## 1. Tax Rates on Domestic Aviation Fuel

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### Introduction
- Recent policy moves (as of March 2006):
  - France and Chile decided to proceed with taxes on international flight departures, earmarked for development financing, from 2006.
  - The United Kingdom and Norway decided that some fraction of existing (aviation and environmental) taxes will be earmarked for development purposes.
  - About 10 countries (including Brazil) have agreed to adopt the initiative at least in principle.
- Key motivations for enhanced taxation of aviation:
  - Aviation causes significant border-crossing environmental damage, including air pollution and noise.
  - Emissions related to international aviation are excluded from the Kyoto Protocol.
  - Tax competition may lead countries to set aviation taxes lower than would be optimal collectively, especially to protect domestic carriers and tourism.

### Types of aviation tax (definitions and theoretical distinctions)
- Main indirect tax instruments analyzed:
  - Excise tax on aviation fuel (specific form: fixed monetary amount per gallon).
  - Ticket tax (ad valorem excise on passenger tickets and cargo waybills; distinct from a creditable VAT).
  - Trip tax (fixed charge per trip; departure tax as leading example).
- Theoretical notes:
  - Aviation fuel and business travel/freight are intermediate inputs; Diamond and Mirrlees (1971a, 1971b) imply production efficiency argues against taxing such inputs absent externalities.
  - Passenger travel is final consumption and can be targeted by commodity taxes.
  - Under perfect competition and homogeneous product assumptions:
    - Ad valorem and specific taxes are equivalent.
    - A ticket tax could be equivalent to a trip tax of the same monetary amount.
    - If fuel efficiency and load factors are fixed, a fuel tax would be equivalent to a ticket tax.
  - Crucial policy consideration: taxes operate on different decision margins; substitution possibilities determine comparative effects.

### Aviation taxes in practice — fuel, tickets, and departure/airport charges
- Aviation fees and charges:
  - Many charges are user fees (airport landing charges, passenger security charges, route facility charges) and are often earmarked for aviation purposes.
- VAT and fuel:
  - Domestic aviation fuel is generally subject to VAT.
  - Because aviation fuel is typically a business input for VAT-registered enterprises, VAT on fuel is (in principle) fully credited.
- Selected domestic aviation fuel rates (specific, US$ per gallon; ad valorem percent as reported):
  - Norway: 0.16 US$ per gallon; 14 percent.
  - United States: Aviation gasoline 0.19 US$ per gallon; 18.1 percent. Jet fuel 0.22 US$ per gallon; 21.0 percent.
  - Japan (domestic flights only): 1.10 US$ per gallon; 96 percent.
  - Netherlands (domestic flights only): 0.92 US$ per gallon; 81 percent.
  - Canada: 0.06 US$ per gallon; 6 percent.
  - Brazil: Aviation gasoline 1.57 US$ per gallon; 40.4 percent. Jet fuel 0.06 US$ per gallon; 4.9 percent.
  - Taiwan: Aviation gasoline 0.89 US$ per gallon; 39.4 percent. Jet fuel 0.06 US$ per gallon; 3.3 percent.
  - Venezuela: Aviation gasoline 0.05 US$ per gallon; 4.4 percent. Jet fuel 0.04 US$ per gallon; 5.0 percent.
- Ticket taxes and VAT treatment:
  - Domestic air travel: widely subject to VAT in high-income countries; many EU members (all except Denmark, Ireland, and the United Kingdom) charge VAT on domestic aviation services, often at reduced rates.
  - Selected high-income examples (April 2005):
    - Australia: Domestic VAT 10 percent; Domestic ticket tax 0 percent.
    - Canada: Domestic VAT 0 percent; Domestic ticket tax 7 percent.
    - United States: Domestic VAT 0 percent; Domestic ticket tax 7.5 percent (earmarked security charge), plus fixed charge of US$3.20 per segment for domestic air travel and US$14.10 per takeoff and landing for international travel.
    - Japan: Domestic VAT 0 percent; Domestic ticket tax 5 percent.
  - International air travel: typically zero-rated under VAT in high-income countries; some developing and emerging market countries impose VAT on international travel. Argentina was noted as levying both VAT and an ad valorem ticket tax on international travel.
- Departure, airport, and arrival charges (per passenger fixed charges) — illustrative values (US$ per traveler; exchange rates as of June 2005; April 2005 data):
  - United Kingdom: Total passenger charges up to 27–109 US$.
  - Japan: International total passenger charges 11–28 US$.
  - United States: Domestic total passenger charges 22 US$; International total passenger charges 34 US$.
  - Netherlands: Domestic and International total passenger charges 40–42 US$.
  - Mexico: Domestic total passenger charges 25 US$; International total passenger charges 49 US$.
  - Colombia: International total passenger charges 60–66 US$.
  - Pakistan: Domestic total passenger charges 27 US$; International total passenger charges 39–52 US$.
  - Peru: International total passenger charges 43 US$ (includes both arrival and departure tax).
- Observations:
  - Charges are typically higher for international than for domestic travel.
  - Some emerging market countries (Colombia, Mexico, Pakistan, Peru) have international charges at or above the highest levels in high-income countries.
  - Major emerging markets (China, India, several East Asian countries) tend to have low rates.

### Other possible aviation taxes (Box 2 overview)
- Emissions tax: targets proximate cause of pollution damage; encourages airlines to reduce emissions for given fuel input.
- Noise tax: best targeted to noise pollution; may be encompassed within airport landing charges (Swiss airports have such taxes).
- Local air pollution tax: taxes aircraft emissions at individual airports depending on local marginal pollution damage cost.
- “Green” levy variant of departure tax: example Norway since 1995 — a levy on all national flights for which there is a rail alternative.
- Airspace levy: could allocate scarce airspace resources efficiently where congestion arises.
- Quasi-taxes and charges: levies for airport use, landing, and navigation fees act as aviation taxes to the extent rates differ from the marginal private benefit of services received.

