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Airline Ticket Taxes and Development Aid

Is this new idea just a gimmick — or a case of real European leadership?

February 28, 2006

Is this new idea just a gimmick — or a case of real European leadership?

Since 1980, when the Brandt Commission called on industrialized countries to raise their level of official development assistance, this goal has been set — and reset — almost as often as development objectives are announced.

But the target has become more and more modest over the years, falling from the goal of 1% of GDP set by the Brandt Commission to 0.7% in subsequent U.N documents. This decline in target levels matches the decline in actual aid, which went from about 0.35% of GDP in the late 1970s to its current level near 0.2% of GDP.

The recent announcement by Britain and France that they will use a tax on airline tickets to finance development aid is received by some as a departure from this long history of toothless commitments to increase aid. The tax has also been embraced in principle by Germany, Spain, Brazil and Algeria, according to the United Nations.

The commitment of airline ticket tax revenues to development assistance has been a European initiative championed especially by President Chirac of France.

Of course, not everyone is enthusiastic. The International Chamber of Commerce, never a friend of business taxes, has offered vocal opposition, in the name of fairness to business and to travelers. Rather implausibly, the ICC is framing its opposition to the tax as a defense of the low-income traveler.

No doubt all air travelers as well as airline companies would bear a burden from a mandatory tax on airline tickets, but there also is little doubt that the burden would be progressive, falling predominantly on households with above average income.

If the airline ticket tax really is the first step in renewed commitment to aid, Europe may not only show the world that it is willing to put some money where its mouth is. It also needs to demonstrate that it can take on full-fledged global initiatives whether the United States comes on board or not.

However, there are some reasons not to start applauding too soon.
First, it is not clear that the revenues of the tax on airline tickets will represent new funds for development.

They could simply be a new, highly publicized source that replaces other revenues that had been used to finance aid. The fact that Britain is not increasing taxes at all — but simply redirecting the revenues from existing taxes on airline tickets — suggests that this concern is not far fetched.

Under pressure to increase a particular type of aid, countries often reallocate existing resources without increasing the total.

Second, the report of the Commission of the European Communities on the question of taxing air tickets to finance aid looks at both a mandatory tax and a voluntary contribution. It is not clear whether the countries that have endorsed the idea intend to make the tax mandatory.

Third, even if the tax is mandatory, its base is small. With a tax rate of €5 on inter-EU flights and €10 on international flights, the commission staff estimates total EU revenues of less than €3 billion, about 10% of current overseas development assistance by France, Germany, UK, Italy, Netherlands and Belgium together.

The French tax, which is reported to impose taxes of €1 to 40 per ticket, depending on destination and class of travel, could raise a bit more or less than this estimate.

Fourth, while a tax on airline tickets is likely to hit relatively high-income households, it will be borne in part by the airlines, through decreased revenues. No industry is happy to see a new tax slapped on its product — and economists, too, are likely to see such a narrow tax as distortionary.

The United States, with most of its old airlines in bankruptcy, is unlikely to sign on to a new tax. The U.S. Chamber of Commerce has dug in its heels in opposition to the idea, joining the International Chamber of Commerce.

Finally, if the goal really is to increase aid by some proportion of GDP (say, half of one percentage point), then participating governments could raise the rate on a broad-based tax, like the VAT, by a small amount and dedicate the extra revenues to aid.

Of course, there are many competing calls for new government spending financed through the VAT. The real question is whether European governments are serious about increasing aid substantially — or if they want to show their concern without spending much.

Looking at the prospects of future aid more broadly, the OECD makes projections of future aid flows, based on its Secretariat's analysis of members' commitments. These projections convey both good news and bad about the actual changes in the aid pipeline.

The good news is that almost every member intends to increase ODA relative to its GDP over the next five years. From four countries that today give at least 0.7% of their GDP (Denmark, Netherlands, Sweden, and Norway), we can expect six in 2010, when Belgium and Finland join that elite group.

Other countries may not exceed 0.7% by 2010, but their contributions are likely to rise significantly. Germany is expected to increase its aid from 0.28% to 0.51% of GDP and France from 0.42% to 0.61% over this period.

Against this good news, a number of countries have pledged very modest increases. These include Japan (0.18% to 0.22%) and the United States (0.16% to 0.18%), the two largest donors in 2004.

The development tax on airline tickets may be more of a public display than an important new initiative, but it could signal a genuine independent European commitment to aid the poorest countries. If the OECD's projections are right, we are entering a period of rapid growth in overseas development aid with Europe taking the lead.

2010 ODA Volume Vs. 2004 Aid Flows

Data Source: OECD-DAC Secretariat