Friday 24 May 2013

Does a small tax really make so much difference?

Last week, a cross-party group of MPs urged the UK Government not to devolve Air Passenger Duty (APD).  No real surprise there – most MPs seem to be as strongly against devolving anything as I am in favour of devolving everything.  Taken in isolation, though, I find it hard to get as excited about APD as some do.  It’s a tiny part of total taxation revenue in the grand scheme of things, and the ability to vary it has little impact on total budget.  Insofar as it is a policy lever worth having, its value depends less on its revenue-raising ability than on its alleged impact on the success or otherwise of Cardiff airport.

On that point, I’m something of a sceptic. I’m simply not convinced that reducing the tax at one airport is going to result in the flow of business from elsewhere which others are predicting.
In a highly unusual show of unity by organisations which are usually at each other throats, four airlines joined forces a few months ago and commissioned a report from PricewaterhouseCoopers which argues that abolition of APD would benefit the UK economy.  It would also, of course, be of no small benefit to the airlines concerned. 
The argument put was that abolition of the tax would have a number of effects, including:
  • making it cheaper for companies to physically visit their customers more often, thereby maintaining better relationships and selling more product
  • making it cheaper for all of us as consumers to fly abroad on holiday and therefore encouraging us to fly more often
  • encouraging airlines to invest in new and bigger aeroplanes and to open new routes.
The net effect, the report argues, would be to increase the U.K.’s GDP by around 0.45% in year one and by an average of 0.3% over three years.  Are they right? 
It’s an argument which has more than a little relevance for Wales given the suggestion that APD could be devolved.  (Although abolition of APD at UK level, should the airlines be successful with their proposal, would mean that Wales would have to set a negative air passenger duty if it wanted to use this tax for competitive advantage – in short, the government would have to pay us to fly.)
I don’t disagree entirely with the methodology used by the report.  There are however a number of caveats and unstated assumptions which are open to challenge, and which may affect the claimed benefits.  And I rather suspect that advocates of devolution of APD and subsequent slashing of the tax for flights from Cardiff are making very similar assumptions.
Firstly, it is effectively taken as read that globalisation is the way forward and that our economic model for the future should be based increasingly on travelling the world to sell our wares, rather than on a more localised approach to business.  And that, in turn, is based on the unstated assumption that fuel costs for transportation will remain at a low proportion of total costs.  In the short to medium term that may even be true; I’m far from convinced that it will be true in the longer term.
Secondly there is a question in my mind about the extent to which GDP really grows or is simply moved from one place to another.  If the sales made by jet-setting business people are truly “extra” then the overall world GDP does indeed grow; but if they simply replace goods currently being supplied from elsewhere, then we’re merely shifting someone else’s GDP to the UK.
Which brings me onto the third point – there is an implicit assumption that action by one country (or airport, in the case of the Cardiff proposals) to improve its competitive position at the expense of others does not provoke similar moves elsewhere.  It’s another example of the way in which tax reductions can simply lead to a race to the bottom.  And it’s a question which is equally valid in the case of any comparison between, say, Cardiff and Bristol airports.
The report also makes the point that air passenger duty is a regressive tax, which “impacts disproportionately on poorer households”, because the cost of an annual holiday in the sun represents a greater proportion of the disposable income of the lowest paid decile than of the income of the highest paid decile.  It’s true of course - in theory at least.  At a practical level I wonder how many people in that lowest paid decile can afford to fly anywhere anyway – with or without APD.  It also neatly skips over the corollary, which is that abolition of APD disproportionately favours those who can afford to fly off on holiday several times a year.
And somehow I rather doubt that the executives of the airlines commissioning this report would really support the abolition of all “regressive” taxes and their replacement with a more progressive income tax regime.  I suspect that their opposition to regressive taxes is confined to those taxes which are perceived to be limiting their own profits and salaries.
More generally, how desirable, in any event, is the expansion of air travel in policy terms?  Even if it does lead to a significant increase in GDP, is that enough of a justification?  Not all GDP is “good”; there are lots of things which are good for GDP but not necessarily desirable otherwise.  That’s a question which this report seems not even to ask.  And it's a question which those advocating a cut-price tax regime for Cardiff airport also seem not to be asking.


Anonymous said...

From a Welsh perspective there's no point levying APD (long haul). When devolved we may as well just waive it. The UK however will almost certainly not abolish APD (which is good news for our "competitiveness"). They've already increased the rates. I'm comfortable having 1 international airport in Wales. The environmental aspect needs international agreement. If there was a worldwide tax on aviation fuel or on emissions, then fair enough, but we could even then still cut APD to give ourselves an advantage. APD isn't an environmental tax and hasn't had any effect on slowing demand.

We probably couldn't do it as easily with many of the other taxes.

Anonymous said...

Deadweight loss of taxation. Removing it would likely benefit other airports rather than take business away. It makes those flights on the margins of viability far more viable.

G Horton-Jones said...


Anonymous is right.

APD is an irritant a means of squeezing people for a few pence more in tax take

APD tax take amounts to a few hours expenditure on overseas military adventures at their current level

Cardiff needs more destinations and improvements to transport infrastructure by road and rail as well as more offsite parking facilities

Spirit of BME said...

When this tax was introduces the airlines drew a scenario that the end of the world was nigh , what they did not appreciate is HM Treasury being part of the cleptocratic state always wants money and it is easy to collect at no cost to HM Treasury, so they were on a hiding to nothing.
I do not believe that the business market in aviation is going to grow ,but airlines always have to say this as it produces the highest yields and if you con the investors then the Banks are happy and your share are not junk status.
Visual communication is always improving and the need to go and see someone will diminish over the next eight years, having to go somewhere and “kick the tyres” is a very rare event even now.
As for Cardiff (Barry International) Airport, it`s “dead man walking “and will be a continual and increasing burden on the tax payers

Anonymous said...

Maybe we should be a bit more positive than Spirit of BME. I disagree with his comment and think, for bad or worse (probably worse), aviation will actually outlast the petrol car. The evidence that aviation demand will continue to grow is overwhelming. It's not made up. People want to travel.

Gareth said...

There are several points in Friends of the Earth Cymru's submission to the National Assembly that are worth mentioning.
Firstly, APD is a highly progressive tax, as most poor people don't fly at all.
Second, UK Government evidence indicates that "If air travel becomes less desirable, there could be a significant increase in expenditure in the UK by
UK residents, to the benefit of the wider economy".
Thirdly, because APD raises more revenue than is displaced as a result of displaced demand (see below), any reduction would have to be made good by increasing taxation elsewhere.
Anon and G Horton-Jones are mistaken on APD's effect. Here's what the Civil Aviation Authority tells us: "all other factors being equal, an increase in air fares for
outbound leisure passengers of 1% would result in a depression of demand by 0.8%"

John Dixon said...


Firstly, thanks for the link - will duly read and digest!

Secondly, I realised when I read your comment that the original post might be taken to mean that I agreed with their assertion that APD is a 'regressive' tax. I don't, and the fact that the main beneficiaries of abolition would be the better off sort of disproves that idea anyway. I was using their terminology as the basis of argument.

It's not quite a black and white issue though. As a general rule, taxes on spending are more regressive than taxes on income (or wealth) - in theory at least. If everyone has to spend on the same things, then taxes on purchases of goods and services will always disproportionately affect the less well-off. But that's where the flaw in their argument lies - "has to spend on the same things". If everyone bought the same luxury goods then taxes on those luxury goods would indeed be regressive. But regressive in theory can become progressive in reality - as with APD - if the items being taxed are ones which only the better off can afford to buy in the first place.