A Intra-EU flights tax: a possible source of revenue for the EU budget?

by: Ilyana Yasko, Ana Gurau, 16 March 2015

When assessing a tax initiative one must bear in mind that a good tax system should avoid imposing taxes with excess burden on a given citizen. It is for this reason that the issues of efficiency and equity should be given a thorough examination when considering the impact of introducing a new tax.

20140403PHT41952_original

© NATS press office

The design of the tax affects the standard of living in different ways for various groups of society.

While assessing the proposal of introducing a tax on intra-EU flights to finance the EU budget, we should consider the issues that may arise as a result of designing this tax from the perspective of both efficiency and equity.

From an efficiency point of view, the proposed tax should reduce distortions in competition, alleviate the problems of incomplete markets and raise revenue for the provision of public goods. As argued by OECD, “improvements in efficiencies can be achieved through”: 1) broadening tax bases; 2) flattening rate structures; 3) integrating different tax rate structures to avoid arbitrage opportunities[1].

Therefore, we propose the following arguments to assess the tax on the intra-EU flights from an efficiency standpoint:

Firstly, the issue of elasticity is of high importance. It might be assumed that air transport demand is inelastic relative to the increase in price provided by the incorporation of the newly introduced tax, especially what concerns business-class passengers and seasonal travels. However, this might not be the case in what concerns the users of the low-cost airlines: on the one hand, it may seriously hit the low-cost air-line providers, because their consumers are least inelastic to price changes; on the other hand, it may negatively affect the welfare of these low-cost companies’ consumers. Therefore, it might be reasonable to have a progressive tax: which will affect the most vulnerable consumers the least. In this way, the design of the tax may involve some efficiency loses but may contribute at the same time to the perceived fairness and equity.

Secondly, it is important to highlight the issue of compliance costs associated with the introduction of the tax. In order to minimize additional costs, the tax should be clear and simple to apply; therefore the best option might be to have flat-rate tax. However, to be coherent with the argument of fairness and equity it might be optimal to introduce the progressive tax as described above and introduce a technical solution for conducting necessary calculations: this would require one-time investment, will be coherent with the suggested progressive tax and might possibly bring the optimal compliance costs.

From an equity standpoint, we propose the following arguments:

PROs

The common airspace of the European Union represents a public good by all its properties (e.g. non-rivalry, non-excludability), and this alone gives reasons to argue that levying a tax on airspace use is moral and fair in itself.  Since we all benefit from its existence, we should all contribute to its maintenance. Therefore, it becomes crucial to determine the purposes for which the collected revenue will be used. In order to make this tax truly equitable, the citizens must be presented with a concrete set of actions that will be taken in order to mitigate the negative effects of air transport on the airspace, by means of the tax on intra-EU flights.

CONs

If the set of concrete actions to be financed from the collected revenue is missing or not made clear to the public, this tax will become questionable from an equity point of view, and consumer rights’ protection groups might contest it.

In addition, it is mostly EU citizens that take intra-EU flights; however, companies operating flights to or from non-EU countries also use the common airspace of the EU. It is not necessarily equitable, therefore, to tax only intra-EU flights, especially if the end goal of the revenue collected is to finance environmental action.

[1] OECD (2001): ‘Tax and the Economy: A Comparative Assessment of OECD Countries’, OECD Tax Policy Studies 6.

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s