Abstract
In Portugal, casinos are taxed at a 50% rate, and the tax receipts are allocated to “Turismo de Portugal”, which can use it in several ways, including subsidizing tourism firms and advertising. A recent study showed that casino demand in Portugal is predominantly originated in the domestic market. Hence, there is a debate about if casinos should be taxed so heavily.
This paper aims at contributing to this debate. We 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 both to foreign tourists and residents, and a casino sector, supplying gambling services. Domestic residents derive utility from consuming the traded good, tourism services, and gambling. We analytically derive the effects of a reduction in casino taxation and demonstrate that this is welfare improving.