Download why do various gaming markets adopt different tax rates?

THE JOURNAL OF GAMBLING BUSINESS AND ECONOMICS
2008, 3 1
WHY DO VARIOUS GAMING MARKETS ADOPT
DIFFERENT TAX RATES?
GU, Xinhua and LI, Guoqiang 1
ABSTRACT
This paper studies the welfare impact of a gaming tax in a two-sector,
trade base equilibrium model. Its partial-equilibrium part examines tax
divisions between market participants and the impact of this divisiveness on
the relative price of gaming. The general-equilibrium part analyzes the
welfare effect of the tax via the resultant relative-price change. We establish
that market conditions such as supply capacity and market size have a clear
bearing on tax division and overall welfare, and that a gaming tax is more
likely to be economically bad if less of the tax burden can be passed along to
tourist players. A high tax can only be applied if much of the tax is borne by
visitors; a low tax has to be adopted if otherwise. Since its small adverse
effect can be easily absorbed by its induced economic growth, a low gaming
tax will attract outside investment conducive to overall efficiency. We also
point out that policy concerns as well as market conditions may all affect tax
regimes and their differences as observed in the American and Asian markets.
We find that gaming business reality supports our theoretical assertions.
JEL classification: D51, F10, H21, O12.
1
Dr. Xinhua Gu, Assistant Professor, Economics and International Finance,
Department of Finance and Business Economics, Faculty of Business Administration,
University of Macau. ([email protected]).
Dr. Guoqiang Li, Assistant Professor, Economics and International Finance,
Department of Finance and Business Economics, Faculty of Business Administration,
University of Macau.([email protected]).
This paper was presented at the Southern Economic Journal Symposium on
Gambling, Prediction Markets and Public Policy on September 15-16, 2008 in
Nottingham, U.K.; we thank conference participants for their helpful comments. Also,
we have benefited a lot from intensive discussions with Ricardo Chi Sen Siu about
gaming tax issues in each revision of this paper. The usual disclaimers apply.
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WHY DO VARIOUS GAMING MARKETS ADOPT DIFFERENT TAX RATES?
1. INTRODUCTION
The gaming industry is subject to higher levels of taxation than are other
industries in most locations, at least in the United States (Rose 1998, p. 23). It
is not only that U.S. gaming tax rates have increased in the recent period of
more than 10 years, but also that this period has seen an increased variation in
the U.S. tax rates. The blended casino-racino tax rates averaged 18.2 percent
in 2004, an 80 percent increase in the 10 years compared to 1994 when the
average gaming privilege tax rate stood only at 10.1 percent. In 2003-04,
taxes paid by state-licensed casinos (rising 9.4 percent) outpaced their gross
gaming revenues (GGR, rising 6.7 percent) in terms of growth, i.e., gaming
tax burdens rose faster than the underlying tax base. The standard deviation
of effective tax rates across the main American gaming states increased from
seven percent in 1994 to 17 percent in 2004, indicative of increased
differences in gaming taxes between different locations (Christiansen 2005, p.
1 and pp. 5-6).
There is growing concern in the U.S. about this quick hike in gaming
taxes. Raising taxes by the governments is their obvious bowing to necessity
due to revenue shortfalls and budget deficits. Some observers believe this
legislative predilection is due largely to a widely held myth of gaming’s superprofitability. Lawmakers taking this sector as economic “Harry Potters” treat
it as a reliable source of taxes that they can safely raise at whatever rate they
need to balance their budgets (Christiansen 2005, p. 3).
To fight off the high, diverging taxes, gaming operators and professional
analysts have spared no effort in preaching another persuasive myth that low,
uniform taxes are good for economic development; money taken away in
taxation could otherwise be used by private sectors to create jobs and
economic opportunities. They recommend that the average U.S. gaming tax
rate of 13.53 percent be taken as a viable point of departure for policy debate
in all American states and for business negotiation elsewhere including Asia
(Thompson and Stream 2006, p. 3 and 41; T-S 2006 thereafter).
Those private companies, though failing to prevent gaming taxes from
rising or diverging in the U.S., have ironically attained a success in Asia in
their push for low, converging taxes toward 13.53 percent in casino gambling.
The actual tax rates are slightly “above this number in Korea but in range of
the number in Singapore and Japan (proposals)” (S-T 2006, p. 41). Macao
with a rate far in excess of this number is an exception in Asia, and they have
therefore placed the city under pressure for tax abatement. One may argue
from the theoretical perspective against the idea of uniform taxation being
used as a means to seek out low taxes, but has to take into account practical
grounds on which those Asian gaming markets open to foreign investment
have accepted some rough kind of tax convergence. Our paper will tackle
these phenomena by integrating theory with practice, with emphasis put on
the case of Macao.
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WHY DO VARIOUS GAMING MARKETS ADOPT DIFFERENT TAX RATES?
It may be that a unified benchmark for tax choices is overly simplistic and
too arbitrary, given apparent differences or changes in macroeconomic
environment, policy concerns, and market conditions in various gambling
resorts. The uniform tax rate may be still too high for some jurisdictions but
far too low for others. One can recall general theories of taxation and deviate
a bit from either of the above two myths in order to have a neutral stance
toward gaming tax issues and a good understanding of why different taxes
have occurred in different locations.
In spite of the public’s aversion to it, taxation is inevitable for general
government operations. Taxation is justified: 1) to pay for public services; 2)
to redistribute income across segments of society; 3) to punish “sinful”
activities; and, 4) to correct bad externalities. These reasons apply to gaming
taxation since public services support casinos and other businesses, gaming
ventures generate high profits (reinforced by government granted local
monopoly status) that need to be redistributed, and gambling activity creates
certain external costs and social problems that have to be overcome (Rose
1998, p. 25).
Now that there must be taxation, what then is a “good tax”? Good taxation
should: 1) have stable, reoccurring revenues; 2) provide money for needed
social programs; and, 3) encompass ideas of equity so that persons in similar
situations pay the same tax, while parties most able to pay taxes have a greater
tax burden than those less able to pay. It should also: 4) be easy to collect yet
hard to evade, while making tax payment less “painful”; and, 5) encourage
desirable activities while discouraging activities harmful to the common good
(S-T 2006, pp. 10-11).
Some gaming locations have these features of a good tax. Casinos seem
highly productive or impressively profitable (Siu 2007), so it is reasonable for
governments to have a good appetite for high gaming tax. Since many
taxpayers prefer the gaming tax (either on player winnings or casino profits,
as an avoidable tax) over a sales tax (as an unavoidable tax), politicians can
collect revenues in a relatively painless way via gaming taxes (Walker 2007,
p. 10). Further, it is more desirable to impose a tax on GGR than on profits,
which can be falsely reduced by overstating costs.
