Graham Brady on Aviation Taxation

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Graham Brady MP has a go at the latest tax proposals in The Telegraph today. I do think he's rather got the wrong end of the stick though.

All this reflects badly enough on Gordon Brown's economic competence, but how much worse would it be if he were to repeat the whole exercise this autumn? That is what is about to happen with his proposals for a new tax on commercial flights called "aviation duty".

The idea is seductive: scrap an unpopular tax on air passengers and replace it with a new charge on every aircraft taking off from a UK airport. On the face of it, this is a neat incentive for greener aviation - if airlines are taxed per flight rather than per passenger, surely they will stop flying planes with empty seats?

Sounds sensible indeed.

The Government starts with a simple aim: to "provide incentives for the more efficient use of planes by taxing similarly sized aircraft the same, no matter how full the plane"; the duty should "reflect the environmental impacts of flights, including the distance travelled".

The same document warns of the dangers of "creating market distortions" and "tax-motivated behaviour which does not deliver environmental benefits". Unfortunately, a "per plane" duty will achieve exactly that - market distortions but no environmental benefit.

Let's look first at air freight. This sector is vital for the transport of time-sensitive and perishable goods. Air freight underpins thousands of jobs - especially, but not exclusively, in the key election battlefield around East Midlands Airport.

The highly competitive and price-sensitive freight sector is not affected by the existing passenger-related tax, but would be under the new proposals.

If the hefty £16,000-plus currently paid by passengers on a typical long-haul Jumbo is to be recovered from a plane carrying freight, then those flights will be uneconomic.

Leave aside his worries about flight diversions (neither he nor I know how much of this will happen) and look at the basic point of such taxation.

It's called a Pigou Tax: the essential idea is that not all effects of an action are captured in market prices. Thus we add a tax to make sure that all of those externalities are in fact included in market prices. Then when everyone trades on the basis of those prices we actualy have everyone paying the full costs of heir actions. Exactly what we want to happen, no?

For if we have costs which are not included in prices then we have an inefficient market, absolutely not what we want at all.

The move from per passenger to per flight makes sense for the very reason mentioned above, that it increases the pressure to fly planes full rather than half empty.

Now this idea of Pigou taxation is pretty well established: it's not just a revenue grab by the Treasury, it's not just some Green nonsense imposed upon us by the Stern Review (although the level might be, the principle isn't). Mainstream economics it is, entirely mainstream.

Note again that we're not actually adding to the costs of the action itself: we're insisting that those undertaking the action must pay all of the costs associated with it. For example, our airfreighters, they are already imposing those costs of £16,000 (again, the actual level is arguable, but not the principle) upon the Commons: all we are insisting is that they pay for them.

That is, that if by paying these costs those flights become too expensive for the airline, we're not making them uneconomic, we are simply highlighting the fact that they are already uneconomic.

We also have the great joy of telling the food miles fanatics to bugger off. If those airfreighted green beans from Kenya are paying the 1p per 250 grammes (calculated by Tim Harford) that their CO2 emissions cost, then the polluter is paying and the hippies can go hang.

Hmm. Given that Pigou was an economist and he's now dead, this is probably another edition of "Things dead economists can tell us about the modern world."

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