases and the value of outputs. The credit method applies the tax rate to
total sales and then gives each member of the distribution channel a rate adjusted credit
on purchases. Value added taxes are applied throughout the European Union, Japan and
some South American countries.
In some countries, Travel & Tourism
services are taxed at a rate of zero, or the VAT can be reclaimed. In other
countries the VAT discriminates against Travel & Tourism by classifying many Travel
& Tourism services as luxuries which are taxed at substantially higher rates.
Vertical Equity
A concept that refers to the relative tax burden of tax
paying units with different abilities to pay is vertical equity. Issues of vertical equity
are concerned with the relationship between income and the effective tax rate (see also
progressive and regressive tax concepts).
Comparison of taxes on Travel & Tourism
services which appeal to high income groups versus median or low income groups would yield
insight into the vertical equity of a given tax.
<--Prev |
Next-->
Issues in Tax Policy
Home | About |
Intro | Guide |
News | Tax Barometer |
Task Force
|
VAT |
Contact | Search |
Links
|
