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Tax incidence and price discrimination: An application of theories to gambling markets

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  • Gu, Xinhua
  • Tam, Pui Sun

Abstract

This paper examines whether a casino tax is good for local welfare in a tourism economy. We find that what is important for efficiency is not the tax rate itself but the tax incidence on tourists. Casino tourism in Macao engages in price discrimination via market segmentation. We prove that, compared with the mass market, the VIP market will grow faster with a greater price rise if a tax hike on the VIP market is not large, but will grow less rapidly with a smaller price increase if the tax hike is very large. An empirical study is carried out using data from Macao, which is typical of segmenting markets for discriminatory pricing. We show that our theory is largely consistent with observed evidence. This paper also provides some policy recommendations useful for Macao. We propose that its casino tax should be kept low at its current rate in the mass market but be raised substantially in the VIP market if its economic growth is to be made less unbalanced and more sustainable.

Suggested Citation

  • Gu, Xinhua & Tam, Pui Sun, 2014. "Tax incidence and price discrimination: An application of theories to gambling markets," China Economic Review, Elsevier, vol. 28(C), pages 135-151.
    • Handle: RePEc:eee:chieco:v:28:y:2014:i:c:p:135-151
    DOI: 10.1016/j.chieco.2013.10.003
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    References listed on IDEAS

    as
    1. Xinhua Gu & Guoqiang Li & Pui Sun Tam, 2013. "Casino tourism, social cost and tax effects," International Gambling Studies, Taylor & Francis Journals, vol. 13(2), pages 221-239, August.
    2. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70, pages 215-215.
    3. Douglas M. Walker, 2007. "The Economics of Casino Gambling," Springer Books, Springer, number 978-3-540-35104-7, November.
    4. Paton, David & Siegel, Donald S. & Williams, Leighton Vaughan, 2004. "Taxation and the Demand for Gambling: New Evidence From the United Kingdom," National Tax Journal, National Tax Association;National Tax Journal, vol. 57(4), pages 847-861, December.
    5. Hasret Benar & Glenn Jenkins, 2008. "The economics of casino taxation," Applied Economics, Taylor & Francis Journals, vol. 40(1), pages 63-73.
    6. William R. Eadington, 1999. "The Economics of Casino Gambling," Journal of Economic Perspectives, American Economic Association, vol. 13(3), pages 173-192, Summer.
    7. Jim Landers, 2008. "What's the potential impact of casino tax increases on wagering handle: estimates of the price elasticity of demand for casino gaming," Economics Bulletin, AccessEcon, vol. 8(6), pages 1-15.
    8. Daniel B. Suits, 1979. "The Elasticity of Demand for Gambling," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 93(1), pages 155-162.
    9. Anderson, John E., 2005. "Casino Taxation in the United States," National Tax Journal, National Tax Association;National Tax Journal, vol. 58(2), pages 303-324, June.
    10. Julie Smith, 2000. "Gambling Taxation: Public Equity in the Gambling Business," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 33(2), pages 120-144, June.
    11. Mieszkowski, Peter, 1972. "The property tax: An excise tax or a profits tax?," Journal of Public Economics, Elsevier, vol. 1(1), pages 73-96, April.
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    Cited by:

    1. Gu, Xinhua & Li, Guoqiang & Chang, Xiao & Guo, Haizhen, 2017. "Casino tourism, economic inequality, and housing bubbles," Tourism Management, Elsevier, vol. 62(C), pages 253-263.
    2. Zhao, Qingbin & Li, Guoqiang & Gu, Xinhua & Lei, Chun Kwok, 2021. "Inequality hikes, saving surges, and housing bubbles," International Review of Economics & Finance, Elsevier, vol. 72(C), pages 349-363.

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    More about this item

    Keywords

    Casino tourism; Tax incidence; Market segmentation; Price discrimination; General equilibrium;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • F10 - International Economics - - Trade - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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