Friday, 31 October 2014

Air Passenger Duty and rent seeking

The rent-seekers have decided to keep up their attack on Air Passenger Duty, with the Faux Libs at City AM are happily regurgitating as Gospel truth:

The annual £3bn APD take is significant, but robust evidence now exists which highlights that a reduction to the tax would be revenue neutral. Independent PwC research has shown that scrapping the tax would stimulate the creation of 60,000 jobs and lead to £16bn in additional growth, and therefore be self-financing.

APD is first and foremost an economic matter. However, there is also a question of fairness that should be considered. We feel passionately that, for families and for ordinary travellers, the tax is regressive and damaging.

Families receive no “break” on child fares as they do for other goods and services, and a family of four now pays an average of £52 in APD to travel to short-haul destinations, and £284 for long-haul destinations.

We know that Heathrow and other London airports are running at full capacity, demand for slots vastly exceeds the availability and the airlines ration flights by bumping up prices accordingly. Their ticket prices have nothing to do with their actual costs, a large part of it is scarcity value i.e. rent.

So as long as the APD merely takes a chunk of the rent element of ticket prices, no harm done, it does not discourage activity or investment in the slightest. Or else those airports would not be running at full capacity, would they? The same does not necessarily apply to regional airports.

But that £3 billion figure does not reconcile with the headlines figures he bandies about ("£284 for long-haul desinations"). According to Wiki, there are 240 million passenger movements in the UK each year, i.e. 120 million get on a plane and 120 million get off. If APD were a straight per-passenger duty, it would be £25 per person per round trip.

A per passenger duty is a stupid idea of course, a per plane tax is better and the best designed tax would only claw back some of the rent element, so it would be set differently at different airports.

The rent element is highest at Heathrow and other London airports. Going by Wiki's figures, to raise £3 billion, all you would need is a £4,000 tax on each aircraft movement at Heathrow and (say) £2,000 at the other London airports (Gatwick, Stansted, Luton and City). Flights to or from any other UK airport would be completely tax free.

So a round trip to and from Heathrow, assuming average 150 passengers per plane, would work out at £53 per passenger (£4,000/150 x 2) per round trip. There is absolutely no need to distinguish between short and long haul flights, the value is in the slot, and if this encourages airlines to use Heathrow only for long-haul, well so much the better. (Further, aircraft noise is a nuisance, but why would you care whether the airliner roaring overhead is headed to Manchester or Manchuria?)

This would completely demolish their Faux Lib wailing, and they can chuck their stupid PwC 'research' in the bin. IF such a tax did have a negative impact on economic activity, then we can easily measure this - are these airports still running at full capacity? IF yes, then clearly the number of flights has not gone down, so the tax has had no negative impact. AND the chances are that other airports would move closer to full capacity.

Reality check: Heathrow airport charges the airlines about £20 per passenger (£40 per round trip) and this raises £1.5 billion income, double that and there's your £3 billion.


ThomasBHall said...

Is APD set by the EU or UK? This seems to me a really sensible proposal to give to the govt. It drives efficiencies, achieves the same result, and doesn't trample on home owners "property rights". It should even keep the greens happy, as realistically, a plane empty won't pollute/warm the earth much less than a full one...

mombers said...

The thing with APD is it's levied per passenger, not per flight, so this does distort it a bit. Ceteris paribus, planes will not be as full under APD as under a per slot levy. But the result of abolishing APD will be the same - no decrease in prices and no increase in number of flights - just fatter profit margins.

The Stigler said...

someone at work spotted that you can now fly Bristol to Reykjavik for £35 each way, which is just insane and so cheap that I might go and fly there for a few days.

Curtis said...

APD is set by the UK, and only levied on departing passengers who are not in transit for less than 24 hours.

If you're so inclined (and have the time to spare), it's cheaper to fly to Jersey and start your trip there with a "connection" to your long-haul flight from Heathrow.

I recently did this on a trip to Australia on Cathay Pacific First class. They wanted 165000 BA miles plus £550 in fees/taxes including APD.

I live near Heathrow. I drove to Gatwick, flew to Jersey and met my friend for lunch, flew back, then drove home, then went to Heathrow to start my actual flight. Including petrol, parking and the extra flights, the total cost was 165000 BA miles plus £200 in fees. (So obviously if you can earn £350 net in the time it takes you to do that, then you just pay APD, like most businesspeople.)

Bayard said...

"Independent PwC research has shown that scrapping the tax would stimulate the creation of 60,000 jobs and lead to £16bn in additional growth,"

and if they are wrong, and it leads to £0bn in additional tax revenue, are they going to stump up the lost £3bn? Hell, no, they will be too busy producing the next bullshit report for the next special interest group.

Mark Wadsworth said...

TBH, APD is entirely self-inflicted, nothing to do with the EU (AFAIAA).

And it's not just the Greens, the Lib Dems have burbled about moving to a per-plane tax, and the proper free market people have always supported a tax on the value of the landing slots (which is what the tax I suggested amounts to).

TS, that's dirt cheap but Iceland is insanely expensive.

C, thanks, that's an excellent example of the idiotic results you get when you impose an idiotic tax.

B, yup. How they managed to explain how London airports would magically be able to increase capacity is an unknown.

Bayard said...

Well, you must know the joke about the economist stuck on a desert island without a tin opener....

Dinero said...

I can follow this logic - "Their ticket prices have nothing to do with their actual costs, a large part of it is scarcity value..."
Therefore why don't you, in other posts, concir that supermarket produce prices, that do not have scarcity value, do reflect actual costs.

Mark Wadsworth said...

Din, from the point of view of the consumer, supermarkets are very competitive indeed, where have I said otherwise?

Dinero said...

I'm thinking of Supermarkets and VAT . Does VAT on supermarket goods increase the retail price that is paid by the customer of the Supermarket.