Low taxes are good in such locations as Atlantic City whose casinos
provide 75 percent of property taxes and Nevada where gaming tax receipts
eliminate the need for personal or corporate income taxes (Rose 1998, p. 23).
A low tax is good as it helps attract other related industries into a region and
encourage desired economic activity; Nevada is a case in point. Its casino-led,
diversified entertainment facilities bring in an increasing number of tourists
who spend more on non-gambling activities, with the result that only 50.5
percent of its 2005 revenue was from gaming compared to 53 percent in 2000
(S-T 2006, p. 33).
High taxes may be bad for some gaming venues, for example New York
and Illinois, but not for others such as Macao. Gaming taxes are regressive
(wrongly) rather than progressive (rightly) and exacerbate income inequality
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in Illinois since its patron profile is skewed primarily toward low incomes
(Gazel et al 1996, and Rose 1998, p. 22). Due to its tiny territorial size a
reasonably high tax rate is necessary in Macao to avoid overcrowding
gambling facilities and commercial districts. A high tax will also help
alleviate social problems caused by serious Chinese pathological gambling.
High taxes may be necessary in some gaming locations to raise enough
revenues to provide the funds required for regulation to curb externalities and
projects to promote socio-economic development.
This paper develops a two-sector model to provide a new, trade base
equilibrium analysis for the gaming tax issues we have described. Trade-led
growth in tourism-based economies is not a new idea.1 What is special about
this paper is to get a partial equilibrium framework of the exportable (such as
gambling services) nested in a general equilibrium framework of the entire
economy. The partial framework copes with impacts on gaming’s relative
price of tax divisiveness between operators and players, and the general
framework ascertains the overall welfare effect of relative-price changes via
their induced alterations in the terms of trade and production incentives.
Our model offers some useful insights into gaming tax issues for diverse
gaming markets in the real world, and is at odds with the advocacy of low-tax
convergence. Gaming locations differ in economic conditions such as supply
capacity and market size, and these differences, among other things, have a
clear bearing on tax burden divisions, relative prices, and hence overall
welfare. Our theory can thereby have a good potential for explaining why
various jurisdictions have adopted differing tax rates in practice. We establish
that the net effect of a gaming tax is more likely to be economically bad if the
less of its burden can be passed along to visiting players. A high tax can only
be imposed if much of the tax is borne by tourists; if otherwise, a low tax
must be used for efficiency purposes.
“Development comes with low taxes” is a somewhat convincing myth on
some occasions (Christiansen 2005, pp. 12-16). Indeed, the small adverse
distortions of a low tax can be easily absorbed by its induced rise in capital
investment conducive to growth and efficiency. While proving this point in a
vigorous manner, we also point to the risk of immiserizing growth due to
gaming over-expansion caused by low taxes in the presence of rising
competition and externalities that reduce the terms of trade substantially. We
establish that government policy concerns, strategic business considerations,
as well as various market conditions, may all have an influence on tax regime
choices. It is fortunate to see that gaming economic evidence significantly
supports our theoretical predictions.
Some sensitive questions are worth being asked here in order to be
politically correct and economically sensible with regard to gaming tax issues.
1) Who pays the tax? A typical gaming operator, as a price setter, is in an
advantageous position to shift her tax burden, given its divisibility, to her
customers, as uninformed price takers, without their consent, since the
gaming price is usually unobservable by them (simply referred to as “price
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asymmetry”). With all this in mind, one sees that a seemingly “high” tax may
not really be so high for casinos. If more of a tax burden can be shifted away
from their operators, then this tax may not be that bad for development as a
higher rate is imposed mainly on gaming players.
2) Who gambles in the locality? A casino resort is actually a trade-based
economy, with gaming exports serving as the most important autonomous
factor determining its total income. There will be enormous gains from trade
when there is a continuous influx of gambling tourists, so it is rational for
local governments, via gaming taxation, to share these gains with the
operators; besides, the tax burden may fall heavily on visitors. This is
especially true of casinos located on state or country borders (Walker 2007, p.
10).
3) Who owns the casino? All U.S. casinos are domestically owned, but
many states still use them as a “golden goose” for solving immediate fiscal
crises. Deficits come and go over time, but no one expects deficit-initiated
gaming taxes to be reduced or removed once the deficits disappear. Lower
taxes are encouraged for freer competition, but interstate protectionism still
prevails, as seen from the proposed tax credits for gaming owners to raise the
recapture rate for in-state vacations and attract out-of-state or foreign visitors
(S-T 2006, pp. 37-39).
Many Asian casinos are foreign owned but enjoy lower taxes than some
of their U.S. counterparts. Korea and Singapore make use of foreign casino
operators via low taxes who target foreign players, mainly from Japan and
China. In Japan proposed casinos are simply aimed at protecting national
welfare via import substitution; a low tax policy is to be coupled with
ownership sharing, however foreign operators are unhappy with this
arrangement. Half the casinos in Macau have foreign ownership but their
customers are mostly Chinese; its tax rate should not be deemed as high,
given its ownership-patron structure of such kind. The above three questions
are addressed in this paper from both theoretical and practical perspectives.
The rest of the paper is structured as follows. Section two offers the
welfare economics of gaming taxation. Section three proves some results
about the linkage between tax choices and market conditions. Section four
examines certain empirical issues about gaming taxes and economic growth.
Section five is the conclusion.
2.
THE WELFARE ECONOMICS OF GAMING TAXATION
A gaming tax, whether imposed on gambling players or operators, will
have a pervasive impact on the entire economy. Such impact can be analyzed
by the joint use of partial and general equilibrium frameworks, both of which
are connected through the relative price of gaming versus all other goods. The
partial equilibrium framework decides the division of a tax burden between
gaming operators and players, and the influence of this divisiveness on the
relative price. The general equilibrium framework determines the welfare
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effects of the tax via the resultant change in the relative price. Along this line
of reasoning, the present section provides the basic welfare economics of
gaming taxation in a new diagrammatical manner.
(1) The assumptions underlying the formulation of a two-sector model
A typical casino resort, like Macao, is viewed as an open economy
consisting of two sectors: exportable and importable. The exportable sector
includes commercial gaming and other related services exported to visitors,
and the importable sector covers consumption and investment goods imported
for local use. The dichotomy of such an economy is reflected by the fact that
locals sell the exportable to visitors and then use the proceeds to purchase the
importable for consumption. One can thus resort to a two-sector modeling for
the welfare analysis of tax effects in a gaming economy whose output rests
heavily on gaming (e.g., about 49 percent of Macau’s GDP came from its
gaming receipts in 2006).
