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Xinhua Gu
Guoqiang Li


This paper studies the welfare impact of a gaming tax in a two-sector, trade base equilibrium model. Its partial-equilibrium part examines tax divisions between market participants and the impact of this divisiveness on the relative price of gaming. The general-equilibrium part analyzes the welfare effect of the tax via the resultant relative-price change. We establish that market conditions such as supply capacity and market size have a clear bearing on tax division and overall welfare, and that a gaming tax is more likely to be economically bad if less of the tax burden can be passed along to tourist players. A high tax can only be applied if much of the tax is borne by visitors; a low tax has to be adopted if otherwise. Since its small adverse effect can be easily absorbed by its induced economic growth, a low gaming tax will attract outside investment conducive to overall efficiency. We also point out that policy concerns as well as market conditions may all affect tax regimes and their differences as observed in the American and Asian markets. We find that gaming business reality supports our theoretical assertions.This paper was presented at the Southern Economic Journal Symposium on Gambling, Prediction Markets and Public Policy on September 15-16, 2008 in Nottingham, U.K.; we thank conference participants for their helpful comments. Also, we have benefited a lot from intensive discussions with Ricardo Chi Sen Siu about gaming tax issues in each revision of this paper. The usual disclaimers apply.

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