### Environmental externalities motivating taxation
- Air pollution:
  - Main pollutants: nitrous oxide (NOx), carbon monoxide (CO), hydrocarbons, sulphates, soot aerosols.
  - Emissions vary by flight phase: soot emissions are higher by a factor of 10 (per unit of fuel burned) at take-off than in regular flight; CO and hydrocarbon emissions are also substantially higher at take-off.
  - Domestic aviation on average involves greater negative air pollution externalities (per unit of burned fuel) than international activity because many international flights are long and over sea or desert areas.
- Global carbon emissions:
  - Aviation currently accounts for about 3-4 percent of global carbon emissions.
  - IPCC base scenario: by 2050 aviation is likely to contribute 5 percent of carbon emissions, and possibly as much as 15 percent.
- Other warming-related emissions and radiative forcing:
  - IPCC best estimate for aviation contribution to overall radiative forcing: about 3.5 percent in 1992; mid-range reference scenario increases to 5 percent in 2050, with absolute radiative forcing effect 3.8 times the 1992 value (upper possibility about 15 percent). Estimates assume no supersonic civil air transport by 2050.
  - Supersonic aviation: IPCC estimate about 5 times greater effect per unit of fuel than subsonic aviation.
- Noise, airport pollution, congestion:
  - Noise is mostly local and correctable at national level via charges.
  - Airport pollution is local and correctable at national level.
  - Congestion has peak-load character; charges graduated by airplane size, fuel consumption, local noise, and peak-load fees are appropriate. When several airlines operate, internalization of congestion externalities typically fails; congestion charges should be levied, typically at higher rates the more intense competition.

### Theoretical principles for taxing international aviation
- Two main instruments: fuel tax (specific on intermediate input) and ticket/trip tax (on final consumption).
- No cross-border damage (purely domestic environmental harm):
  - With both instruments available:
    - Fuel tax should target environmental damage (Pigovian); ticket tax driven by revenue (Ramsey) considerations.
    - If lump-sum taxation available (δ = 1), optimal policy: set fuel tax at Pigovian level and no ticket tax.
    - When marginal social cost of raising revenue δ > 1, the fuel tax is set below Pigovian level and ticket tax rises with δ.
  - If only one instrument available:
    - Ticket-tax outcome depends on demand elasticity.
    - Stand-alone fuel tax depends on elasticity of demand and elasticity of substitution between fuel and other inputs.
- Cross-border damage:
  - Cooperative taxation:
    - Optimal fuel tax in country i equals marginal social damage suffered by both countries divided by δ (text summary: ti = E' / δ).
    - Optimal ticket tax depends on country-specific demand elasticity and δ.
    - Optimal taxes typically differ across countries due to differences in marginal cost of public funds and demand elasticities.
  - Non-cooperative taxation:
    - Equilibrium fuel taxes reflect only domestic perceived harm and are set lower than cooperative outcomes.
    - Ticket taxes may be set too low as a second-best when fuel taxes are not properly set.
  - Coordination gains:
    - Neglecting harm abroad leads to fuel taxes set inefficiently low; coordinated increases in fuel taxes from non-cooperative levels would benefit all countries.
    - Gains from coordination depend on country asymmetries.

### Business versus economy travel — demand elasticities and implications
- Central elasticity estimates cited:
  - Business travel elasticity (absolute value): around 0.25 for long-haul international travel; around 0.6 for short-haul domestic travel.
  - Economy-class travel elasticity: around 1.0 (long haul) and 1.3 (short haul).
- Implications:
  - Elasticities suggest substantially higher ticket/trip taxes on business than on economy-class travel.
  - Offsetting considerations:
    - Substitution between classes could create distortions, likely small relative to class price differentials.
    - Tax-system interactions could argue for lower taxes on business travel if business travel is an input into production.
    - Diamond-Mirrlees theorem suggests not taxing business inputs if fuel is properly taxed and lump-sum transfers are feasible.
  - Practical conclusion: no overwhelming reason to differentiate; a creditable VAT (with controls) would in principle be preferred to broadly exclude business use.

### Non-environmental market distortions and tax-design implications
- International tax competition:
  - Countries may set aviation taxes low to maintain competitiveness and hub attractiveness; coordinated increases yield collective gains but are complicated by heterogeneity and compensation needs.
  - Strategic fuel bunkering is a practical concern mainly at high tax rates; evidence from Norway (tax near 16–18 U.S. cents per gallon) suggests little excess bunkering at moderate tax levels due to costs of excess fuel weight.
- Imperfect competition:
  - Under imperfect competition, an ad valorem tax tends to mitigate oligopolistic output restriction relative to a specific tax; ad valorem taxes often socially preferable if aviation taxes are a small fraction of overall tax revenue.
  - Where environmental externalities dominate, specific taxation may be preferable, depending on revenue role.
- Network externalities (Mohring effects):
  - Positive externalities from expanded traffic at a given airport can reduce traveling time; one measure: average 20-minute reduction in total traveling time between European capitals from 1990 to 1998 for the average traveler.
  - Empirical magnitude uncertain; not a strong presumption for subsidizing aviation overall.
- Product quality effects:
  - Ad valorem taxes can induce airlines to offer lower-quality products; points some weight toward specific taxes to avoid quality distortions.
- Distortions in competing modes:
  - If competing modes are mispriced, second-best adjustments imply aviation taxes should be lower where alternatives are undertaxed and higher where alternatives are overtaxed.
  - Net implication: aviation taxes generally ought to be higher in Europe than in North America, other things equal.
- Input price distortions and subsidies:
  - Subsidies to airplane production/operation and inappropriate airport fees point to higher optimal aviation taxes; tentative evidence suggests high-income countries tend to subsidize these activities, arguing for higher aviation taxes there.

