Britain's High Taxes

February 9, 2012

In 1994 the British government implemented the first environmental tax on airline travel.  Justified as an economic penalty for the emissions of planes, the tax also brings in substantial revenue for the state.  Despite the higher costs, however, air traffic continues to increase as demand from individual consumers grows.  This leaves two parties with conflicting policy solutions: consumers want more airports in order to alleviate congestion, while state officials simply want to increase the tax in order to bludgeon demand back down, says Roger Bate, the Legatum Fellow in Global Prosperity at the American Enterprise Institute.

  • The increased tax rate would push the cost of a single ticket up by at least £60 (about $95).
  • The Department for Transport projects that, if not constrained by airport capacity, traffic could grow from 241 million passengers annually in 2007 to 465 million in 2030.
  • However, because of the limited capacity (and projections that the status quo will not be changed), the British Air Transport Association claims that existing capacity will cost the UK economy over $10 billion over the next 20 years.

The government maintains substantial leverage in this position because of the innate economic characteristics of the good in question (air travel).  Because demand to fly is relatively inelastic, few consumers will fly less in response to moderately higher costs.  This is because, for the most part, they deem the good to be a necessary expense and are therefore willing to bear the additional burden.

This economic analysis also applies to one of the more specific arguments regarding the taxation of air travel.  Many of the country's poor, already in low economic standing because of the recession, argue that taxes should be increased only on those with first-class seating.  This, they emphasize, would allow the poor to continue flying when they might not be able to otherwise.  Inelasticity is relevant here because, as many premium flyers are doing so on business, their demand would likely not dip at all -- companies, like individuals, will recognize the additional cost as necessary and worth it.

Therefore, it is likely that the state's interests in additional revenue will win out against the desires of regular consumers, because the good in question grants them little leverage in the matter.

Source: Roger Bate, "Britain's High Green Taxes," American Enterprise Institute, February 2, 2012.

For text:

http://www.aei.org/article/economics/international-economy/britains-high-green-taxes/

 

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