So what is the peak of the Laffer Curve on a tourist tax? Credit Ketan Kumawat, public domain, Photo via Good Free Photos

New Zealand has decided to bring a Monty Python sketch to life. They’ve decided that the best way to finance the government of New Zealand is to tax foreigners living in foreign countries. This has the undoubted benefit that foreigners living in a foreign country cannot vote against the politicians imposing the taxation. Something of great interest to politicians of course. The problem is that said foreigners do still have the choice of not turning up and thus not paying the tax:

Tourists to New Zealand are set to be stung with a new tax but Australians have been given a free pass.

From late next year, international visitors heading to New Zealand will pay between NZ$25 and NZ$35 ($23 and $33) to get into the country, the government announced on Friday.

However, Australian citizens and permanent residents, people from Pacific Islands Forum countries and children under two will be exempt.

The move reflects an ongoing debate within New Zealand about the environmental and infrastructure pressures put on the country by booming tourism growth.

As Monty Python did point out, this is a great tax:

As above, from the political point of view this is great. The people paying the tax cannot vote against the people who imposed it. It’s a Get Out Of Jail Free card for the politicians imposing it. That’s not where it ends though, of course it isn’t.

What’s the price elasticity of tourism demand into New Zealand? And what’s the tax take from someone who does visit New Zealand?

That first question, well, how many fewer people will visit as a result of the tax? True, New Zealand is many miles and about half a century distant from anywhere else. It’s not somewhere people go to on a £9.99 Ryanair flight. So, the impact on the number of tourists might not be large. But there will be some impact. Might only be the one person who sticks in the mud with the insistence that if they’re going to charge me to get in I ain’t going! An insistence that a price change isn’t going to change demand at all – that tourism demand for New Zealand is entirely and wholly inelastic – isn’t something we can support. How much? is the important question though.

There will be some amount of tax revenue – VAT at least, excise duties as well – received from the spending of each tourist into New Zealand. So, the question is, will the extra revenue from each tourist in this tax be greater than the loss of revenue from those few to many who don’t turn up as a result of the tax? That is the question that needs to be answered to find out whether this tax will raise net revenue at all. Effectively, what’s the peak of the Laffer Curve for a destination tax?

No, I don’t know either. But here’s the real point. We’re all damn certain that the politicians haven’t worked it out either, aren’t we?

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14 COMMENTS

  1. There are quite a few places out there that are now charging with the *intention* of reducing numbers of tourists. Various sites are effectively full in parts (walking tracks in NZ in particular). Dubrovnik charges an outrageous sum to walk its city walls, precisely to lower visitor numbers.

    In this case there’s a more targeted approach. NZ gets an enormous number of visitors who do it on the very cheap (freedom camping etc) who use more resources than they give back in tax. They are a considerable net loss to the country when they visit.

    If the tax halves the number of hippies and wasters who shit on the beaches rather than stay in a hotel then that alone will be a good thing. I’d like the tax to be higher to dissuade more of them, to be honest.

    It’s effect on the visitors who are prepared to spend real money will be minimal. They’re already spending 100x the tax amount.

    So the analysis needs to be more than “it will reduce numbers”, since that is part of the reason for doing it.

  2. I”m past the clubbing age but I remember when I was a youth in my fifties paying a lot of money to get into a club where I would drink a lot of expensive booze and pay for some floozy to drink a lot of even more expensive booze, upon which the proprietor undoubtedly made a healthy profit– just so that I could laid. People do pay entry fees. HOWEVER the cost of collecting that paltry NZ$25-35 will probably exceed the revenue, while not being enough to discourage the yobs, so it is just one of those bloody-minded taxes meant to irritate and annoy.

    • Collection of the tax isn’t going to be expensive. Every visitor, with trivial exceptions on yachts, comes in by plane or cruise liner.

      The tax might be charged in bulk to the airlines and cruise lines, since they have to provide nationality lists anyway.