### Rates, revenue, incidence — key quantitative findings and scenarios
- Box 3 illustrative optimal tax results (assumes E' = US$0.2 as in text):
  - Table header and values as presented (δ = 1.2 | δ = 2; ε = 1.2 | ε = 0.4 | ε = 1.2 | Ε = 0.4):
    - Fuel tax when used together with ticket tax (US$ per gallon): 0.17, 0.17, 0.10, 0.10.
    - Ticket tax when used together with fuel tax (percent): 14, 41, 42, 125.
  - Tendency: the environmental (fuel) tax decreases and the ticket tax increases with the marginal cost of public funds (δ); described as "quite marked."
- Pigovian estimates and indicative global figure:
  - Pearce and Pearce (2002) summarized estimates pointing to a Pigovian tax around 6 G.B. pence per liter, or about 40 U.S. cents per gallon.
  - Conservative indicative figure for a global Pigovian tax t on aviation fuel stated as 20 U.S. cents per gallon.
  - With the current average jet fuel price in excess of US$2 per gallon—and ignoring any improvement in fuel efficiency—this implies an increase in fuel costs of about 10 percent.
- Table 7 per-airplane estimates (GBP per liter of aviation fuel):
  - A310: Noise Tax 0.01, Air Pollution Tax 0.05, Total Tax 0.06.
  - A340: Noise Tax 0.01, Air Pollution Tax 0.06, Total Tax 0.07.
  - BAe146: Noise Tax 0.00, Air Pollution Tax 0.05, Total Tax 0.05.
  - B737-100: Noise Tax 0.06, Air Pollution Tax 0.04, Total Tax 0.10.
  - B737-400: Noise Tax 0.00, Air Pollution Tax 0.05, Total Tax 0.05.
  - B747-400: Noise Tax 0.01, Air Pollution Tax 0.06, Total Tax 0.07.
  - B757: Noise Tax 0.01, Air Pollution Tax 0.05, Total Tax 0.06.
  - B767-300: Noise Tax 0.01, Air Pollution Tax 0.05, Total Tax 0.06.
  - B777: Noise Tax 0.00, Air Pollution Tax 0.06, Total Tax 0.06.
  - F100: Noise Tax 0.00, Air Pollution Tax 0.05, Total Tax 0.05.
  - MD82: Noise Tax 0.01, Air Pollution Tax 0.05, Total Tax 0.06.
  - Average: Noise Tax 0.01, Air Pollution Tax 0.05, Total Tax 0.06.
- Equivalence and incidence:
  - Fuel costs currently close to 25 percent of airline revenues.
  - A 10 percent tax on aviation fuel would be roughly equivalent to a 2.5 percent ticket tax.
  - This 2.5 percent equivalence would add roughly US$6 to an average airfare:
    - about US$25 for business/first-class tickets,
    - about US$3 for economy tickets.
  - Passenger counts and equivalent departure-tax incidence:
    - About 1.7 billion passengers expected to be carried in 2005 (about 1.5 billion in economy class, the rest in business and first class).
    - The same tax revenue as a 10 cent-per-gallon/2.5 percent ticket tax would be collected through a US$5 departure tax on economy-class passengers, and a US$15 departure tax on business- and first-class passengers.
- Revenue estimates (no behavioral response):
  - A 20 cent fuel tax would raise on the order of US$10 billion per annum.
  - Applied only to international aviation (about two-thirds of aviation fuel use in 2003) it would raise about US$6.5 billion.
  - Applied only in Europe (EU and current non-EU members in Western and Eastern Europe including Russia), accounting for nearly 30 percent of all passenger kilometers traveled by air, it would raise about US$3 billion.
  - A uniform departure tax raising US$10 billion would require a charge of US$6 if applied worldwide.
  - A uniform departure tax levied in Europe alone would need to be set at US$20, or about 16 euros, to raise US$10 billion.
- Behavioral responses and yield impacts:
  - Ticket tax demand elasticity example:
    - With general price elasticity of demand of –2/3:
      - Global ticket tax revenue falls from about US$10 billion to around US$9.87 billion.
      - European ticket tax revenue falls from US$3 billion to about US$2.96 billion.
  - Aviation fuel tax responses:
    1. Short run: airlines increase fuel efficiency by utilizing energy-efficient planes more intensively and increasing average airplane load factors.
       - Empirical indication: the 2002–03 aviation fuel price hike (16 percent) resulted in a 3 percentage point increase in average airline fuel efficiency worldwide.
    2. Long run: further improvements via phasing out less energy-efficient planes.
  - Combined effects (excerpted calculation):
    - Two offsetting effects reduce projected revenue: a direct tax yield and a demand response to increased ticket prices driven by a (mitigated) increase in fuel costs of 1.5 percent.
    - Combining these effects, revenue from the global tax is reduced from US$10 billion to US$9.5 billion, and for Europe alone from US$3 billion to US$2.85 billion.
- Estimated optimal environmental tax level cited: about US$0.20 per gallon, or 2.5 percent as a ticket tax (subject to considerable uncertainty).
  - At that tax level, projected revenue is:
    - a little under US$10 billion if levied worldwide;
    - a little under US$3 billion if levied in Europe alone.
- Historical context: increased fuel costs added at least US$40 billion to airlines’ gross expenses in 2005 over the previous year.

