KI Traveller's Levy Economic Impact Assessment - Kangaroo Island ...
KI Traveller's Levy Economic Impact Assessment - Kangaroo Island ... KI Traveller's Levy Economic Impact Assessment - Kangaroo Island ...
Commercial-in-Confidence KI Traveller’s Levy Impact Assessment 2. THE ECONOMICS OF A TRAVELLER’S LEVY In considering a possible Traveller’s Levy for KI, a range of economic considerations must be taken into account – both in conceptualising and analysing its likely impacts and determining the optimal design (in terms of setting the rate, its base, administration and collection). This section overviews some of the key principles underpinning the economics of a Traveller’s Levy. 2.1 EFFICIENT DESIGN CRITERIA In assessing alternative mechanisms for collecting revenue (such as taxes, levies or charges), economists draw on a range of criteria against which to evaluate different options. In some cases these criteria are complementary, in others they are competing and hence must be traded off based on priority. Ultimately, it is never possible to meet all criteria simultaneously. Revenue sustainability: does the levy generate sustainable, reliable revenues for Council to meet its expenditure requirements over the longer term Simplicity: are the compliance costs to business and collection costs to Kangaroo Island Council excessive Is the levy a cost-effective revenue-raising instrument Efficiency: does the levy significantly distort behaviour in a way that results in large dead weight losses Equity: does the burden of the levy fall disproportionately on particular parts of the community that may be a concern Cross-border competitiveness: does the levy reduce KI’s competitiveness as a tourist destination in a way that overly encourages tourists to visit alternative locations Competitive neutrality: are businesses conducting similar activities treated in similar ways 2.2 EFFICIENT TAXES AND THE ELASTICITY OF DEMAND An important construct in the analysis of a Traveller’s Levy – both its design, and by extension its impacts – is the relationship between the elasticity of demand, efficiency and economic incidence. Economists generally measure the efficiency of a tax or levy by the level of ‘deadweight loss’ that it generates. A perfectly efficient tax is one which does not change behaviour and therefore imposes no efficiency-cost or deadweight loss on the economy. The extent to which behaviour changes in response to a change in (tax-inclusive) price is determined by the price-elasticity of demand. Where demand is invariant with price (perfectly inelastic), the introduction of a tax or levy will have no impact on demand, therefore resulting in no change in behaviour and hence no deadweight loss to the economy. Alternatively, where demand is highly responsive to price, the introduction of a tax or levy will induce relatively large changes in behaviour and result in relatively significant deadweight losses. That is, where demand for visitation to KI is relatively inelastic, the introduction of a levy will have little – or in the extreme, no – impact on visitation and the impact on tourism-orientated businesses will be minimal. 15
Commercial-in-Confidence KI Traveller’s Levy Impact Assessment The price-elasticity of demand also has a major bearing on the economic incidence of a tax or levy (i.e. by whom it is borne). The greater the elasticity of demand, the smaller the proportion of the tax or levy that the consumer bears, and the more is borne by the producer. The distinction between legal and economic incidence here is an important one. Even though the legal incidence of a tax or charge may fall on producers (i.e. producers are the ones who directly pay), where demand is inelastic (and subject to the elasticity of supply), such a tax or charge will be passed onto consumers through higher prices, leaving them to ultimately bear the economic incidence to the tax or levy. Where demand is relatively more elastic, passing on the tax will result in a reduction in demand, leaving producers more inclined to absorb the tax themselves. Chart 2.1 depicts this point. Rising price-elasticity of demand lowers the efficiency of the tax and shifts the economic incidence of a tax from consumer to the producer. The efficiency or ‘deadweight’ loss induced by the imposition of taxes in these diagrams is represented by the red (consumer surplus losses) and green (producer surplus losses) triangles. CHART 2.1: RISING PRICE-ELASTICITY OF DEMAND AND TAX EFFICIENCY 2.3 PRINCIPLES OF EFFICIENT COST RECOVERY Given that part of the rationale underpinning a Traveller’s Levy would be the generation of revenue to fund essential tourism infrastructure (particularly roads), the principles of cost recovery provide important context in which to analyse a levy’s possible design. That is, as the primary use of the revenue raised would be increased road maintenance, and one of the factors contributing to the increased costs of road maintenance on the Island (and hence the 16
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Commercial-in-Confidence<br />
<strong>KI</strong> Traveller’s <strong>Levy</strong><br />
<strong>Impact</strong> <strong>Assessment</strong><br />
The price-elasticity of demand also has a major bearing on the economic incidence of a tax<br />
or levy (i.e. by whom it is borne). The greater the elasticity of demand, the smaller the<br />
proportion of the tax or levy that the consumer bears, and the more is borne by the producer.<br />
The distinction between legal and economic incidence here is an important one. Even<br />
though the legal incidence of a tax or charge may fall on producers (i.e. producers are the<br />
ones who directly pay), where demand is inelastic (and subject to the elasticity of supply),<br />
such a tax or charge will be passed onto consumers through higher prices, leaving them to<br />
ultimately bear the economic incidence to the tax or levy. Where demand is relatively more<br />
elastic, passing on the tax will result in a reduction in demand, leaving producers more<br />
inclined to absorb the tax themselves.<br />
Chart 2.1 depicts this point. Rising price-elasticity of demand lowers the efficiency of the tax<br />
and shifts the economic incidence of a tax from consumer to the producer. The efficiency or<br />
‘deadweight’ loss induced by the imposition of taxes in these diagrams is represented by the<br />
red (consumer surplus losses) and green (producer surplus losses) triangles.<br />
CHART 2.1: RISING PRICE-ELASTICITY OF DEMAND AND TAX EFFICIENCY<br />
2.3 PRINCIPLES OF EFFICIENT COST RECOVERY<br />
Given that part of the rationale underpinning a Traveller’s <strong>Levy</strong> would be the generation of<br />
revenue to fund essential tourism infrastructure (particularly roads), the principles of cost<br />
recovery provide important context in which to analyse a levy’s possible design. That is, as<br />
the primary use of the revenue raised would be increased road maintenance, and one of the<br />
factors contributing to the increased costs of road maintenance on the <strong>Island</strong> (and hence the<br />
16
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