A typical gaming resort usually is a small open economy,2 but actually
enjoys some market power as a major exporter of gaming and other related
services, and so will be able to influence their prices. Thus, both the effect of
a gaming tax on the terms of trade and the burden of the tax on two sides of
trade are affected by the supply condition of the economy as well as by its
customers’ demand behavior. Macao, for example, is a small city, but in a
position to decide on the price of gaming in the vast Chinese market just
because it is the only jurisdiction in China that has legalized casino gambling.
A production tax on gaming output, assumed to be a quantity tax for
expository convenience, will generally raise the price paid by players and
lower the price received by operators. The increased consumer price boosts
the terms of trade while the decreased producer price hampers incentives for
exportable production. In addition, operators can pass along part or all of a tax
to players, and how much of the tax gets passed along will depend on the
characteristics of demand and supply. In fact, whichever side of the market
(players or operators) is more responsive to price changes than the other side
will get less of the tax burden.
As is well known, gaming services are hard to price openly due to price
asymmetry, and these services are not sold at any explicit price. However, one
has to admit that there must be an implicit price governing supply and demand
in the gaming market. This pricing issue will be discussed with the aid of the
Figure 1 framework.
One might be skeptical about the tax burden divisiveness embedded in the
above price changes because gaming operators often complain of their higher
taxes compared to those in other industries. Nonetheless, a tax on casinos may
not hurt profits much if one carefully examines questions as to who gambles
(outsiders or locals), who pays the taxes (players or operators), who receives
the benefits from the public services the taxes support, and who creates
externalities (negative or positive). Even if the tax is apparently on casinos,
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player well-being remains affected. This has been confirmed by several case
studies of U.S. local gambling residents. A survey of South Dakota players
suggests that lower income people play video poker machines more than
persons with greater wealth, thus the tax derived from such gaming is very
regressive (T-S 2006, p. 31). If an income tax applies to player winnings (e.g.,
25 percent in Las Vegas and 10 percent proposed in Singapore; see S-T 2006,
p.43), then it is the winning player who has to pay much or all of the tax
directly.
(2) Tax effects on the relative price in a partial-equilibrium framework
Let X and Y denote the exportable and importable outputs, P and Q their
prices, respectively. P/Q is the relative price of X vs. Y, also known as the
terms of trade. Q is assumed constant (or equal to one) for simplicity and
omitted from the vertical axis scaling in the Figure 1 partial equilibrium
framework of the exportable.3 SSh is the supply curve of home operators, and
DDt the total demand curve for both outside and home players. At the
equilibrium point A, P*/Q is the market-clearing terms of trade and X* the
resultant quantity of output. No distinction between the consumer and
producer prices exists in equilibrium without taxation.
Figure 1: Effects of a Production Tax on the Relative Price
After a production tax is imposed, the supply curve SSh is shifted up by
the same amount as the tax rate T in Figure 1. As a result, equilibrium output
is reduced from X* to X*’, and there appear two equilibrium prices. The
consumer price Pc (= P* + Tc) exceeds its no-tax counterpart P* by Tc, the tax
passed along to players; whereas the producer price Pf (= P* - Tf) falls below
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its no-tax counterpart P* by Tf, the tax borne by operators. Both tax burdens
must add up to the tax amount (Tc + Tf = T), and hence Tf relates inversely to
Tc. The more of a tax is paid by players, (i.e., Tc rises), the less of it will be
borne by operators (i.e., Tf drops).4
The gaming tax is usually imposed on gaming revenues as an ad valorem
tax (or a value tax), but can be viewed as a production tax on gaming output
in the form of a quantity tax for the sake of simplicity. If a value production
tax were used, the supply shift would not be a parallel one as in Figure 1.5 Tax
distortions could be amplified if demand became less elastic, in which case
players had to pay even higher prices while operators must receive even lower
prices. This point is a bit technical and can only be made clear by carefully
drawing an illustrative graph, yet the tax effects in this setting remain
qualitatively unchanged when compared with a quantity tax. The gaming tax
may also take the form of an income tax on the demand side, and this type of
taxation involves a downward demand shift which, in essence, has the same
effect as the above upward supply shift. Thus, it suffices to study the
production tax only.
To illustrate the pricing and taxing of gambling services, consider an
artificial case where a casino attracts 1.2 million people a year, who are
equivalent to 400,000 average players by some standardizing measure (with a
conversion ratio of 1/3). Suppose that the average probability of player
winning (APPW) is 1/5 in this casino and that those players gamble 100
million dollars. Assume away taxation for the time being. The casino’s yearly
GGR will therefore be 80 million dollars (with 5/8 of this amount covering all
costs C and the remaining 3/8 left over as profits π), and an average player
drops 200 dollars a visit which is just the price charged by the casino
operator. Clearly, this price is affected by the casino determined APPW, yet
the two concepts are different after all.
Those data under no tax are depicted in Figure 1 in such a way that X* =
400,000 visits, P* = $200 / visit, GGR = OX*AP* = P*X* = $80 million, C
= OX*A = $50 million, and π = OAP* = $30 million, where output units are
measured as standardized visits by average players.
Assume now that an income tax is imposed on player winnings or a
production tax on the operator. Suppose the casino APPW, the gaming
revenue division ratio between cost and profit, and the conversion proportion
from casino visitors to average players are all held fixed. Yet the tax depresses
gambling activity to the extent that the number of people coming to the casino
falls to 960,000, equivalent to 320,000 average players, with total gambling
bets reduced to 90 million dollars.
As a result, they contribute a GGR of 72 million dollars to the casino, and
have to pay a higher price than before in the sense that they drop an average
of 225 dollars per visit. Suppose the tax rate is 20 percent in terms of GGR or
45 dollars in terms of the average visit. The casino will effectively receive a
lower price of 180 dollars per visit, and can thus retain a net gaming revenue
(NGR) equal only to 57.6 million dollars, with 36 million dollars spent as
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costs C’ and 21.6 million dollars remaining as profits π’ (8.4 million dollars
less). The government takes 14.4 million dollars as its tax revenue (TR) away
from the operator.
All data under taxation can be depicted in Figure 1 in the following way:
X*’ = 320,000 visits, Pc = $225 / visit, GGR = OX*’BcPc = PcX*’ = $72
million, Pf = $180 / visit, NGR = OX*’BfPf = PfX*’ = $57.6 million, C’ =
OX*’Bf = $36 million, π’ = OBfPf = $21.6 million, TR = PcBcBfPf = $14.4
million, and π’ - π = - $8.4 million. The gaming operator and its customers
are burdened with the tax of T = $45 / visit, which is split up into Tf = $20 /
visit on the operator and Tc = $25 / visit on the players. The deadweight loss
caused by tax distortions is measured as the area ABcBf.