### Incidence: distribution by class and region
- General supply/demand assumptions for incidence:
  - Competition sufficiently intense and returns to scale close to constant imply very elastic supply of aviation services.
  - Oil supply relatively fixed in the short run but highly variable over the longer term.
  - Under these assumptions, a tax on aviation fuel will most likely be almost fully passed on into input prices faced by airlines, and any increase in ticket prices will be fully borne by travelers.
- Distribution by travel class (worldwide traffic and revenue shares, Table 8):
  - Economy class: 89.6 (passenger number), 90.4 (traveled km), 73.1 (airline revenue).
  - Business class: 9.6 (passenger number), 8.2 (traveled km), 20.1 (airline revenue).
  - First class: 0.8 (passenger number), 1.4 (traveled km), 6.7 (airline revenue).
- Implications by tax type:
  - A uniform departure tax (or fuel tax charged equally by distance) would place about 90 percent of its incidence on economy-class travelers and about 10 percent on business- and first-class travelers.
  - A uniform ad valorem ticket tax would place almost 30 percent of its burden on premium travelers.
- Distribution by region (IATA-based allocation proportional to passenger kilometers):
  - North America: about 36 percent of the tax burden.
  - Europe: about 28 percent.
  - East Asia and the Pacific: about 24 percent.
  - Other regions (South and Central America, Africa, the Middle East and South and Central Asia): about 12 percent.
- Departure-tax allocation proportional to departing passengers (approximate):
  - Europe: about 31 percent.
  - Asia-Pacific: about 26 percent.
  - North America: about 29 percent.
- Regional/class specifics (Table 9 excerpts — shares of total numbers of air passengers by class for traffic originating in major regions):
  - Traffic originating in Europe: Economy class 85.0, Business class 14.6, First class 0.4.
  - Traffic originating in North America: Economy class 89.0, Business class 9.3, First class 1.7.
  - Traffic originating in Latin America: Economy class 91.1, Business class 7.3, First class 1.6.
  - Traffic originating in Asia and Pacific: Economy class 90.5, Business class 8.7, First class 0.8.
  - Total traffic (aggregate): Economy class 89.6, Business class 9.6, First class 0.8.
- Exemption scenarios and tax-base impacts:
  - Exempting all of Latin America and the Caribbean, Africa, and Asia (except Japan and other high-income countries) would eliminate approximately 25 percent of the global tax base (somewhat less for ticket taxes, somewhat more for fuel taxes).
  - Exempting only economy-class travel within and from such destinations would reduce the tax base by on the order of 15 percent.
  - Such exemptions require higher overall tax rates to achieve a given revenue target.

### Administration and compliance issues
- Collection feasibility:
  - Little technical difficulty in collecting taxes on aviation fuel, tickets, or departures; established excise and departure tax procedures already exist in most countries.
  - Levying tax on fuel used in international aviation might facilitate administration by narrowing the tax differential between fuels used internationally and domestically.
- Key enforcement concerns:
  - Ticket-tax design must ensure tax is levied on final sales to the consumer, not on sales from airlines to agents.
  - If proceeds do not accrue to the collecting country (e.g., used for international development), incentives to collect may be blunted.
    - Mitigation example: allow collecting authorities to retain some proportion of receipts, perhaps on the order of 10 percent.
  - Even with retention, marginal retention less than 100 percent reduces collection incentives.
  - Countries may enforce taxes less intensively for national self-interest reasons (protecting carriers, tourism); this can take forms such as lengthened payment periods or infrequent inflation adjustments.
- Need for coordination and verification:
  - Participating countries will likely insist on detailed agreement on base, taxpayers, payment periods, interest, and penalties.
  - Verification options include joint audit activities or independent monitoring of aviation activity to estimate tax due.
  - Pressures for mutual oversight grow with the number of participants.

### Policy conclusions and recommendations
- From pure tax-policy grounds, a generalized increase in taxes on international aviation is warranted:
  - Current rates of tax are low.
  - Persuasive evidence exists of significant cross-border environmental damage from international air travel.
  - International air travel is an appropriate object of indirect taxation and is administratively similar to existing excises.
- Optimal taxation likely involves a combination:
  - An excise on aviation fuel to address principal cross-border environmental harm.
  - A tax on tickets focused on raising revenue, with the ticket tax best taking the form of a VAT to exclude business use (including cargo); if environmental costs must be reflected for business and cargo, use a non-creditable excise or an additional excise.
- Legal and political considerations:
  - Main legal obstacles are mutual exemptions in bilateral air service agreements; the Chicago Convention does not prevent countries from taxing aviation fuel bunkered in their own borders.
  - Legal restrictions can, in principle, be overcome regionally (e.g., within the EU).
  - In the absence of cooperation, tax competition may drive rates inefficiently low; regional schemes can still be effective because the tax base is not perfectly mobile.
- Development-finance potential:
  - Indirect aviation taxes have appeal as a prospective source of development financing because aviation activity is mostly international and thus a charge on use of a common resource.
  - The tax base is buoyant and projected to grow strongly in international airline traffic.
- Political timing and resistance:
  - Many countries (large high-income market-holders and smaller low-income tourism-dependent countries) strongly oppose aviation taxes.
  - Current high and uncertain fuel prices and financial pressure on many airlines reduce short-term political feasibility.
  - Nevertheless, some countries (e.g., France and Chile) have committed to introducing new aviation departure taxes for development finance, and regional implementation is feasible.
- Overall recommendation:
  - The case for strengthening indirect taxation of international aviation is strong enough to warrant continued attention and closer analysis.

*Source: _wp06124 - IMF working paper extract.*

### 1. Tax Rates on Domestic Aviation Fuel .................................................................................

### 1. Tax Rates on Domestic Aviation Fuel

### Introduction
- Recent debate on global taxes for development finance has focused on indirect taxes on international aviation.
- As of March 2006, France and Chile decided to proceed with taxes on international flight departures, earmarked for development financing, from 2006.
- The United Kingdom and Norway decided that some fraction of existing (aviation and environmental) taxes will be earmarked for development purposes.
- About 10 countries (including Brazil) have agreed to adopt the initiative at least in principle.
- Key motivations for enhanced taxation of aviation:
  - Aviation causes significant border-crossing environmental damage, including air pollution and noise.
  - Emissions related to international aviation are excluded from the Kyoto Protocol.
  - Tax competition may lead countries to set aviation taxes lower than would be optimal collectively, especially to protect domestic carriers and tourism.

