Airport capacity constraints: rationing through the back door

Council Tax has to be the most unpopular tax there is in the UK. That is not because of its level (it accounts for just 5 per cent of total tax revenue), nor because of what it is spent on (most of which is fairly uncontroversial). It is because Council Tax is brutally transparent. Firstly, taxpayers know the exact amount of their Council Tax bill. There is no way to hide it; it cannot be merged with the price of something else, nor can it be labelled in a way which suggests that somebody else was paying it (unlike ‘employer contributions’, ‘bank levies’ etc.). Secondly, people have to make the transfer themselves, out of their own bank accounts. It is not automatically deducted from wages, or automatically included in some other payment. Thirdly, it is paid on a regularly recurring basis, so unlike Stamp Duty or Inheritance Tax, it is not a one-off annoyance. Most other taxes fulfil one or two of these criteria, but none fulfils all three. If all taxes were as transparent as Council Tax, government expenditure could never have risen to anywhere near its current level. Fiscal transparency and Big Government do not mix.

The same is true for other forms of government intervention. On the face of it, it is not clear why environmentalist groups are so fiercely opposed to airport expansion, given that capacity constraints are such a crude and inefficient way of achieving their own aim of keeping emissions in check. If reducing emissions is the aim, it can be achieved much more cost-effectively by taxing those emissions directly. A Pigouvian tax is just as effective in discouraging flying as a ban on airport expansions, but it also generates tax revenue, and it provides additional incentives to invest in fuel efficiency improvements. A targeted tax can achieve everything that a ban on expansions can achieve, and more, at a lower economic cost. So why don’t the campaigners throw all their weight behind that option?

The major difference between the two approaches is in their degree of transparency. Excise taxes are not especially transparent, but many airlines are now providing a breakdown of the components of a ticket price, listing the tax share separately. If these rates are hiked further and further, taxpayers will eventually begin to ask uncomfortable questions about what they are paying these taxes for, and whether punitive levels are really justifiable on environmental grounds. (They are not.)

In contrast, the effect of capacity constraints is a much more subtle one. If capacity constraints are not eased while demand keeps growing, airport charges and ticket prices will rise, marginally profitable flight connections will disappear, new flight connections that would otherwise have been opened will not be opened, the frequency of flight delays and cancellations will increase, airports will generally become more crowded, and the experience of flying will generally become more unpleasant. But it will not be possible to definitely link any given change to capacity constraints, because it will be unknowable what exactly the counterfactual would have been. What is more, constraining capacity does not even require active political decisions; in the current system, it is the default option that will result from inaction. People will notice the changes and respond by flying less frequently, but the responsible policymakers will not be held to account. They enable rationing through the backdoor.

In short, Pigouvian taxes are a relative transparent way of limiting emissions from air travel, while a ban on airport expansions is a hidden, opaque way. Is this the reason why environmentalist groups are so keen on the latter?

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