A ‘per plane’ duty has a number of advantages over APD, writes Tim Leunig, chief economist at liberal think tank CentreForum
No one likes being taxed, and no industry thinks that the taxes they pay are fair. Companies that hire a lot of people dislike National Insurance – a tax on jobs – while capital intensive manufacturing firms lobby for greater capital allowances. Greggs has got the country into a frenzy over the pasty tax, while the church believes that it should keep its (partial) exemption from VAT.
The aviation sector dislikes air passenger duty, particularly now that it is a significant sum, particularly for long-haul flights. But, frankly, APD is here to stay, and stay it should. It is here to stay because the government needs the money, and it should stay because aviation would otherwise be hugely undertaxed.
Remember that aviation counts as public transport, and is thus exempt from VAT because it counts as a necessity. How flying halfway round the world on holiday could ever be described as a necessity is quite beyond me!
Broadly speaking, APD can be seen as a tax in lieu of VAT. £13, the short-haul economy rate, would be 20% of a £65 (single) fare. Although it is possible to travel for less than £65, £13 looks to be a bit on the low side to be a reasonable substitute for VAT.
Similarly, £65 for long haul economy flights would be 20% of a £325 (single) fare. There are long-haul destinations that can be reached for less, but again, £65 will be less than 20% of a typical long haul price. The business class APD rates are far lower than 20% of business-class fares.
Aviation, of course, damages the environment. For sure, airlines have improved, but the reality is that carrying 400 people in a 400 tonne aeroplane is always going to be energy intensive.
A scientist friend assures me that thorium nuclear powered planes are the answer, but until then, aviation’s inclusion in the EU Emission Trading Scheme is sensible, in addition to retaining APD which exists in lieu of VAT.
Of course, APD is a poorly designed tax, and could be improved. Passengers flying over 2,000 miles face a rather arbitrary leap in APD, from £13 to £65, while in contrast transfer passengers are exempt from duty.
Aside from anomalies in coverage and level, APD does nothing to promote better practice by airlines, in terms of emissions and noise pollution. It would be possible to tackle these issues and improve on the current duty by moving to a ‘per plane duty’.
A per plane duty has a number of advantages. It would be calibrated on the expected carbon emissions of a particular type of plane on a particular route. This would give people an incentive to fly less far within any given band. It would also encourage airlines to fill up their planes, meaning fewer flights and less damage to the environment for any given number of passengers flown.
A per plane duty could take into account an aeroplane’s noise, thus giving airlines an incentive to use their quietest planes. Even better, it could take into account the number of people affected by the noise.
Finally, a per plane tax would solve the current anomaly that transfer passengers are exempt from duty. It seems very odd that we tax foreign travellers flying to Britain to trade with us, and yet we allow (for example) New Yorkers flying to Africa to change planes in London, inflicting noise and raising our measured carbon dioxide emissions in the process, without charging them at all.
The Conservative party and the Liberal Democrats both pledged to replace APD with a per plane duty at the last general election, and that pledge was repeated in the coalition agreement. That pledge has now been reneged on. The government said it “will not introduce a per plane duty in place of APD at the present time, but nevertheless will continue working with our international partners to build understanding and support for this approach in the future”.
It is unlikely that we will fully understand the reasons for this u-turn until the 30 year rule allows us to read government papers. It would be better if government had stuck to the original policy and replaced APD – one a revenue neutral basis – with a tax on planes.