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August 07, 2006

Vat on Air Tickets

A slight confusion here I think over the correct role of taxes upon environmental externalities:

VAT should be imposed on all international air tickets from Britain and the rest of the European Union in an attempt to reduce greenhouse gases, a committee of MPs has said.

The 17.5 per cent increase in prices would trigger protests from airlines and passengers, but the all-party group maintains that it is a price worth paying to protect the environment.

The Environmental Audit Committee also wants Air Passenger Duty, which was frozen in the Budget for the fifth consecutive year, to rise from its average of £15. It proposes new taxes on flights within the EU, and a government levy on domestic flights for the first time.

Not that I particularly like the idea of anyone raising taxes ever but there is a role in taxation being used to internalise the external effects of certain actions: correcting for the fact that the market does not already account for them.

The committee also said that cars with large engines which produce the most carbon emissions should be more heavily taxed, with drivers of the worst polluters paying up to £1,800 a year car tax.

Drivers of gas-guzzling cars such as the 4 X 4 Toyota Land Cruiser Amazon currently pay less vehicle excise duty than owners of smaller cars producing less emissions.

You shouldn’t be taxing the ownership: that’s not actually what you care about. What you care about is the emissions so you should be taxing them. That means raising fuel duty once again. If, in fact, fuel duty is still too low to include the external effects of its use. Given that we already have perhaps the highest fuel duties in the world this might be a difficult claim to support.

“Air passenger duty should be raised, so as to slow the growth of aviation and stabilise its absolute level of emissions.”

Ah, no, that is precisely wrong. Environmental (or externalities based) taxation is not about detering specific activities people disapprove of, not of choking off demand for a particular good or service. It is about making sure that all activities have included in their market price all the external efects. So with flights, for example, we need to work out the actual costs of CO2 emissions, noise and so on. Then a tax should be applied  which is exactly equal to that cost. Not lower and not higher, but equal to.

We have thus internalised the costs into the prices in the marketplace and people will see the full costs of their actions. This is, by the way, exactly what Teddy Goldsmith was arguing for in "Blueprint for Survival" all those years ago, it’s a terribly green idea, one that has become mainstream nowadays.

If we don’t start our dicsussions of green taxation from the right point, we’re never going to get the taxes themselves correct.

For example, if VAT goes on plane flights, it really ought to go on train tickets as well.

August 7, 2006 in Climate Change | Permalink

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Comments

But the whole point is using the green agenda to discourage things said politicians don't approve of. The Gas guzzler/Chelsea Tractor tax being the most obvious example.

Posted by: Mark T | Aug 7, 2006 9:18:13 AM

Tim, I'm young and never paid enough attention in class but you don't make sense. Why should air travel have a specific tax and cars have a blanket tax? If to correctly internalise the cost the tax must be "exactly equal to that cost" then why should lower emission cars suffer the same tax as higher emission cars (you can't assume that higher emissions cars have worse mileage).

Tim adds: Can’t assume that higher emission cars have worse mileage? Where do the emissions come from then, if not from the use of more fuel?

Posted by: James von Simson | Aug 7, 2006 9:54:42 AM

"If to correctly internalise the cost the tax must be "exactly equal to that cost" then why should lower emission cars suffer the same tax as higher emission cars (you can't assume that higher emissions cars have worse mileage)."

Well if you're talking about pollution, then the government does not seem to care much either. They're still talking about mileage since they want to tax modern, clean burning yet fuel hungry engines rather than old dirty, but small engines.

Posted by: Josh | Aug 7, 2006 10:18:29 AM

James,

I didn't think Tim made that suggestion. I think Tim is arguing that the fuel in each case should be taxed, being in direct proportion to the carbon emitted rather than a flat rate on ticket prices or a specific tax on big cars.

I suspect, as in Australia, the tax on fuel is more to raise revenue rather than reduce carbon emissions.

What this does of course is push investment into developing more efficient cars and planes rather than, say, desperately needed infrastructure investment in developing countries.

Rather than open European agriculture markets to African countries and invest in agribusiness development, thereby improving living standards for millions and providing cheaper food for poor consumers, Europe prefers to develop super-fuel efficient diesel cars.

I guess the collective guilt is so much easier to bear with so little inconvenience and expense. And those heated leather seats are so comfy.

Forester

Posted by: Forester | Aug 7, 2006 10:40:26 AM

I did a rough calculation based on average prices for carbon offset to try and find out what Fuel Duty for petrol should really be. It came out as 3.95p per litre. Even if I'm out by up to an order of magnitude Fuel Duty would covers the cost of the externalities, and a bit more, without the need for any more taxes. But this isn't about the enviroment just another way of raising revenue for the central government.

