Wednesday, November 25, 2009

Economics 26/12/2009: International report on Irish Air Tax

So in few hours from now, Ryanair will launch a report commissioned by them, Aer Lingus and CityJet that comprehensively destroys any argument in favour of the Irish Travel Tax. Here are the exerts from the report - well ahead of all other media. Note: this research was carried out by consultants who earlier this year convinced authorities in Holland to revoke their own travel tax in order to improve economic performance of their air transport sector. My comments are in brackets below.

“Aer Lingus, Ryanair and CityJet, which account for 83% of total departing passengers from Irish airports, are currently endeavouring to persuade the Irish Government to withdraw the Irish Air Travel Tax (ATT), which has applied to flights out of Ireland since 30 March 2009. The ATT imposes a tax of € 10 per passenger on all flights from Irish airports to airports which are situated more than 300 kilometres from Dublin Airport. For flights from Irish airports to airports within this limit a reduced rate of € 2 applies.

“It is envisaged that the revenue of the ATT would have been approximately € 130 million per annum if no demand reduction had occurred as a result of the imposition of the ATT. However, economic theory and empirical evidence clearly demonstrates that passengers will react to higher travel costs, which will inevitably reduce demand for air travel.

“If airline capacity had been maintained at 2008 levels and the ATT was to be passed on in full to passengers in the form of higher fares, it is estimated that the total resulting demand reduction would be between 0.5 and 1.2 million departing passengers based on a price elasticity range of between –0.5 and –1.5. On this basis, ATT revenue would be between € 117 million and € 124 million but total revenue losses for airlines, airports and the tourist sector would range from a minimum of € 210 million up to € 465 million, dependent on the elasticities assumed While some revenue losses may be absorbed by the relevant sectors in the form of resulting cost savings, there will still be a significant adverse effect on the Irish economy. These losses are compounded further down the supply chain as companies purchase fewer goods and services.

“In particular, there will be a direct loss of jobs of at least 2,000 to 3,000 affecting airports, airlines and the tourism industry dependent upon the extent to which companies are willing to accept the inherent diseconomies of scale from a reduction in demand. The direct consequences of the reduction in passenger demand as a result of the ATT would give rise to significant reductions in government revenues in the following categories:

Less revenues from income tax (as well as higher unemployment costs)

Less revenues from corporate tax

Less revenues from sales tax (value added tax (VAT))

“While it is not possible to quantify the scale of these revenue losses, the level of expected job losses as a consequence of the ATT would, assuming that every lost job results in additional costs of approximately € 20,000 per annum to the Government in the form of reduced income tax and social welfare payments, give rise to an additional cost to the Irish government of the order of € 50 million or more. These costs are related to social welfare payments as jobs are unlikely to be replaced in the short to medium term. Over the longer term, as the economy recovers from the recession, the net loss of jobs may reduce as labour switches to less productive employment in a new economic equilibrium.

“In reality, airlines have not been able to pass on the ATT to passengers in the form of higher fares but have reacted by a combination of absorbing the tax by lowering fares and redeploying capacity outside of Ireland to locations where no travel tax is applicable. Consequently, actual revenue losses across the various sectors as a result of the ATT have been significantly higher than might have been expected due the impact of higher prices alone, estimated at between € 428 - € 482 million based on activity by Aer Lingus, CityJet and Ryanair alone, with ATT revenue estimated to be € 116 million. The resulting loss of revenue on the part of the Government will also be significantly higher as a result of the additional loss of jobs.

“Our analysis clearly demonstrates that the imposition of the ATT has resulted in a decline in revenue to specific sectors of the Irish economy of a far greater magnitude than the amount of tax likely to be collected. Based on the actions of airlines to date and the revenue impact on the airlines, who have had to absorb the tax in lower fares to maintain volumes, it is likely that the level of capacity will further reduce as airlines continue to redeploy their resources to lower cost markets in the European Union where no travel tax applies. This will have a further detrimental impact on the Irish economy and the tourism industry in particular. In addition, the resulting reduced airline network will reduce air service connectivity to Ireland, making it less attractive to visit and a less attractive place to do business, which may also serve as an impediment to economic regeneration more generally.”

[My comment: I have nothing to add, other than – I told you so months ago!

But let me ask this question - economics aside, why no one has questioned the ethical authority of this Government to levy an arbitrary tax on air travel? After all, air travel involves a voluntary transaction between a passenger and an airline. Use of airport infrastructure is already charged for. Vat and other taxes are already factored in. Income taxes were paid. What service does the state claim to provide to justify this surcharge? None. Not even in theory should the Government have a right to levy a tax that is so apparently ad hoc and serves solely the purpose of discriminating against one group of people (those undertaking overseas travel for personal or business reasons) in favor of generating cash revenue for general spending purposes. You disagree? Ok, should we have a marriage tax next? Or a tax on private libraries? X-box use surcharge? I-phone listening levy? Children walking assessment? Where does the abuse of power to tax stop?]


