There is no Laffer curve in tourism

The Sunday Times reported on a recent paper by Niamh Callaghan and me.

The paper is on the demand for tourism in Ireland by UK visitors. This is relevant because UK tourists make up about 45% of all visitors to Ireland (and because UK tourists are not that different from other tourists).

The paper starts with descriptive statistics. Irish tourism prices have developed roughly in line with prices elsewhere, except in 2008, when Irish prices rose very sharply, and in 2009, when Irish prices fell as the rest of the world raised their prices.

Ireland roughly maintained its market share in UK tourism. The drop in visitor numbers in Ireland seems to be because people take fewer holidays during a recession, rather than because there is something wrong with Ireland as a tourist destination. Ireland does well in the market for secondary holidays (city visits, fishing trips etc) and people economize on that rather than on the main family holiday.

We then estimate the price elasticity of UK tourism demand — that is, the price elasticity across destinations — using twelve years of micro-data from the International Passengers Survey. We use that to run two simulations, abolishing the travel tax and reverting the VAT cut. The results are qualitatively the same for both scenarios. The tax changes have a small impact on the total cost of the trip. With a price elasticity smaller than one, the impact on visitor numbers is small too. Tax cuts bring additional visitors and additional revenue, but all tourists (including those that would have come anyway) pay less tax. The latter effect is larger, so that there is a net loss to the Irish economy.

Tourism tax breaks are like export subsidies. Foreigners benefit. The tourism sector benefits. The overall economy loses out.