Posted by: chris | Aug 7, 2006 11:23:29 AM

No matter what kind of tax you want to impose to discourage this or that externality, it is not going to be credible unless the tax money collected is physically destroyed. Only then will we know that revenue was not the motive.

Regards, Don

Posted by: Don Lloyd | Aug 7, 2006 1:08:59 PM

The introduction of VAT on flights would be uncollectable - flights can be sold anywhere and no one would buy them in the UK. The same problem attaches to taxing aviation fuel - planes would just fill up (more inefficiently) abroad. Ain't tax competition great?

Posted by: aristeides | Aug 7, 2006 1:12:41 PM

I'm curious (possibly because I'm a bit thick), but if you tax emissions what do you spend the money on to 'balance out' the harm that the emissions cause. Is global warming/pollution curable with enough money thrown at it? Can you buy cleaner air?

Would you use it to build more 'green' power stations and he like?

Posted by: Tom Reynolds | Aug 7, 2006 1:27:27 PM

You shouldn’t be taxing the ownership: that’s not actually what you care about. What you care about is the emissions so you should be taxing them.

The double-taxation seems to make sense to me - because surely the aim is to a) get people to drive less and b) get people to drive more efficient (which are not quite the same). So if there's an upfront cost of £2k for your Lexus on top of the £1 per litre, that satisfies both conditions nicely.


The introduction of VAT on flights would be uncollectable - flights can be sold anywhere and no one would buy them in the UK. The same problem attaches to taxing aviation fuel - planes would just fill up (more inefficiently) abroad. Ain't tax competition great?

Uh, how about a charge for the plane landing or taking off? You can't do that in another country. Oh, yeah, that's just what the report is suggesting, isn't it? A higher rate of airport tax.

Posted by: sanbikinoriaon | Aug 7, 2006 1:50:23 PM

sanbikinoriaon:

surely the aim is to a) get people to drive less and b) get people to drive more efficient (which are not quite the same).

Both those aims are satisfied by a tax on fuel. If someone drives more, he uses more fuel. If someone drives in a less efficient manner (because he owns a gas-guzzling Lexus, or because he drives like a prat), he will use more fuel.

The thing that you want to discourage is emissions. That means that the thing that you need to tax is emissions. Conveniently, we are able to place a tax on fuel, the use of which correlates 100% with emissions (that's true if we're talking about CO2. For NOx, the cleanliness of your engine and the efficiency of your catalytic converter also matter.)

You can't do better than taxing something that correlates 100% with the behaviour that you want to deter. Taxing something different is obviously worse.

In the case of your Lexus tax, the thing that you would be deterring the the ownership of Lexuses (Lexi?). That may appeal to you if you are a self-righteous envy-driven class-warrior like Red Ken, but if your concerns are genuinely environmental, you should oppose such a charge. A Lexus in a garage makes no emissions.

Uh, how about a charge for the plane landing or taking off? You can't do that in another country.

Well, actually, you can. A significant fraction of our airport traffic is destined for final destinations outside the UK. If it's too hard to come to Heathrow, they'll go to Schipol. If it's an EU-wide scheme, I imagine you'll see a lot of building in Gevena and Zurich.

Posted by: Sam | Aug 7, 2006 4:16:39 PM

"The introduction of VAT on flights would be uncollectable - flights can be sold anywhere and no one would buy them in the UK."

Really? How are the current taxes collected then?

Posted by: Matthew | Aug 7, 2006 4:17:08 PM

>>>Really? How are the current taxes collected then?<<<

VAT is collected from UK businesses. Duties are also payable on imported goods.

If I want to fly LHR-JFK I can buy an e-ticket on, say, travelocity.co.uk or travelocity.com (and pay in USD for the latter). I can even ring up a travel agent in New York and pay by credit card. Are they going to charge me VAT?

Ever wondered what happened to betting duty?

Posted by: aristeides | Aug 7, 2006 4:48:41 PM

>>>Uh, how about a charge for the plane landing or taking off? You can't do that in another country. Oh, yeah, that's just what the report is suggesting, isn't it? A higher rate of airport tax.<<<

Well, you can do that but it isn't VAT (or aviation fuel tax). The report appears to suggest charging VAT:

"VAT should be imposed on all international air tickets from Britain and the rest of the European Union in an attempt to reduce greenhouse gases, a committee of MPs has said."