Anonymous said...

I agree with your points.
Perhaps you could do something on the tv licence.

This is a tax on ownership of a tv .The annual licence fee is often more than the cost of the TV
Certainly over the life of a tv set the combined costs of annual licence fees add up to several times the price of the set.

The tv licence dtermines the content and therefore the agenda of rte as they are the main beneficiaries.In effect rte have a front loaded tax of over 100 % that will be used to transmit its own content and propoganda.

If I dont watch rte I am still charged for the licence.

In my view this is cencorship through taxation.


Another John M said...

"... why no one has questioned the ethical authority of this Government to levy an arbitrary tax on air travel?"
Why restrict yourself to a tax on air travel? Or restrict yourself to taxes? This government has no ethical authority to do anything.
As for the comments above about the TV licence, I totally agree. To add insult to that particular injury, RTE isn't available free to air. I bought a satellite dish in Lidl to cut back on cable fees. Now I have to use a rabbit's ears to get the Irish channels. So if/when RTE goes ditigal, we will all have to pay extra for set-top boxes? Give me a break! I'm totally sick of the government rip offs.

Ernie Ball said...

You wrote:

"Not even in theory should the Government have a right to levy a tax that is so apparently ad hoc and serves solely the purpose of discriminating against one group of people (those undertaking overseas travel for personal or business reasons) in favor of generating cash revenue for general spending purposes."

Your principled objection might carry a bit more weight had you not written the following in regard to the so-called "pensions levy"

"Needless to say - this is simply referring to a 7.5% pensions levy, which I do not consider a wage cut, but a delayed payment for pensions benefits. "

Of course it's neither a wage cut nor a payment for pensions benefits. What it is is special tax on the public sector, "a tax that is so apparently ad hoc and serves solely the purpose of discriminating against one group of people (those working in the public sector) in favor of generating cash revenue for general spending purposes."

Don't think so? Then why is it that even those in the public sector who don't even have pensions still have to pay the pensions levy? Why is it that the money isn't going into any kind of pension fund but is simply being used for general government expenditure?

The fact that you are in favour of the pensions levy but against the air tax shows your "principled stance" to be merely another form of expediency.

I'll leave it to others to decide whether that makes you a hypocrite.

TrueEconomics said...

Ernie, thanks for the comment. I feel I need to clarify my position on pension levy.

Pension levy covers an actual benefit to be provided in the future. My opinion on public sector pensions is a simple one and consistent with my view of taxation policy in general.

Pensions in public sector should be fully funded by the recipients/ beneficiaries. They should not be funded out of general public expenditure. Thus, pension levy should form a fund that is fully ring fenced to provide such benefit. It should not be used to finance general public spending.

Those in the public sector who are not granted a guarantee of a pension should not pay this levy. If they do, this levy in their case is equally immoral.

By extension of this position, NPRF should not be used to finance public sector pensions as it is a general tax on Irish economy as a whole.

General taxpayers' funds should not be used to fund public sector pensions as these pensions should be funded out of own fund.

Public sector employees, all, should, in my view, be entitled to exactly the same pension provision system as the rest of the economy - defined contribution pensions fully financed by employees themselves.

Transition to this system should be managed so as not to prejudice existent public sector retirees and current contracts granted to public sector employees. This is a tricky process and I simply don't have space to elaborate on it, but the principle is the same as the one I applied to tax policy in general.

So to re-iterate - levy must be imposed, but its proceeds should be fully ring-fenced to provide stated benefit (pensions). Those who have no access to guaranteed benefit should not be required to pay the levy. General funds should not be used to pay for public sector pensions.

Hope this explains.

Best regards, Constantin

Anonymous said...

I'm not so sure that the air travel tax is unfair or wrong. My understanding is that air travel benefits from an unfair subsidy as compared to (say) motor or rail travel, as aviation fuel is exempt from VAT. The ATT perhaps helps to level the playing field a bit.

Unknown said...

Thanks for posting this, I look forward to reading the full version. I will be especially interested to see what values the authors place on greenhouse-gas emissions, air pollution, noise pollution, etc. These externalities are not captured in what you characterise as a private transaction. This is the basic "ethics" for the tax as far as I can see, apart from the need to raise government finance from somewhere...

As for arbitrariness, don't you think it is arbitrary that (for reasons of international law) aviation fuel escapes tax, unlike any transport fuel?

And don't you think taxing consumption is preferable to taxation of income or even profits? In fact, taxes on aviation are perhaps the least regressive and most carbon-mitigating tax I can think of.