### European Debate (Box 1 — key points and numeric details)
- On June 7, 2005, ECOFIN discussed a possible contribution to development finance based on airline tickets; proposals considered voluntary implementation at two levels (country-level opt-in and passenger-level opt-in/opt-out).
- The European Commission (2005a) judged compulsory national-level schemes politically infeasible at the time due to member-state resistance.
- Voluntary passenger-level schemes may be:
  - Burdensome for airlines (accounting and ticketing changes).
  - Low revenue-raising.
  - Potentially not counted as official aid.
- The Commission’s main suggestion: some EU countries implement a compulsory levy in the form of a departure tax on all domestic and international flights, likely differentiated by class (economy, business, first) and possibly by destination (EU vs non-EU).
- Specific national measures described:
  - French tax, to be imposed from July 2006: maximum rates in economy class of 1 euro per departure to destinations within Europe, 4 euros to other destinations; for business and first-class travelers, maximum rates of 10 and 40 euros, respectively.
  - Chilean tax, imposed from the start of 2006: US$2 departure tax on all international departures.

### Purpose and Scope of the Paper
- Aim: develop the public economics of indirect taxes on aviation (excluding direct taxation on airlines’ profits).
- Focus: identify, analyze, and assess merits of various forms of aviation taxes as tax policy measures in their own right.
- Explicit exclusions:
  - The paper largely leaves aside use of proceeds for development (additionality issues are not the main focus).
  - Direct taxation of airlines (corporate income tax) is not considered; “aviation taxes” here refers only to indirect taxes.

### Types of Aviation Tax (Section II)
- The analysis focuses on three indirect tax types:
  - An excise tax on aviation fuel, assumed in specific form (fixed monetary amount per gallon). (Footnote: Specific taxation is the norm for fuel excises.)
  - A ticket tax: an ad valorem excise on sales of passenger tickets and cargo waybills (distinct from a VAT on tickets, which is creditable).
  - A trip tax: a fixed charge per trip (departure tax as leading example).
- Key theoretical distinctions:
  - Aviation fuel and business travel/freight are intermediate inputs; under Diamond and Mirrlees (1971a, 1971b) production efficiency implies such inputs should not be taxed in the absence of externalities.
  - Passenger travel is final consumption and can be targeted by commodity taxes.
- Equivalence notes under idealized conditions:
  - Ad valorem and specific taxes are equivalent under perfect competition for a homogeneous product.
  - A ticket tax could be equivalent to a trip tax of the same monetary amount.
  - If fuel efficiency and load factors are fixed, a fuel tax would be equivalent to a ticket tax.
- Crucial policy consideration: taxes operate on different decision margins; substitution possibilities determine comparative effects.

### Aviation Taxes in Practice (Section III) — Taxes on Aviation Fuel
- Aviation faces a variety of fees and charges; many are user fees for services (e.g., airport landing charges, passenger security charges, route facility charges) and are earmarked for aviation purposes rather than general-revenue taxes.
- Domestic aviation fuel is generally subject to VAT.
  - Because aviation fuel is typically a business input for VAT-registered enterprises, VAT on fuel is (in principle) fully credited and thus has no ultimate economic impact for these users.
- Many countries also charge excise taxes on aviation fuel used for domestic flights.
  - Excise rates are sometimes differentiated between propeller planes (aviation gasoline) and jets (kerosene).

### Plan of the Paper (as stated)
- Section II: types of aviation taxes.
- Section III: current practice.
- Section IV: border-crossing externalities from international aviation.
- Section V: theoretical principles for aviation taxes.
- Section VI: extensions of theory in light of other distortions in the aviation market.
- Section VII: appropriate rates of aviation taxes, revenue yield, and incidence.
- Section VIII: administration and compliance issues.
- Section IX: conclusions.

*Source: _wp06124 - 1. Tax Rates on Domestic Aviation Fuel (IMF working paper extract).*

### Box 2. Other Possible Types of Aviation Tax

### Box 2. Other Possible Types of Aviation Tax

### Types of aviation tax (overview)
- Emissions tax
  - Targets proximate cause of pollution damage; encourages airlines to reduce emissions for given fuel input (for instance through engine choice).
- Noise tax
  - Best targeted to noise pollution; might be encompassed within airport landing charges. Swiss airports currently have such taxes.
- Local air pollution tax
  - Taxes aircraft emissions specifically at individual airports and depends on local marginal pollution damage cost; can shift some air traffic from airports with high marginal damage to airports with lower damage.
- “Green” levy variant of departure tax
  - Example: Norway since 1995 — a levy on all national flights for which there is a rail alternative.
- Airspace levy
  - Could allocate scarce airspace resources efficiently where congestion arises (WGBU, 2002).
- Quasi-taxes and charges
  - Levies and charges for airport use, landing, and navigation fees act as aviation taxes to the extent rates differ from the marginal private benefit of services received.

### Aviation fuel tax practice and selected rates (Table 1 summary and illustrative figures)
- Systematic aviation fuel tax data are limited; domestic aviation fuel taxes vary widely by country and, in the United States, by state (some states have no tax).
- Where reported, both specific amounts (US$ per gallon) and equivalent ad valorem percentages (specific tax relative to the price of fuel) are shown.
- Selected illustrative rates (specific, US$ per gallon, and ad valorem percent as reported):
  - Norway: 0.16 US$ per gallon; 14 percent (Norway has had a domestic aviation fuel tax since 1999; the text also reports 0.28 NOK per liter, equivalent to US$0.16 per gallon).
  - United States: Aviation gasoline 0.19 US$ per gallon; 18.1 percent. Jet fuel 0.22 US$ per gallon; 21.0 percent.
  - Japan (domestic flights only): 1.10 US$ per gallon; 96 percent.
  - Netherlands (domestic flights only): 0.92 US$ per gallon; 81 percent.
  - Canada: 0.06 US$ per gallon; 6 percent (both aviation gasoline and jet fuel).
  - Brazil: Aviation gasoline 1.57 US$ per gallon; 40.4 percent. Jet fuel 0.06 US$ per gallon; 4.9 percent.
  - Taiwan: Aviation gasoline 0.89 US$ per gallon; 39.4 percent. Jet fuel 0.06 US$ per gallon; 3.3 percent.
  - Venezuela: Aviation gasoline 0.05 US$ per gallon; 4.4 percent. Jet fuel 0.04 US$ per gallon; 5.0 percent.
- Notes on data timing: country-year footnotes include 2000, 2001, 2002, 2003, 2004 as applicable; percent figures are percent of average fuel prices in the respective year (in most cases around US$1 per gallon for 2000–03, US$1.50 per gallon for 2004).

