Does a small tax really make so much difference?

Tweet 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.