Indirect Taxation and the Effect on Apd

4b) Discuss whether the UK Government should raise indirect taxation, such as Air Passenger Duty, on air travel in order to increase sustainability. (20)

Indirect taxation is a form of taxation that is not taken directly from wage packets and therefore is only incurred when a certain action is taken. In the case of the Air Passenger Duty the taxation is only applicable to members of the public who decide to take flights. The main sustainability issue involved with aviation is the pollutants emitted threating the ability of future generations to satisfy their needs due to the effects of global warming.

On the one hand the increases in indirect taxation will cause flight tickets to increase in cost as the airlines will not be willing to sacrifice profit in order to cover the increased taxation themselves, therefore the overall price of the ticket will rise to cause the excess cost to be absorbed by the consumer. The result of this is that certain people, particularly those with a lower amount of RDI and those taking flights for leisure purposes, may choose not to fly and may instead look to take holidays within the UK to avoid the growing cost of fares. This would increase sustainability as people wouldn’t be travelling by plane and therefore due to the fall in demand the airlines will reduce their supply and hence less pollutants will be emitted as there will be fewer planes in the air.

For those travellers who continue to travel by aircraft the increased costs will internalise their negative externalities resulting in the effects shown in the below diagrams.

In diagram one there is the inclusion of a triangle representing the welfare loss that previously occurred before the costs were internalised. The overconsumption of the good was eliminated once the marginal private costs (MPC) increased to meet the marginal social costs (MSC). This results in increased sustainability as the negative externalities of the flight have been internalised as hence the effect on the third party has been covered by the consumer.

On the other hand an argument to suggest that the increase in indirect taxation in the aviation sector will not increase sustainability is that in the UK the tax revenue received by government is not hypothecated and therefore all ends up in the same treasury fund. The result of this is that taxation received from airline travellers may not be spent on reducing the effects of flying by reducing the effects of the emissions and therefore will in no way lessen the negative externalities incurred by flying and as a result the ability to satisfy needs of future generations may well be compromised.