### VAT, international flights, and legal constraints
- Typically no tax on aviation fuel used on international flights; under the VAT, items related to international transport are generally zero-rated (no tax charged on sales; any tax paid on inputs is refunded).
- Legal framework constraining taxation of fuel on board:
  - Article 24 of the 1944 Convention on International Civil Aviation (the Chicago Convention) requires that fuel and lubricating oils on board an aircraft of a contracting State, on arrival in the territory of another contracting State and retained on board on leaving the territory of that State, shall be exempt from customs duty, inspection fees or similar national or local duties and charges.
  - The Chicago Convention does not prevent countries from taxing fuel purchased for international flights in their own jurisdictions nor preventing taxation of purely domestic flights, but it does prevent undoing incentives for carriers to refuel in a country by tanking in lower-tax jurisdictions.
  - Bilateral air service agreements also typically include mutual agreement not to tax aviation fuel.
  - In the EU, there is no direct legal impediment to taxation, by mutual agreement, of aviation fuels used on flights between EU member states (Directive 2003/96 on energy taxation).
- Practical implications:
  - Renegotiating the Chicago Convention appears infeasible; renegotiating bilateral agreements is possible but painstaking due to their large number.
  - Even without legal restrictions, international tax competition and fuel bunkering could lead to inefficiently low fuel tax levels; however, strategic bunkering may be economically unattractive at moderate tax levels (Norway example).

### Ticket taxes (ad valorem) — practice and variations
- Ad valorem taxes can be applied to passenger tickets and cargo waybills; may be VAT (creditable) or non-creditable excise.
- Domestic air travel
  - Widely subject to VAT in high-income countries (Table 2); many EU members (all except Denmark, Ireland, and the United Kingdom) charge VAT on domestic aviation services, often at rates lower than their standard.
  - In selected high-income examples (April 2005):
    - Australia: Domestic VAT 10 percent; Domestic ticket tax 0 percent.
    - Canada: Domestic VAT 0 percent; Domestic ticket tax 7 percent.
    - United States: Domestic VAT 0 percent; Domestic ticket tax 7.5 percent (earmarked security charge), plus fixed charge of US$3.20 per segment for domestic air travel and US$14.10 per takeoff and landing for international travel.
    - Japan: Domestic VAT 0 percent; Domestic ticket tax 5 percent.
- International air travel
  - Typically zero-rated under VAT in high-income countries (Table 2); some developing and emerging market countries impose VAT on international travel.
  - Ad valorem ticket taxes on international travel tend to be confined to developing and emerging market countries and, where levied, are generally at lower rates than domestic rates.
  - Argentina was noted as levying both VAT and an ad valorem ticket tax on international travel (of the countries for which information is provided).
- Policy insight
  - Within the EU, ad valorem ticket taxes would arguably run counter to rules requiring VAT to be the only broad-based turnover tax; prospects of such taxes in the EU are remote.
  - VAT on international air travel is not precluded in principle.

### Departure, airport, and arrival charges (per passenger fixed charges)
- Per passenger fixed charges are common and vary widely; many countries differentiate by domestic vs international, by traveler class, and by residency/foreign status.
- Illustrative values (rates as of April 2005; US$ per traveler; exchange rates as of June 2005):
  - High-income examples (Tables 4 summary):
    - United Kingdom: Total passenger charges up to 27–109 US$ (range reflects class and destination differentiation; highest for first-class travelers to destinations outside the EU at US$109).
    - Japan: International total passenger charges 11–28 US$.
    - United States: Domestic total passenger charges 22 US$; International total passenger charges 34 US$.
    - Netherlands: Domestic and International total passenger charges 40–42 US$.
  - Emerging/developing examples (Table 5 summary):
    - Mexico: Domestic total passenger charges 25 US$; International total passenger charges 49 US$.
    - Colombia: International total passenger charges 60–66 US$.
    - Pakistan: Domestic total passenger charges 27 US$; International total passenger charges 39–52 US$ (class-differentiated).
    - Peru: International total passenger charges 43 US$ (includes both arrival and departure tax).
- Observations:
  - Charges are typically higher for international than for domestic travel.
  - Some emerging market countries (Colombia, Mexico, Pakistan, Peru) have international charges at or above the highest levels in high-income countries.
  - Most countries with particularly high rates account for a relatively small share of global aviation traffic; major emerging markets (China, India, several East Asian countries) tend to have low rates.