(3) Tax effects on economic welfare in a general-equilibrium framework
The rise of Pc/Q above P*/Q in Figure 1 indicates that the improved terms
of trade result in greater welfare while the drop of Pf/Q below P*/Q suggests
that the deteriorating domestic relative price causes lower incentives to
produce the exportable. These two changes are incorporated in the general
equilibrium framework of Figure 2. As will be shown, the relative magnitude
of those changes eventually determines the net effect of the gaming tax on the
economy’s overall welfare.
Figure 2: Adverse Effects of Gaming Tax on Real Income
The economy’s maximum output capacity, constrained by its resource
base and technological knowledge, is captured by the production possibility
frontier (PPF) in the (X, Y)-graph of Figure 2.6 Under no tax, a trade line (line
1) whose slope is -P*/Q is tangent to the PPF such that optimal production is
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at P. An indifference curve of the economy tangent to line 1 gives optimal
consumption at C with a utility level of U.7 As consumption is fully supported
by production, trade is exactly balanced with the income from exports CD just
enough to cover the expenditures on imports DP. The length of the steeping
side of the trade triangle CDP, CP, measures the extent of trade.
The two effects of tax T identified in Figure 1 enter Figure 2 via two
separate channels.8 One is Tf that depresses the production incentive for X by
making the domestic relative price line (line 2) flatter than before (line 1) and
hence shifting production from P to Pt. The other channel is Tc that improves
the terms of trade so that the new trade line (line 3) becomes steeper than
before (line 1) and hence changing consumption from C to Ct. Notice that CP
> CtPt, i.e., trade is depressed by the tax. Also, X* and X*’ in Figure 2
correspond to X* and X*’ in Figure 1, respectively. Unfortunately, the
exportable production is reduced by so much while the terms of trade are
improved so little that real income is not raised but lowered by (U - Ut) > 0.
In this case of Figure 2, Tf is so large that Pf (=P* - Tf) is too low (i.e., line
2 is much flatter than line 1), whereas Tc is so small that Pc (=P*+Tc) is not
high enough (i.e., line 3 is only a little steeper than line 1). Consequently, the
tax with undesirable net distortions is welfare-destructive. In another case, if
Tf is small enough that Pf is not too low while Tc is sufficiently large that Pc is
very high, the overall effect of the tax can be good for efficiency and real
income is expected to rise by (Ut - U) > 0. Thus, how the burden of gaming
tax is divided between players and operators can make a pivotal difference to
welfare; that is, T is a bad tax in the former case but a good one in the latter.
3. GAMING TAX CHOICES UNDER DIFFERING MARKET
CONDITIONS
The above trade equilibrium analysis shows that the net effect of a gaming
tax is more likely to be bad for efficiency if less of its burden can be shifted to
players. A high tax can only be imposed if much of the tax is borne by
visitors; if otherwise, a low tax has to be adopted. Tax choices of such kind
have much to do with market conditions such as supply capacity and market
size in various gaming locations. This section investigates why certain
differing market conditions have a distinct bearing on how the burden of a
gaming tax is divided between visiting players and local operators. Such
discussion, aside from policy concerns, helps account for the rational selection
of a specific tax regime in a gaming location.
(1) Supply capacity
Many gaming resorts such as racinos are still at the growing stage of their
market cycles even in the U.S., and this is especially true of Macao in the
Chinese gaming market. These markets are not yet mature, and incumbent
firms subject to supply capacity constraints are trying hard to meet locally
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unsatisfied demand. Businesses in this case can be profitable even under high
taxes, as observed by gaming analysts who, however, provide no reason for
why this is so. Perhaps, grossly undersupplied markets give legislators some
flexibility in their choices of gaming tax (Christiansen 2005, p. 2, 11, and 18),
yet we find no theory to model this conjecture.
The presence of this latent unsatisfied demand implies both that the
market is under-supplied and that existing gaming services may be underpriced. Players feel that their satisfaction from those services is much higher
than they have paid for, so will demand more than is supplied. This
disequilibrium is depicted in Figure 3, where an excess demand (Xd - Xo)
exists at the current price Po. Market forces will drive this gap to vanish by
pushing up both the price (that in turn cuts demand from Xd to Xt) and supply
(from Xo to Xt). In this process of restoring equilibrium, a tax T can be
imposed, with both the consumer and producer prices exceeding the original
price (Pc > Pf > Po, where Pc - Pf = T). Actually, gaming operators in sector X
are made better off with the tax than without it since the producer surplus rises
by PfBfAPo.
Figure 3: Tax Effects on an Under-Supplied Market for Gaming
The terms of trade and the X-production incentive both get a boost due to
the tax in this case with the production that is of under-capacity. This tax is
therefore expected to be efficient with regard to real income economy wide,
as illustrated in Figure 4. The economy initially produces at P and consumes
at C to have utility U. Under the tax T, the economy will operate at a new,
better combination (Pt, Ct) of production and consumption to reach a higher
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level of utility Ut, with a real gain measured as (Ut - U). That implies that
taxes are good for efficiency in the under-supplied case. This result is quite
robust since taxation can be raised to a high level of T’ = EA in Figure 3. T’ is
the maximum permissible rate without hurting operators who are just as well
off as before since there is no loss or gain in producer surplus (equal to
OAPo). Outside and home players of gaming are big losers on this occasion
while the government is the only winner capturing all consumer loss. Overall,
this tax can be far more efficient than lower taxes such as T as depicted in
Figure 4 since it (T’) fully improves the terms of trade (without affecting Xproduction incentive, still at Xo) and hence boosts real income greatly. It is
seen from Figure 4 that line 4 is steeper than line 3 such that Ut’ > Ut even
under a bigger regulation distortion.
Figure 4: Welfare Analysis of a Gaming Tax in an Under-Supplied Case
As the only city in China that has legalized casinos, Macao enjoys the
potentially vast Chinese market for gambling. The contribution of mainland
Chinese visitors to Macao GGR is estimated at around 93.4 billion U.S.
dollars a year on average (UMPS 2008). The Chinese mainland central
government supports Macao’s growth by providing customers via a limited
“Free Travel Scheme” (FTS). However, gaming services, prohibited in the
rest of China, are severely under-supplied by Macao as a very small place,
which is alone in the market. The city could not accommodate additional
mainland China visitors if the FTS were to be fully liberalized. For example,
in the month of December, over the past six years (MSC 2002-07), about 53
percent of visitor arrivals were from Mainland China and their average yearon-year increase reached a rate in excess of 32 percent. In this under-supply
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case, maintaining a high gaming tax in Macao is justified as an effective way
for the economy to stay efficient.
