Increase the APD... eventually.

There are growing calls in the UK for the government to scrap a proposed increase in air passenger duty (APD) later this year.

APD is a tax levied by the UK government on international departures. Currently this is £10 per departure within Europe and £40 for other destinations (I am simplifying a little. The full details are here).

Last year Gordon Brown announced that from November 2009, these rates would increase. There will be four bands based on distance of capital cities from London, with rates (for economy) ranging from £12 to £85. For all international departures, this is an increase. For those trips less than 2,000 miles [capital city to capital city] the increase is modest (£10 to £12). For some (greater than 6,000 miles) this is slightly more than doubling the rate.

The Telegraph has a campaign to get the change removed. See it here.


"Recession and APD forces airlines to cancel routes".
The recession has caused airlines to cancel routes. APD has not [at least, yet].

"Passenger tax will be a disaster for the Caribbean".
Disaster? this is almost laughable. The Telegraph campaign continues "Next year, passengers flying to the Caribbean will have to pay £75 per person APD in economy class or £150 per person on flights in other classes. It goes without saying that the addition of up to £600 to a four-person family's air fare will have devastating effects."

- even in economy class, a family of four is likely to pay £4,000 for return flights to the Caribbean. Sure, £600 is a lot of tax to pay ontop of that, but of course the £600 is for classes above economy. British Airways are currently quoting £6,500 per person for first class flights to Jamaica [per person] - I saw a United flight for an amazing £8,000. Even in business class, the Telegraph's family of four will be paying around £12,000. An additional £600 will not have a devastating effect on a family able to afford such a fare.


"Airlines facing 'worst year in aviation history'" [Richard Branson].
This is almost certainly true. With maybe the exception of the post-September 11th downturn. It is not because of the scheduled increase in APD.

"Budget 2009: Chancellor urged to scrap APD "
While the Telegraph's arguments are entirely false, and politically motivated to try and cause an embarassing U-turn from the government, the argument is deeper.

I have three points.

Firstly, we need to bear in mind that if it weren't for APD, international air transport from UK airports would be entirely untaxed. That's right, they pay no VAT and no tax on fuel. The new duties will in fact be approximately the same as if airlines paid VAT like most other industries, but complicated by the banding system, meaning that on some flights APD is cheaper than VAT would be, but more expensive on others [incidentally, a tax charging a percentage of ticket price would be far better than the band system]. It will not compensate for the fact that they do not pay tax on fuel.

Secondly, APD is often seen as a green tax. It is not. It is simply a VAT replacement, that has until now applied a tax at a rate around half what the airline industry would be paying if they were eligible for VAT. APD does not tax airlines in relation to their fuel use. From 2011 they will have to pay for CO2 emissions from fuel under the EU's emissions trading scheme. There will be outcries nearer thetime, not least to remove APD when emissions are taxed. These outcries have to be resisted.

Thirdly, it makes sense to tax international aviation. It is an export tax on a product where prices are not set by foreign markets (think OPEC and their raising of oil prices). The tax is relatively small compared to the total cost of a holiday (bear in mind that the figures above are just the prices of air fares), so it is unlikely that they will lead to large changes in demand. It is a progressive tax - the Telegraph's family of four paying an additional £600 are not on the breadline. While I cannot say that because of these arguments APD should be at rate x, it is clear that aviation should be at least as heavily taxed as any other industry.

Against these points, there is a very real arguement that this is not the right time for an APD increase. Those of you who have read some of my papers might guess that I do agree with this argument. Skilled workers, from airline pilots to cleaners and baggage handlers, are being laid off because of the recession. Some of these will become long-term unemployed, and their skills learned over years or decades will be lost to society. When the economy does eventually pick up we will regret these lost skills. As part of the government's fiscal stimulus, a boost to the airline industry (and to tourism) does makes sense. These industries are badly affected by the recession because they sell luxury goods (remember, see below, even domestic tourism demand is down by far more than GDP).

But again, the APD increase does make sense. In fact, it still looks small when the reasons for increasing the tax are considered. So, I call on Gordon Brown and Alistair Darling to:

- postpone the APD increase. You know that increasing taxes during a recession is a bad idea. The fiscal stimulus [and quantitave easing]
do nothing specifically for aviation or tourism.

- increase APD when the recession has finished. The only reason for postponing is the recession. You must resist all pressure from the industry to scrap the increase altogether.

- make the APD increase larger when it is eventually increased. Even the scheduled APD increase does not compensate for international aviation's VAT-free status.

- include domestic flights. The environmental rationale for taxing flights is greater for shorter flights. Why should these be tax free?

- ensure that international aviation is included at Copenhagen. It just has to be. Don't let industry pressure tell you otherwise.