### Environmental and other externalities from aviation
- Overview: key externalities motivating aviation taxes include air pollution, global carbon emissions, other greenhouse-affecting emissions, noise, airport pollution, and congestion.
- Air pollution
  - Main polluting substances: nitrous oxide (NOx), carbon monoxide (CO), hydrocarbons, sulphates, soot aerosols.
  - Emissions effects vary with location and phase of flight: soot emissions are higher by a factor of 10 (per unit of fuel burned) at take-off than in regular flight; CO and hydrocarbon emissions are also substantially higher at take-off.
  - Domestic aviation on average involves greater negative air pollution externalities (per unit of burned fuel) than international activity because many international flights are long and over sea or deserted land areas.
- Global carbon emissions
  - Aviation currently accounts for about 3-4 percent of global carbon emissions.
  - IPCC base scenario: by 2050 aviation is likely to contribute 5 percent of carbon emissions, and possibly as much as 15 percent.
- Other emissions affecting global warming (non-CO2)
  - Relevant substances: NOx, methane, water vapor, sulfates, soot.
  - IPCC’s best estimate for aviation contribution to overall radiative forcing (carbon and non-carbon emissions): about 3.5 percent in 1992; mid-range reference scenario increases to 5 percent in 2050, with absolute radiative forcing effect 3.8 times the 1992 value (upper possibility about 15 percent). These estimates assume no supersonic civil air transport by 2050.
  - Supersonic aviation (altitudes 17–20 km) would have much larger effects per unit of fuel consumption; IPCC estimate about 5 times greater effect per unit of fuel than subsonic aviation.
- Noise
  - Mostly local, arising near airports and varying with airport location and nearby population density; major local problem correctable at national level via charges.
- Airport pollution and congestion
  - Airport pollution (de-icing fluids, oil spills, runway chemicals) is local and correctable at national level.
  - Congestion consists of (1) air transport system congestion (runways, airspace) and (2) passenger overcrowding (terminals, parking). Peak-load nature suggests charges graduated by airplane size, fuel consumption, local noise, and peak-load fees to airlines.
  - When several airlines operate at an airport full internalization of congestion externalities typically fails; congestion charges should be levied, typically at higher rates the more intense competition.
  - It is unclear whether existing fees fully reflect externality costs; evidence is mixed.

### Principles for taxing international aviation (theoretical implications)
- Two main instruments considered: fuel tax (specific on intermediate input) and ticket/trip tax (specific or ad valorem on final consumption).
- No cross-border damage (purely domestic environmental harm)
  - Clean separation when both instruments available:
    - Fuel tax should target environmental damage (Pigovian); ticket tax driven by revenue (Ramsey) considerations.
    - If lump-sum taxation available (δ = 1), optimal policy: set fuel tax at Pigovian level and no ticket tax.
    - When marginal social cost of raising revenue δ > 1, the fuel tax is set below the Pigovian level and ticket tax rises with δ.
  - If only one instrument is available:
    - Ticket tax under isolation depends on elasticity of demand.
    - Stand-alone fuel tax depends on weighted average of elasticity of demand and elasticity of substitution between fuel and other inputs; stronger substitution leads to lower optimal fuel tax relative to ticket tax.
    - All else equal, ticket tax is more likely preferred the greater the need for revenue and the lower marginal environmental damage.
- Cross-border damage
  - Cooperative taxation (countries maximize joint welfare)
    - Optimal fuel tax in country i = marginal social damage suffered by both countries (sum of damages) divided by δ: ti = E' / δ (text formula summary: ti = E' / δ).
    - Optimal ticket tax depends on country-specific elasticity of demand and δ.
    - Even under cooperation, optimal taxes typically differ across countries because of differences in marginal cost of public funds and demand elasticities.
  - Non-cooperative taxation (each country maximizes its own welfare)
    - Equilibrium fuel taxes reflect only domestic perceived harm and therefore are set lower than in cooperative outcome; ticket taxes' characterization remains as in cooperative case but may be set too low as a second-best instrument in the absence of properly set fuel taxes.
  - Coordination gains
    - Neglect of harm abroad leads to fuel taxes set inefficiently low; coordinated increases in fuel taxes from non-cooperative levels would benefit all countries.
    - Gains from coordination hinge on asymmetries between countries; larger asymmetric contributors internalize more harm and may be less responsive to coordination gains.

### Treatment of business versus economy travel
- Market segmentation implies differing demand elasticities across traveler types; central elasticity estimates cited:
  - Business travel elasticity (absolute value): around 0.25 for long-haul international travel; around 0.6 for short-haul domestic travel.
  - Economy-class travel elasticity: around 1.0 (long haul) and 1.3 (short haul).
- Implications:
  - Purely on elasticity grounds, substantially higher ticket/trip taxes on business than on economy-class travel would be indicated.
  - Offsetting considerations:
    - Substitution between classes could create distortions; likely small relative to class price differentials.
    - Wider tax-system interactions could argue for lower taxes on business travel if business travel is an input into production.
    - Diamond-Mirrlees theorem suggests not taxing business inputs if fuel is properly taxed and lump-sum transfers are feasible.
  - Practical conclusion: no overwhelming reason to differentiate; a VAT creditable to registered taxpayers (with controls) would in principle be preferred.

### Non-environmental market distortions and implications for tax design
- International tax competition
  - Countries may set aviation taxes low to maintain competitiveness and hub attractiveness; collective gains from coordinated increases in taxation are possible but complicated by heterogeneity of country interests and potential compensation needs.
  - Strategic fuel bunkering (tanking in low-tax jurisdictions) is a practical concern mainly at high tax rates; evidence from Norway (tax near 16–18 U.S. cents per gallon) suggests little excess bunkering at moderate tax levels due to costs of excess fuel weight.
- Imperfect competition
  - Product differentiation and potential market power (especially in business/first-class segments) complicate optimal tax choices.
  - Under imperfect competition an ad valorem tax tends to mitigate oligopolistic output restriction relative to a specific tax; ad valorem taxes often socially preferable if aviation taxes are a small fraction of overall tax revenue.
  - When environmental externalities dominate, a case can be made for specific taxation, but this depends on the revenue role of the tax.
- Network externalities
  - Positive externalities (Mohring effects) from expanded traffic at a given airport can reduce traveling time; measured gains include average 20-minute reduction in total traveling time between European capitals from 1990 to 1998 for the average traveler.
  - Empirical magnitude uncertain; not a strong presumption for subsidizing aviation overall.
- Product quality effects
  - Ad valorem taxes can induce airlines to offer lower-quality products (consumer price must rise by more than cost increases for quality improvements). This points some weight toward specific taxes to avoid needless quality distortions, especially where quality improvements act like price reductions (e.g., reduced waiting times).
- Distortions in competing modes (road and rail)
  - Short-haul air competes with car and rail. If competing modes are mispriced (e.g., road undertaxed in the U.S., road overtaxed in Europe, rail heavily subsidized in parts of Europe), second-best adjustments imply aviation taxes should be lower where alternatives are undertaxed and higher where alternatives are undertaxed in the opposite direction.
  - Net implication: aviation taxes generally ought to be higher in Europe than in North America, other things equal, though this depends on cross-elasticities and policy feasibility.
- Input price distortions and subsidies
  - Subsidies to airplane production/operation and inappropriate airport fees/charges point to higher optimal aviation taxes; tentative evidence suggests high-income countries tend to subsidize these activities (argument for higher aviation taxes), while lower-income countries may tax them.