(2) Market size
The size of market is identified as another factor that can have an
influence on welfare effects of a gaming tax via the two channels, terms of
trade and production incentives. As a rule of thumb, high gaming tax rates
should be avoided unless the market is very large (such as Chicago, see
Christiansen 2005, p. 2, 17, and 19). We are concerned with why this claim is
correct from the perspective of economics, and one needs a rigorous proof as
in Figure 5. Market size involves both sides of a market, and a larger market
embracing both more suppliers and more demanders can be captured by a
larger quantity of transaction in equilibrium. In Figure 5, market A is smaller
than market A’ since X* < X*’, and suppose for simplicity that the two
markets happen to share the same no-tax equilibrium price P* initially.
Figure 5: Impacts of Market Size on Tax Effects
Suppose the same tax T is applied to both markets, and assume for
convenience that demand is equally elastic across those markets (i.e., DDt’ is
parallel to DDt in Figure 5). However, the two markets differ in their supply
elasticities, and normally, a large market such as A’ that has evolved from a
small one such as A should have a more elastic supply curve than its previous
counterpart (i.e., SSh’ is flatter than SSh). As a result, more of the given tax T
is shifted from operators to players by the larger market (Tc’ > Tc, so Tf’ < Tf),
13
WHY DO VARIOUS GAMING MARKETS ADOPT DIFFERENT TAX RATES?
and the terms of trade (or X- production incentives) are better (or less
adversely) affected in this market (Pc’ > Pc, and Pf’ > Pf). From such tax
effects, it follows that a desirable situation of “good tax” is likely to occur in a
large market, whereas an unfortunate outcome of “bad tax” (as in Figure 2)
can possibly arise from a small market. In other words, from the welfare
perspective a high tax can be imposed on a large market while a low tax
should apply to a small market. One sees that supply elasticity in association
with market size has a role to play in determining the division of a tax and its
effect on welfare.
Further, in the short run the market supply curve has an upward slope so
that part of the tax falls on consumers and part on firms, yet in the long run
the market supply curve tends to be horizontal under prefect competition so
all of the tax falls on consumers. Thus, the “good tax” scenario is more likely
to take place in the long run than in the short run. In addition, it is worthwhile
to look at how a market expansion affects the terms of trade. Imagine that a
local market has grown from A through B to A’ as in Figure 5. The terms of
trade under no tax are lowered from P* to P*’ by a supply expansion and
lifted from P*’ back up to P* by a demand surge. It is the demand surge,
along with the tax imposition, which boosts the terms of trade, thereby
increasing real income; whereas the supply expansion does the opposite, so
growing firms taking advantage of the market expansion should not request
tax relief.
The Macao gaming market has grown rapidly since its opening to foreign
investment in 2002 (i.e., a supply expansion), with growth reinforced by the
FTS starting from 2003 (i.e., a demand surge). Macao serves 16.67 million
patrons a year with existing casinos (T-S 2006, p. 41) and surpassed Las
Vegas in 2007 in terms of operating revenue as the world’s largest casino
resort. With the increased size of gaming market, Macao is now in a better
position to keep its current tax level intact, with no need to lower it. As time
passes and the market continues to grow, (i.e., demand and supply both rise),
more and more of a given tax will be shifted to arriving gamblers and real
income can be sustainably increased for Macau.
4. LOW GAMING TAXES ARE GOOD FOR SUSTAINABLE
ECONOMIC GROWTH
There are many other factors, in addition to those identified above, that
have an impact on gaming tax choices. It is not only various market
conditions that may affect the setting of tax rates, but government policy
concerns and business strategic considerations can also influence gaming
taxes. The ideal criterion for tax choice, in theory, is to maximize the chance
of welfare enhancing or minimize the risk of efficiency reducing, yet it is
difficult in reality to find a genuine “good” tax universally acceptable by all
market participants and governments. Gaming operators and private analysts
are constantly preaching their doctrine that low taxes are always good for
14
WHY DO VARIOUS GAMING MARKETS ADOPT DIFFERENT TAX RATES?
sustainable growth. Nonetheless, one has to be more sophisticated about
gaming tax setting for real development (different from only GDP growth, see
Perkins et al 2001). In this section, we look at gaming tax issues in multiple
dimensions and from broader perspectives.
(1) Low taxes for sustainable growth
As perceived by some, both investment and employment are related
inversely to gaming privilege tax rates in the U.S. (Christiansen 2005, pp. 1216). They believe that low taxes will attract gaming investment, stimulate job
creation, facilitate more openings of diversified entertainment, reduce the risk
of foreclosing resort development, block gaming capital from outflows to
other competing jurisdictions, and make local economic growth sustainable.
This point is missing from the static analysis in Figure 2, where a tax turns out
to decrease efficiency because the Tc effect is dominated by the Tf effect. In
this case of “bad tax”, if at a low rate, its net effect on real income, though in
adverse distortion, is small and can be easily absorbed as the low tax attracts
outside gaming investment conducive to economic growth and job creation
(also to tax revenue generation). This shows in an outward PPF shift in Figure
6, where we are taking a dynamic approach to tax issues.
Figure 6: Welfare Growth Made Possible by Low Taxes
15
WHY DO VARIOUS GAMING MARKETS ADOPT DIFFERENT TAX RATES?
The static analysis in Figure 2 is reproduced in the right panel of Figure 6
involving points P and Pt on the PPF (along with lines 1 and 2), points C and
Ct (on lines 1 and 3), and a drop in real income from U to Ut. One may thus
recommend a low gaming tax, which will only create a small welfare loss
under certain unfavorable market conditions that result in a combination of
(Pc, Pf) in the left panel. Fortunately, this small tax may be so “investment
friendly” that outside capital can be attracted to the locality and invested in its
exportable sector (gaming and other recreational facilities). This will shift the
PPF outwards to the PPF’ and the SSh rightwards to SSh’ in Figure 6 (see both
panels). The same tax T thus has different impacts than before, and is now
divided into Tc’ and Tf’ to form a new combination of (Pc’, Pf’) in the left
panel. This change in relative prices corresponds to lines 4 and 5 in the right
panel, so one can locate a new position for production at Pt’ and consumption
at Ct’. The economy reaches a new level of real income Ut’ that is now higher
than U as desired. This dynamic analysis reveals that low taxes are likely to
be efficient as regards welfare growth.
There is one unavoidable complication needing our attention, however.
