Assessing Indirect Tax Reform in a Tourism-Dependent Developing Country

Summary The paper investigates the effects of reform of the current structure of indirect taxes in Mauritius, a relatively tourism-dependent economy. It uses a computable general equilibrium model to explore the relative efficiency of changing sales tax rates on tourism and nontourism related sectors, and allowing for equity considerations. The efficiency of tax reforms are also distinguished for cases where tourist arrivals are exogenously set, and where they endogenously adjust to changes in relative prices. The simulation results show that the tourism sectors are currently undertaxed. Additionally, taxing tourism sectors is found to be the most socially efficient means of raising tax revenue.