Saturday, January 07, 2006

Taxing times

This article, in the Times on Thursday, by Camilla Cavendish trotted out some familiar arguments against aspects of the aviation industry. Whilst I agree with some of her comments (for example, relating to the lobbying power of airlines – even the most die-hard socialist is likely to prefer a business-class seat to an economy-class one – the BAA monopoly of London airports, and her concern about the fact that whilst carbon emissions across the UK should be reducing, the aviation industry is moving in the other direction), too much of the article was poorly thought out for it to pass without comment.
If Gordon Brown taxed aircraft fuel at the same rate as petrol for cars, he would raise a cool £9 billion for the Exchequer.
Before everyone breaks into cheerful grins at the thought of taking loads of filthy lucre from the evil capitalists who run airlines, it might be worth considering that the amount of money made by airlines is relatively small. In world terms, the United Kingdom may be unique in having an airline industry that has fairly consistently made a profit over the last five years – the industry worldwide has lost billions.

What this narrow margin means is that any increase in cost has to be passed on directly to the consumer – the airlines simply don't make enough money, and fuel is too large a proportion of their costs, for them to absorb an increase in costs of even a tenth of this amount. So, as Cavendish implies, but doesn't openly state, this £9 billion would come from the consumers – that is, the people who buy the tickets – that is us.

Now, does the population as a whole have £9 billion spare to spend? Of course not. This equates to another 3-4p on the basic rate of income tax – hardly a minor fiscal adjustment. So the £9 billion that would be raised through this tax would be lost to the Exchequer, industry and tourism through other means. You don't get £9 billion from nowhere – somebody, somewhere ends up paying it. And it won't be the government or the airlines.

It sounds fantastic – a whole industry ripe to face a swingeing tax increase. And it is. The Chancellor did significant damage to the pensions industry when he changed the tax structure a few years ago – I hope that he is sensible enough to realise that sudden, large changes in taxation policy tend to have substantial, unpredictable secondary effects. And, to be quite honest, given the way in which tax levels have risen under this government and how little we have seen for it, I am sceptical of the ability of the government to do something useful with yet another £9 billion.
[The Chancellor] smiles on airlines that pay no VAT, fuel duty or climate change levy.
It may be true that airlines don't pay these taxes. However, they do pay Airline Passenger Duty. This isn't anything like the amount that would be paid if it was scrapped and replaced by fuel duty at the levels charged on road fuel – in 2003, according to a quick search on the internet, APD amounted to a mere £1 billion. But this is a tax that you don't have to pay on a rail ticket. Oh, and rail tickets tend to be more expensive than air tickets. Oh, and if that isn't enough, the government is putting quite a lot of taxpayers' money into subsidising the rail network as well. Oh, and whereas the average airfare has fallen in absolute terms – let alone real terms – over the last five years, the average rail fare has risen by substantially more than the rate of inflation.

Don't get me wrong. I'm not saying, “scrap the rail network”. But the airlines exist as things stand as companies, taking relatively small amounts of money for their shareholders, and yet employing significant numbers of people, paying taxes as businesses, paying tax and National Insurance as employers, and not being subsidised. They contribute to the economy. The rail network, which is basically the alternative, is costing the country a fortune, and most people think we are getting very little back for our money.
The difficulty of negotiating international tax agreements is real, but not as insurmountable as it is convenient for politicians to pretend.
This is a bold sentence. However, the fact of the matter is that attempts to reach any agreement on even a European scale, let alone a global scale, almost always fail, tripped over by vested interests. This happened with Kyoto, the European budget, and the World Trade Organisation. It seems unlikely that new negotiations are going to achieve a wider level of consensus than any agreement which we already have.
No matter that those who live around airports are locked into homes blighted by noise and pollution. Their disadvantage apparently cannot compare with that of those who might be deprived of a cut-price trip.
This is a manipulative paragraph that can be challenged at various points. Firstly, there aren't many people who have lived in areas blighted by airports from before the airports had a significant environmental impact. People who have moved into an area knowing that there is an airport there can hardly then grumble about it. They presumably weren't forced to move there.

Secondly, the noise and pollution impact of most airports and airliners has reduced over the last decade, due to improvements in technology.

Thirdly, many people who live around airports are actually happy to be there. The airport brings employment, investment and income to the local area.

Fourthly, a democracy is supposed to allow majority representation whilst protecting the interests of the minority. If 50,000 people live around an airport and are being inconvenienced by its presence, should their opinions override those of the millions of users of the airport? And yet, in the case of many UK airports, great lengths are gone to for the sake of the welfare of local residents. And the government isn't even allowed to think about the possibility of building a new airport somewhere else, where it might inconvenience fewer people.

Ms Cavendish raises some important points in this article. Unfortunately, these are outweighed by misrepresentation, one-sided analysis, and a failure to think through the implications of what she is saying. Important debates need more rigour and better information than this.