The point is that low-tax driven gaming expansions may not necessarily be
“as always” favorable as conventionally assumed. If new casino openings
exceed gambling visitor arrivals by too much in a local market in the long run,
the supply shift will overwhelm the demand shift, as point C suggests in
Figure 5 (P*” << P*), so greatly that the terms of trade can be severely
impacted regardless of tax incentive effects on investment. Consequently, the
situation of Ut’ < U may occur (not shown in Figure 6). In this case, economic
performance may not be as impressive in real terms (measured by U changes)
as it appears in some “nominal” sense (measured by PPF growth). Note that it
is not impossible for immiserizing growth to arise from the deteriorating
terms of trade. This possibility is mentioned in Walker (2007, pp. 15-16) and
discussed at great length in Li et al (2008) based on supply-side competition
for customers and demand-side pressures from government to curb problem
gambling.
(2) The empirical facts in comparison with the theoretical findings
Our theory predicts that gaming taxes should change with differing local
market conditions apart from other factors such as policy and business
considerations. This assertion is supported by the U.S. experiences. According
to T-S (2006; p.9, 19, 20, and 43), gaming tax rates differ greatly across the
American states: for commercial casinos. Illinois authorizes a top tax rate of
70 percent on riverboat revenues while casinos in the Las Vegas Strip pay
Nevada’s gambling taxes only at 6.75 percent; for VLT gambling. Oregon
imposes a 71.2 percent tax while this rate in Montana is only 15 percent; and
for combined gaming, the tax rate is 47.34 percent in Rhode Island but only
2.13 percent in California, while several other states such as Minnesota and
Washington impose no tax. Clearly, those specific tax rates, high or low,
16
WHY DO VARIOUS GAMING MARKETS ADOPT DIFFERENT TAX RATES?
hinge largely on particular market conditions and specific policy concerns
over regulation, externalities, growth, etc. Now that tax rates vary widely in
U.S. gaming markets, there is no particular rationale for Asian gaming resorts
to adhere to the average U.S. tax rate of 13.53 percent as a sensible point for
casino business negotiations between foreign operators and local
governments.
Major possible factors affecting tax choices of a typical gaming location
include: economic structure, development level, business cycle,9 patron base,
demand elasticity,10 supply capacity, industry structure, market size, resort
location, touristic amenities, fiscal situation, policy intention, bargaining
power, protection sentiment, ownership arrangements, strategic competition
(for customers and investments), etc. These factors can be empirically used as
regressors to study their respective impacts on gaming tax choices as the
regressand if the required data are available. Each estimated regression
coefficient, if statistically significant, may be able to weigh up the relative
importance of the corresponding factor against the other factors to the
observed tax choice, which may not necessarily be efficient. This is so
because governments are not so much interested in efficiency as they are in
revenue-maximization, at least when considering gambling legalization
(Walker 2007, p. 81).
Tax rates in the Asian market are determined by such significant factors
as, among other things, weaker bargaining power than their foreign investors
since this market relies heavily on them for luxury resort development and
advanced corporate management. Unlike many American states appealing to
gambling as a “golden goose” for solving their fiscal crises, budgetary books
of the Asian countries in question are often in better shape, and their national
saving rates are usually much higher than America’s. Their opening up the
gaming industry to foreign investment is not deficit-motivated but for other
reasons (of great help with this point is the following citation about Korea,
Singapore, and Japan from T-S 2006, pp. 40-45).
Singapore with a population of around four million must market to foreign
tourists, mostly the Chinese, so will have to sell its gambling services in a
Chinese atmosphere. Singapore’s goal is to increase tourist visits from the
current eight million to 17 million a year and earn 18 billion U.S. dollars
annually through tourist spending throughout its economy. To get tourists to
come, Singapore required casino operators to provide “must see” gaming
facilities and other entertainment complexes such as art museums. The
casinos are projected to win 1.5 to two billion U.S. dollars each year, and
were initially required by the government to secure 50 percent of their
revenues from non-gaming activities; however this requirement was later
abandoned. Singapore uses a low 15 percent tax to encourage casino operators
to bring in foreign tourists and this low tax is accompanied by a shared
monopoly plus an income tax of 10 percent on player winnings.
With more casinos than Macao, Korea utilizes gaming business via low
taxes as a vehicle for promoting economic development and local
17
WHY DO VARIOUS GAMING MARKETS ADOPT DIFFERENT TAX RATES?
employment as well as for seeking out the best players from Japan, which
provides 80 percent of the customers, and China. Most casinos in Korea are
not open to its own citizens, and only Koreans from other provinces are
allowed to play one day a month at a single casino called Kangwon Land,
which is jointly owned by the government and a private company. Korea
intends to exploit foreign players through resort facility development such as
ski runs, golf courses, and other luxury entertainment attractions, so that its
government has adopted laissez-fair regulation and low taxes (10 percent on
all casinos, plus another 10 percent “development fee” on one casino) but not
at the cost of its national interests.
Japan’s motivation for setting up resort casinos is because many Japanese
leave the country to pursue casino gambling in other venues. Politicians are
wary of this situation that damages national welfare, and several interests in
the country have suggested that there should be resort casinos within Japan. A
proposal submitted to the National Diet (legislature) calls for establishing
overall national policies, imposing a 10 percent national tax, and participating
by local governments (prefectures) in casino ownership, which will allow
them to take a large share of profits. Private investors are happy with the low
taxes but not with the ownership arrangements. Foreign gaming operators
especially dislike the idea that the governments simply expect private
concerns to make investments and then give out half of their equity interest.
Without enough profits captured privately, foreign investors are not interested
in being engines of “development”.
The Macao casinos are subject to a 40 percent tax on their GGR, and
some people are unhappy about this “high” rate. To judge whether this rate is
reasonable depends on a careful synthesizing of all major factors, which
jointly affect the tax choice.
---- Macro conditions / demand side. The patron base for Macao is
mainly Chinese whose demand for gambling is price-inelastic yet quite
income-elastic (UMPS 2008). China’s economy has grown around 10 percent
a year in the past few decades, without any noticeable business cycle. Newly
moneyed Chinese continuously arrive in Macao as the country’s best casino
resort whose construction is to “duplicate” the Las Vegas Strip. Those visitors
always “keep Macao facilities full”, and place large gambling bets. The
location of Macao is accessible by expressway to more than 100 million
Chinese who live within a one-day drive. The patron recapture rate is quite
high as players keep coming back for gambling.
---- Market situation / supply side. Macao gaming facilities, as a whole,
remain a true monopoly in the vast Chinese market since gambling is
prohibited in the rest of country. This market, though having grown into a
large one, is still under-supplied and far from saturated. Macao’s
unemployment rate has actually been “negative” since the number of its
imported workers is larger than that of its unemployed residents, so the
government is under no pressure for job creation. There is no arrangement for
ownership sharing between the private/foreign and public sectors. There is no
18
WHY DO VARIOUS GAMING MARKETS ADOPT DIFFERENT TAX RATES?
need, either, for Macao to compete with any other domestic jurisdictions for
customers and investments both of which have rushed into this locality.