      It might be more difficult for the UK, with so many points of entry.

  3. I’m beginning to think Bath needs something like this. We have more tourists than we can handle. The majority seem to be day tourists and most just drive round in coaches, gawking at the buildings which cost us a fortune to keep looking nice, on pain of prosecution. I believe Florence charges such a tax on coaches.

  4. Tim’s thesis — that the tax will face Diminishing Returns and most of the Parliament don’t know what that means — is reinforced by the fact that 2/3 replies at this point effectively say, “Yes, people will not visit — and hurrah for that!”

    Many countries charge a Departure Fee, at least for tourists rich enough to Depart by airliner. Japan required a separate step and a separate payment I was not ready for. It has always seemed to be a bad final memory to leave the tourist with. A fee to enter the country is a tiny bit better. It will probably get included in the quoted airfare and you can decide whether to avoid New Zealand in favor of a country it is “cheaper to fly to.”

    Little New Hampshire’s effective motto is not Live Free Or Die but Tax Someone Else Invisibly. People arrive via toll roads to shop “without sales tax,” though their meals, hotel rooms, and car rentals are subject to a sales tax almost double that of neighboring Taxachusetts. The impression is that money paid by flatlanders is money not paid by me. All other things being the same, this would be true; but they never are. Taxation with impunity makes it easier to raise taxes. This windfall funds the most indefensible projects, and residents still pay through the nose for police and schools.

    • Sorry if I mischaracterized you. But you confirm the point I was making, which is that, if legislators understood how their new tax might start killing the goose that was laying golden eggs, they might support it even more fervently.

      On your second paragraph: Tourism is an industry, which produces revenue and taxation (not just boorish foreigners). What if I said, “Just building a manufacturing plant for the sake of it is stupid,” and asserted some sort of right to judge what is being manufactured?

  5. I may be wrong, but it seems to me that I paid some sort of airport tax in NZ years ago. Is this really different? Given the costs of a trip to NZ, this figure probably isn’t enough to dissuade many from going.

    Pretty place. I had a work assignment there once for several months. Enjoyed myself greatly.

  6. sounds like the dumb government of Jordan. When i was there in 2016 every jordanian was complaining about the drop in tourism – approx 70% drop. The solution – 20% tax on food and drink for tourists. Ended up getting our guide who was jordanian to pay for all meals and we’d then reimburse him.

  7. moqifen: that’s the argument I used to hear when I was on Taxi Licensing: our customer numbers are dropping, so we want to put prices up to recoup the losses.

    I would always tell them: regulated fares are a *ceiling*, not a fix, if you want more customers try dropping your fares.

    If I had my way I’d’ve abolished the fare ceiling, let the market sort it and reduced regulation down to safety of driver and vehicle. The problem with Hackney is the annonymous supplier problem, you don’t know the price until you’ve agreed to purchase (by flagging down). Just as with bus fares, you tend to desire to know the prices before you’ve got on. With buses you know that all Big Blue Bus buses will have the same fare as all Big Blue Buses and the same (generally) as yesterday, so its irrelevent which Big Blue Bus you happen to get on but with Hackneys every Hackney is a different supplier.

    The obvious solution of putting the fare chart on the outside of the vehicle large enough to read at a distance and at speed would fix this, but that would also require optical upgrades for the potential passengers as well.

    • I don’t agree at all that flagging a taxi constitutes an agreement to ride in it, though sure they will act offended if you don’t. Getting the attention of a taxi driver should be the start of (usually brief) negotiations (though negotiations are usually interdicted by fares set by rulebook).

      Boston at least has fares posted on the outsides of vehicles. Good luck figuring what you will owe from that, but again, you can make a taxi stop so you can take a closer look without promising to get in. Also, branding of taxis removes transaction uncertainty.

      “Your way” (to regulate only the things that need regulation) is sensible, but won’t happen while taxis are an oligopoly that controls its regulators with an eye toward keeping everyone else out of the industry.