Tariff and Consumption Tax Reforms in a Developing Tourism Economy

This paper examines the effects of a coordinated tax reform by replacing import tariffs with point-by-point increases in consumption taxes for a small-open developing tourism economy. Foreign tourists demand for the non-traded goods provided in the informal sector of the host economy, resulting in a tourism-induced terms-of-trade effect. The presence of inbound tourism lends a support to positive tariffs even for a small open economy. The indirect tax reform of this kind can increase residents’ welfare and government revenue when the initial tariffs are relatively larger to the consumption taxes.