Clearly, all these factors take a stand for the “high” gaming tax of 40 percent
in Macao. It pays foreign owners to accept such a good price for the oligopoly
status in this casino “paradise”.
---- The government / policy. Besides regulating gaming activity, money
from gaming taxes is needed to deal with severe gambling addiction problems
and other related external costs as non-gaming taxes are only a small part of
Macao fiscal revenue. Unlike the American states, whose gaming taxes
represent miniscule portions of state budgets and expenditures (combined
casino taxes amounting to only 1.45 percent of state expenditures), Macao’s
fiscal revenue rests largely in casino GGR that equals 49 percent of its GDP
and in the tourism industry which took up 68 percent of its GDP in 2006.
Therefore, it is reasonable for policymakers to extract revenues via a “high”
enough tax from gaming receipts, given Macao’s special economic structure.
Additionally, unlike America with strong protection sentiment prevailing
across state lines (T-S 2006, pp 37-39), Macao’s economic policy is very
liberal; that is why the Macao casinos, domestic and foreign, have enjoyed a
tax rate, which is not too high but lower than that on the domestically owned
casinos in Illinois.
There have been some interesting discussions in the gaming literature
about why taxation can be a zero-sum or a positive sum game. As found out
by Goodman (1994) and Rose (1998, p.12 and 31), unfortunately, the vast
majority of the gaming studies are biased in favor of private operators. In
many cases, the biases are intentional, as are the use of biasing assumptions
and the omission of key considerations such as the external costs and
substitution effects of gambling activity. This is especially true of gaming tax
studies some of which are arbitrary and inconsistent. In other cases, the biases
may arise from the narrow scope of study, absence of good data, mechanical
application of simple models, or lack of sophistication on the part of the
analyses. All study findings thus far should be taken with a grain of salt,
because it is not easy to evaluate the reliability of those studies if researcher
credentials of affiliation and sources of sponsorship are not known. An
independent research without accepting private grants is likely to produce
honest results, and we wish that our rigorous theoretical work would lay the
foundation for future empirical studies of gaming tax issues in a neutral and
serious manner.
5. CONCLUDING REMARKS
This paper has studied the overall impact of a production tax on the
welfare of a gaming economy in a trade base equilibrium, two-sector model.
We have built our analysis on the assumption that a typical resort, enjoying
some market power in its gaming exports, is able to influence the relative
price of gaming. The partial-equilibrium part of our model deals with the
19
WHY DO VARIOUS GAMING MARKETS ADOPT DIFFERENT TAX RATES?
division of a tax burden between gaming operators and players, and with the
impact of this divisiveness on the relative price. The model’s generalequilibrium part examines the welfare effect of the tax via the resultant
change in the relative price, suggesting that the tax may be welfare- reducing
or enhancing, depending on the division of the tax burden between both sides
of a gaming market.
The result we have established is that market conditions such as supply
capacity and market size have a clear bearing on the tax burden division and
hence on overall economic welfare. As gaming economies differ in these
conditions, our theory can have a good potential for explaining why different
gaming markets have adopted different tax rates in practice. It has been shown
that the net effect of a gaming tax is more likely to be economically bad if the
less of its burden can be passed along to outside players. A high tax can only
be imposed if much of the tax is borne by visitors; if otherwise, a low tax has
to be adopted for efficiency purposes.
The paper has also analyzed the orthodoxy of low tax being good for
economic development spread by gaming operators and private consultants.
Indeed, in the case of a “bad tax”, if at low rates and with a small net effect in
a static setting, its adverse distortion can be easily absorbed by a dynamic
economy, because the low tax attracts outside gaming investment conducive
to growth and efficiency. However, there may be a certain risk that
immiserizing growth might arise from gaming over-expansion induced by low
taxes, which can be welfare reducing due to the deteriorating terms of trade,
rising competition, and aggravated externalities. We have also pointed to
government policy concerns and business strategic considerations as the
important factors which affect the chosen tax regimes and their observed
differences across the American and Asian markets, finding that gaming
economic realities clearly support our theoretical assertions.
REFERENCES
J E Anderson ‘Casino taxation in the United States’ National Tax Journal (2005) 58 303324.
R E Caves, J A Frankel and R W Jones World Trade and Payments: an Introduction 9th
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E Christiansen ‘The impacts of gaming taxation in the U.S.’ Christiansen Capital
Advisors LLC (2005) American Gaming Association.
R Gazel, D Rickman and W Thompson ‘Casino gambling as an economic development
tool: export activity-import substitution or business cannibalization and perverse income
redistribution? Evidence from Wisconsin (the 35th Annual Meeting of the Western Regional
Science Association, 1996).
R Goodman ‘Legalized gambling as a strategy for economic development’ U.S. Gambling
Study (1994), Centre for Economic Development, University of Massachusetts, Amherst, MA.
G Q Li, X H Gu and R C S Siu ‘The impact of gaming expansions on economic growth: a
theoretical reconsideration’ (Nottingham, Symposium on Gambling, Prediction Markets and
Public Policy, 2008).
D H Perkins et al Economics of Development 5th ed. (W.W. Norton & Company, 2001).
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A Rose ‘The regional economic impacts of casino gambling: assessment of the literature
and establishment of a research agenda’ (Washington DC, National Gambling Impact Study
Commission, 1998).
R C S Siu ‘Is casino gaming a productive sector? A conceptual and cross-Jurisdiction
analysis’ Journal of Gambling Business and Economics (2007) 1: 2 129-146.
Statistics and Census Macao (SCM) The Number of Visitors Arrivals (in the Decembers of
2002-2007) http://www.dsec.gov.mo/index.asp?src=/english/html/e_tourism.html, Accessed
August 10, 2008.
W N Thompson and C Stream ‘Casino taxation and economic development: American
lessons for Asian policymakers’ Law, Regulation and Control Issues of the Asian Gaming
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United Morning Post of Singapore (UMPS), ‘China takes measures to crack down on
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http://www.zaobao.com/special/newspapers/2008/07/taiwan080720j.shtml,
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York, 2007).
ENDNOTES
1. Citizens enjoy gambling in casinos and may go outside to seek their services if unavailable
locally. Instead of “importing” those services this way, the citizens will substitute the
imports with locally provided services if home casinos can be built (called the “import
substitution” strategy; its effectiveness is measured as the “recapture rate” whose U.S.
level was 50 percent; see Rose 1998, p.7). A gaming expansion may bring about local
economic benefits, including capital formation, job creation, and tax-revenue generation.
