Casino tourism, social cost and tax effects

Abstract

Local economic growth can be spurred by casino tourism, yet this may take place at the expense of the external regions where tourists live. We show that Pigouvian taxes should be imposed on gambling activity to attenuate its external cost. The tax may boost social welfare in the local and external communities even though casinos and tourists incur certain private losses due to their tax burdens. The tax can also mitigate gaming-biased unbalanced growth via resource reallocation, and improve the terms of trade for local welfare enhancement through tourism as an exporting industry. If taxes are collected from tourists but not fully refunded, local tax policy then plays the dual roles for both social cost reduction and public revenue generation. Our empirical study suggests the importance of casino taxation for preventing the ‘exported’ social cost from coming back to hurt the local economy, for too much such exportation may trigger visa policy restrictions by tourists' home communities.

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