In Portugal, casinos are taxed at a 50% rate and the tax receipts are allocated to Turismo de Portugal, which can use it in different ways- subsidizing tourism firms, advertising and so on. A recent study shows that casino demand in Portugal is originated predominantly in the domestic market. There is a debate about (i) the level of the tax levied on casinos and (ii) how the tax receipts should be used, as tourists rarely visit casinos. The paper contributes to this debate. The authors develop a dynamic general equilibrium model of a small open economy, comprising an industrial sector producing an internationally traded good, a tourism sector producing tourism services offered to both foreign tourists and residents and a casino sector supplying gambling services. Domestic residents derive utility from consuming the traded good, tourism services and gambling. The model is calibrated to the Portuguese economy. Using numerical simulations, the authors discuss the welfare effects of abandoning the taxation of casinos, as well as of different uses of casino tax receipts.
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