While these benefits are kept at home, casinos can attract visitors from outside (80 percent
of U.S. tourists were casino patrons; see Rose 1998, p.7). Tourism is just an “export” of
the local economy, thus fostering growth in economic fortunes and labor immigration
(called the “export oriented” expansion). As noted by Walker (2007, p.12), however, the
existing literature is punctuated with the “one-side, misleading” studies with the sole focus
on either a demand/exports or a supply/imports model. By contrast, our model, a true trade
model with both imports and exports in it, combines demand and supply in the complete
context of market equilibrium for full insight into real processes of a touristic economy.
Modeling of such type, by borrowing techniques of analysis from the extant theory of
international trade, can widen and deepen our thinking about the economics of casino
gambling (Li et al 2008).
2. A small open economy without market power has no ability to influence the terms of trade
and must instead take prices as given. In this case, for example, a tariff on imports is
bound to reduce national welfare in a static economic setting. However, the burden of a
tariff imposed by a large open economy can be shifted, in part, to its trading partners since
its restrictions on trade via domestic taxation can have an influence on international prices.
In this case, taxation can be manipulated by a large country to enhance its national interest.
3. This diagram is similar to that used in Walker (2007, p.124) but somewhat different from the
latter since our demand curve DDt covers the demand for local gambling services by
outside as well as home players. Walker’s diagram is a case of closed economy, whereas
ours is an open-economy case where gaming operators also enjoy so much market power
under monopoly or oligopoly that they can have an influence on the gaming price. For this
reason, the assumption of “small open economy” does not hold and we can then include
outside (foreign and non-local domestic residents) consumers in our demand curve DDt.
21
WHY DO VARIOUS GAMING MARKETS ADOPT DIFFERENT TAX RATES?
4. It is important to pay attention to shifts in tax burden caused by different demand or/and
supply conditions. In the extreme cases, if supply is perfectly elastic or demand is
perfectly inelastic the tax gets completely passed along to consumers; if supply is perfectly
inelastic or demand is perfectly elastic none of the tax gets passed along. Generally, in an
intermediate case, it is the relative elasticity of demand versus supply that determines the
division of tax burden. Here, we focus on the price- rather than income- elasticity of
demand even if gambling is income elastic. To reiterate, either a consumer or a producer
will get less of the tax the more elastic their behavior is to price swings than the other side
of the market. This result is derived for a competitive market, and it is possible for the
result to become more favorable to firms if market structure is not perfectly competitive.
5. In this case, the first-order condition for competitive profit maximization is: (1 - T) P =
MC(X). Using the linear approximation that eT ≈ 1 + T and e-T ≈ 1 - T for small T, we
have: P ≈ (1 + T) MC(X). Since SSh is the aggregation of all domestic firms’ MC
(increasing in X since C”(X) >0), we know that the tax T rotates SSh roughly in a counterclockwise fashion.
6. The PPF curve is strictly bowed out from the origin, reflecting the increasing opportunity
cost of producing one good measured in terms of another because of requiring different
factor proportions and/or the variability of factors’ aptitudes in different occupations. This
geometric property arises naturally if decreasing returns to scale prevail in all sectors (i.e.,
the average cost (AC) rises with scale of output), and can happen even if X- and Yproduction each separately exhibits constant returns to scale (i.e., the AC stays constant
regardless of output). Even in the case of increasing returns to scale (i.e., the AC drops as
output expands) which are not sufficiently strong, we can safely assume that the PPF
curve still bows out except near the axes (Caves et al 2002). Production will be at point A
if all resources, labor and capital, are devoted to producing X only, or at point B if
producing Y. The reason why OA > OB as in Macao is that the economy is more
productive in sector X than in sector Y; in other words, the city has a comparative
advantage in X rather than in Y.
7. Since a gaming economy like Macao is a main provider but a minor consumer of gaming
services X (i.e., many locals make money from working for casinos to finance their nongaming consumption), the economy-wide indifference curves (ICs) should be based on
certain special forms of utility function (UF). These UF forms must reflect the fact that
most, if not all, of (increased) income is spent on all other goods/services Y. Two types of
preferences can meet our needs: a quasi-linear and a Cobb-Douglas UF. The quasi-linear
UF takes the form of U(X, Y) = V(X) + Y which has no income effect for X (Varian 2003,
p.103), implying that all increased income will increase Y-consumption only. The CobbDouglas UF is specified as U(X, Y) = XaY1-a, where 0 < a << 1, meaning that a 100% of
money is spent on gambling services X. If, for example, a = 0.05, then 95% of income (or,
increased income) will be used for (or, to raise) Y-consumption. One can use the
assumption of a representative consumer to specify the UF or ICs for the entire economy
under certain conditions as in the theory of international trade.
8. Line 1 is referred to as the relative price line (RPL) for trade (reflecting the terms of trade),
meaning that at the relative price of P*/Q the economy sells its products depicted by P and
uses the proceeds to buy consumption goods depicted by C. Line 1’s slope can be
determined either in a partial-equilibrium setting as in Figure 1 or in a global trade
equilibrium setting by using the home and foreign offer curves as in Li et al (2008). After
imposing the tax in Figure 2, there will be two RPLs: one is line 2 called the domestic
RPL whose divergence from line 1 illustrates the changed incentive for (both X- and Y-)
production while the other is line 3 different also from line 1 and regarded as a new termsof-trade line that changes consumption choices. Normally, the deviations of lines 2 and 3
from line 1 alter the welfare position reflected by utility levels and viewed as “real
income” changes in the international trade literature. Note that utility changes can be
converted into monetary changes via the compensating or equivalent variation in income
(i.e., CV or EV) (Varian 2003, pp.254-6).
9. Some casino locations are vulnerable to business cycles and economic stress occurring
elsewhere, as witnessed by the decline of Las Vegas resort profits as the inflow of “high
22
WHY DO VARIOUS GAMING MARKETS ADOPT DIFFERENT TAX RATES?
rollers” from Asia was sharply reduced due to the 1997-98 financial crisis in their home
region (Rose 1998, p 33).
10. There are two kinds of this economic variable: one is the price elasticity of demand for
gambling, and the other the income elasticity of demand. Cited from Rose (1998, p.ii),
some analysts have statistically measured the U.S. income elasticity at 1.5, meaning that
people’s spending on gambling goes up 1.5 percent for every 1 percent increase in their
income on average. Since the Chinese seem to love gambling much more than other
nationals, the Chinese income elasticity could be far higher than 1.5 percent even if
China’s per capita income is much lower than America’s.
23