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?]