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#BTColumn – Revolutionary and disruptive tourism taxation

Disclaimer: The views and opinions expressed by the writer(s) don’t represent the official position of Barbados TODAY.

By Dr. Basil Springer

“Don’t be conformed to this world, but be transformed by the renewal of your mind, that by testing it’s possible you’ll discern what’s the desire of God, what is nice and acceptable and ideal.” – Romans 12:2

Over the past 65 years, greater than 30 warm-weather tourism destinations within the Caribbean archipelago of islands and coastal communities have attracted leisure and business visitors alike.

Tourism has matured right into a world-class service sector and the taxation derived from this has been a serious boost to the economies of the region. The vision of Caribbean destinations is to penetrate the worldwide market efficiently and successfully.

The MPE Caribbean Report of Monday. September 26 conveyed the highlights of a “dynamic taxation system” proposal by Nicola Madden-Greig, president of the Caribbean Hotel and Tourism Association (CHTA), to deal with the vexing airline ticket tax issue, which was debated during IATA Caribbean Aviation Day within the Cayman Islands last month.

The difficulty is that the fee of an airline ticket is just too high and is a disincentive to travel. The federal government tax generally is a major factor of the fee of the ticket.

Madden-Greig is proposing a seasonal reduction in the federal government tax component of the airfare to extend the variety of individuals traveling, say within the low season, and recovering a few of that lost ticket tax revenue on the tourist spend on the destination e.g. accommodations, food & beverage, recreation, entertainment, transportation etc.

If the ticket sale is lost because the fee is just too high for the traveler, then the potential traveler’s spending money never reaches the destination, which impacts negatively on the economic return to the destination. The challenge is to get more people to the destination and maximize the overall tax collected.

The implication here is to cut back the taxes on the air fares (inputs) and tax the destination services (outputs) or, put more colloquially, “tax the outputs not the inputs”.

I even have continually referred to this idea in my weekly columns. I recall first hearing the phrase used a few years ago by experienced Barbadian economist Dr. Frank Alleyne (now Sir Frank) but not necessarily within the context of the tourism industry.

Within the case of President Madden-Greig’s proposal of a “dynamic taxation system”, we want to find out what’s the distribution of tax, between inputs and outputs, governments must levy on the industry to optimize the economic return from visitors to the Caribbean.

Allow us to learn from an easy agricultural experimentation analogy with which I’m very familiar. The target is to find out the optimal level of nitrogen/phosphorus/potassium fertilizer at a given price per kilogram that must be applied to a crop (pigeon peas, say) to maximise the profit per acre of the crop.

If we apply too little fertilizer, the profit per acre, at a given fertilizer cost, will probably be low. If we use an excessive amount of fertilizer, this will damage and even kill the plant and the profit may even be low.

What’s the optimum amount of fertilizer at that price to be applied to the plant to maximise the profit per acre? It is a decision problem, and the optimal amount of fertilizer to be applied is solved using classical experimental design and evaluation methodology.

Tourism taxation will little question be the mainstay of the economies of the Caribbean in the long run. Governments must experiment by innovating and disrupting its tourism taxation policies, using a “Sequential Evolutionary Approach”, to fuel the expansion and sustainability of the industry.

Like in other decision-making problems, the Nicola Madden-Greig proposal to unravel this optimization problem calls for an empirical solution. Let’s start fixing this now with passion, persistence and patience.

(Dr. Basil Springer GCM is a Change-Engine Consultant. His email address is [email protected] His columns could also be found at www.nothingbeatsbusiness.com)

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