Posted by: aristeides | Aug 7, 2006 5:27:40 PM

"That may appeal to you if you are a self-righteous envy-driven class-warrior like Red Ken,"

What's weird is that these characters seem to hate low cost flights as well, even though they provide the means for the people they claim to represent to have the luxury of foreign holidays like the rich. Maybe they're just afraid for the future of their political career if something comes along that breaks the class divide, such as Sir Stelios.

Posted by: Josh | Aug 7, 2006 5:51:05 PM

"VAT is collected from UK businesses...If I want to fly LHR-JFK I can buy an e-ticket on, say, travelocity.co.uk or travelocity.com (and pay in USD for the latter). I can even ring up a travel agent in New York and pay by credit card. Are they going to charge me VAT?"

Are you saying that if I book a hotel room on travelocity.com with a US hotel chain (say Marriot) in London I won't pay VAT? You must have that wrong.

Posted by: Matthew | Aug 7, 2006 6:13:34 PM

No Matthew, I am not saying that... have you ever done it? If you stay at the hotel in London, you get the bill when you checkout, with VAT, even if you have prepaid. You will have used goods or services within the UK and you would expect to pay VAT on that.

Air travel is completely different. This is probably best exemplified by the fact that you go through customs (and enter the "duty-free" - i.e. VAT-free - zone) before you get on the plane!

I really didn't answer your previous question very well though - the current taxes are collected in a different way from VAT: they are unreclaimable taxes paid by the airlines.

Don't get me wrong: I am not saying you could not have a 17.5% air ticket tax payable on all flights that take off or land in the UK. However, it would not be VAT.

Posted by: aristeides | Aug 7, 2006 8:41:38 PM

The problem with using taxes to internalise negative externalities is that they are inefficient in disintermediating the two parties involved in the transaction (in a Coase sense). If we count aircraft noise as an externality, then clearly someone living in Hounslow is much more affected than someone living in Taunton. Yet their air fares to fly from Heathrow are increased equally*. Much better in theory would be a system whereby the victims affected by noise pollution were directly compensated by the airlines and airport operators (i.e a Coasean bargaining system).


* there's a positive externality here as well: it's a lot cheaper to fliy from Gatwick if you live in Crawley than if you live in Runcorn.

Posted by: David Gillies | Aug 7, 2006 8:49:07 PM

"Don't get me wrong: I am not saying you could not have a 17.5% air ticket tax payable on all flights that take off or land in the UK. However, it would not be VAT."

Ok fair enough. I think its the level of the tax not the form that takes that is important, but if it can't be called VAT then it can't be called VAT.

Posted by: Matthew | Aug 7, 2006 9:40:55 PM

An aviation tax will almost certainly be EU wide, and was one of the things put forward in a paper by the EU as a possible extra funding mechanism to get it away from being so reliant on funding from the member states. nothing to do with the environment. And based on the Denied Boarding Regulations I think we can conclude that the EU Eurocrats really do not like the cheap airlines.

Posted by: chris | Aug 7, 2006 9:47:32 PM

>>>Ok fair enough. I think its the level of the tax not the form that takes that is important, but if it can't be called VAT then it can't be called VAT.<<<

My point was actually not quite that pedantic. What was proposed was VAT. The other thing about VAT of course is that it is reclaimable by businesses meaning that for a large number of particularly premium (i.e. first and business class) passengers there would be no disincentive at all.

The consequence of a blanket aviation tax at that level on an EU-wide basis would, as Sam says, drive traffic to Switzerland and probably Oslo. This would obviously be highly inefficient.

You could almost close Heathrow on the back of such a policy - certainly a terminal or two. Peace and quiet for us and the lucky workers would have more leisure time on their hands too.

Posted by: aristeides | Aug 8, 2006 6:00:36 AM

"The consequence of a blanket aviation tax at that level on an EU-wide basis would, as Sam says, drive traffic to Switzerland and probably Oslo. This would obviously be highly inefficient.

You could almost close Heathrow on the back of such a policy - certainly a terminal or two."

I don't think the first is going to happen, even if they didn't follow suit, the Swiss are not about to allow Geneva to become Heathrow, for a start because it is hemmed in between mountains and a lake. Their expansions plans actually envisage using Lyon airport, which is in France.

Tim adds: Same runway though, isn’t it? Just different terminal buildings?


Posted by: Matthew | Aug 8, 2006 9:00:05 AM

Not quite. I know what you mean - Geneva airport is in France & Switzerland, you can exit to either country without going through other (and presumably enter)

But Lyon is about 100kms away and the plan is to link it with a high speed train.

Posted by: Matthew | Aug 8, 2006 9:40:52 AM