Air passenger duties as strategic tourism taxation

Abstract

There has been a recent debate on the rationale and economic impacts of air passenger duties (APDs) linked to puzzling empirical results on this topic. We argue that an approach from strategic tourism taxation can improve our understanding of these results. APD set by origin countries of tourists can be viewed as an instrument for extracting economic rents that would otherwise be retained by tourism destinations. A theoretical model of strategic taxation between an origin and two destinations is developed to illustrate this idea. We find that countries’ strategies may end up with winners and losers, or with all parties facing welfare losses. The game outcome depends on countries’ market shares of profits and the substitutability between tourism services provided by different destinations. The findings suggest that the economic impacts of APDs recently evaluated in the literature might be biased because of the omission of other countries’ potential tax reactions.