Macau researchers propose Pigouvian tax for casinos

A research team at the University of Macau in China’s special administrative region – which now rivals Las Vegas for the title of world’s biggest gaming region – have proposed the introduction of Pigouvian taxes to help ensure the overall impact of casinos in the area is positive.

Drs Xinhua Gu, Guoqiang Li and Pui Sun Tam are professors of economics at the university, and have published their findings in the journal International Gambling Studies.

They argue that Pigouvian taxes would be an effective way to counteract any negative external economic effects arising from casino gambling, without excessively detracting from the positive economic growth created through casino tourism.

Pigouvian taxes are a concept formulated in 1920 by British economist Arthur C Pigou as a way to restore the balance of benefits and costs in systems where one side of the equation is external to the private business interest.

In gambling, for instance, a Pigouvian tax might see casino profits subjected to gaming duty, with the funds used specifically to operate support services for gambling addicts.

Within the UK, the Responsible Gambling Trust effectively provides for this function, with gambling operators contributing to its fundraising, and those funds used to support research into problem gambling and other such issues.

However, the Macau researchers add that in a formal taxation system, consideration must be given to local markets, in order to ensure that the funds raised are spent in a way that correctly rebalances any existing imbalance in the benefits and costs of casino tourism.

They write: “If taxes are collected from tourists but not fully refunded, local tax policy then plays the dual roles for both social cost reduction and public revenue generation.”

Without taxation to tackle these external social costs, the researchers argue that they could become too much for local economies to bear – leading to further outcomes, such as visa policy restrictions in the home communities of casino tourists.

“Tax can also mitigate gaming-biased unbalanced growth via resource reallocation, and improve the terms of trade for local welfare enhancement through tourism as an exporting industry,” they add.

Introducing taxes that directly divert funds towards recompensing any external social costs could have one additional benefit, by removing the apparent conflict of interests faced by governments when taxing the gambling industry.

As the researchers point out in their introduction, governments must be seen to tackle problem gambling, but also raise substantial profits through taxation – meaning that, in an ordinary taxation structure, they face the task of both promoting and discouraging gambling, something a Pigouvian structure would arguably help to overcome.