### Rates, revenue, and incidence (introductory observations)
- Optimal design typically uses both fuel taxes (for environmental correction) and ticket taxes (for revenue), with rates depending on:
  - responsiveness of final demand (elasticity),
  - pattern and marginal global external damage,
  - ease of substitution between fuel and other inputs,
  - marginal cost of public funds (δ).
- Substantial uncertainty exists about key parameters (elasticities, E', δ).
- The text indicates simple calculations illustrating alternative optimal taxes are reported in Box 3 (not reproduced here) and that subsequent analysis considers setting aviation taxes at levels reflecting marginal global external damage E' under further simplifying assumptions.

*Source: _wp06124 - Box 2. Other Possible Types of Aviation Tax (excerpt)._

### Box 3. Optimal Aviation Tax Rates for Alternative Parameter Values

### Box 3. Optimal Aviation Tax Rates for Alternative Parameter Values

### Optimal tax rates under alternative parameter values
- Table of implied tax rates from applying alternative values for the elasticity of demand and marginal cost of public funds (assumes = ′ EUS$0.2 as in the text):
  - Header as presented in source: δ = 1.2 | δ = 2
    - ε = 1.2 | ε = 0.4 | ε = 1.2 | Ε = 0.4
  - Fuel tax when used together with ticket tax (US$ per gallon): 0.17, 0.17, 0.10, 0.10
  - Ticket tax when used together with fuel tax (percent): 14, 41, 42, 125
- The tendency: the environmental (fuel) tax decreases and the ticket tax increases with the marginal cost of public funds (δ); this tendency is described as "quite marked."

### Comparison with Pigovian estimates of external damage
- Pearce and Pearce (2002) summarized estimates pointing to a Pigovian tax around 6 G.B. pence per liter, or about 40 U.S. cents per gallon.
- The text notes that marginal aviation externalities may be higher than average in the United Kingdom (due to relatively high income and population densities).
- A conservative indicative figure for a global Pigovian tax t on aviation fuel is stated as 20 U.S. cents per gallon.
- With the current average jet fuel price in excess of US$2 per gallon—and ignoring any improvement in fuel efficiency—this would imply an increase in fuel costs of about 10 percent.

### Table 7 — Estimated average aviation fuel tax necessary to cover main externality costs (noise and air pollution)
- Per-airplane estimates (GBP per liter of aviation fuel) as presented:
  - A310: Noise Tax 0.01, Air Pollution Tax 0.05, Total Tax 0.06
  - A340: Noise Tax 0.01, Air Pollution Tax 0.06, Total Tax 0.07
  - BAe146: Noise Tax 0.00, Air Pollution Tax 0.05, Total Tax 0.05
  - B737-100: Noise Tax 0.06, Air Pollution Tax 0.04, Total Tax 0.10
  - B737-400: Noise Tax 0.00, Air Pollution Tax 0.05, Total Tax 0.05
  - B747-400: Noise Tax 0.01, Air Pollution Tax 0.06, Total Tax 0.07
  - B757: Noise Tax 0.01, Air Pollution Tax 0.05, Total Tax 0.06
  - B767-300: Noise Tax 0.01, Air Pollution Tax 0.05, Total Tax 0.06
  - B777: Noise Tax 0.00, Air Pollution Tax 0.06, Total Tax 0.06
  - F100: Noise Tax 0.00, Air Pollution Tax 0.05, Total Tax 0.05
  - MD82: Noise Tax 0.01, Air Pollution Tax 0.05, Total Tax 0.06
  - Average: Noise Tax 0.01, Air Pollution Tax 0.05, Total Tax 0.06

### Equivalent ad valorem / ticket impacts and incidence
- Fuel costs are currently close to 25 percent of airline revenues.
- A 10 percent tax on aviation fuel would be roughly equivalent to a 2.5 percent ticket tax.
- This 2.5 percent equivalence would add roughly US$6 to an average airfare:
  - about US$25 for business/first-class tickets,
  - about US$3 for economy tickets.
- Passenger counts and equivalent departure-tax incidence:
  - About 1.7 billion passengers expected to be carried in 2005 (about 1.5 billion in economy class, the rest in business and first class).
  - The same tax revenue as a 10 cent-per-gallon/2.5 percent ticket tax would be collected through a US$5 departure tax on economy-class passengers, and a US$15 departure tax on business- and first-class passengers.

### Revenue estimates (no behavioral response)
- A 20 cent fuel tax would raise on the order of US$10 billion per annum.
- Applied only to international aviation—which accounted for about two-thirds of aviation fuel use in 2003—it would raise about US$6.5 billion.
- Applied only in Europe (encompassing the EU and current non-EU members in Western and Eastern Europe including Russia, and covering both domestic and international flights), which accounts for nearly 30 percent of all passenger kilometers traveled by air, it would raise about US$3 billion.
- A uniform departure tax raising US$10 billion would require a charge of US$6 if applied worldwide.
- A uniform departure tax levied in Europe alone would need to be set at US$20, or about 16 euros, to raise US$10 billion.

### Behavioral responses and impacts on yield
- Ticket tax demand elasticity example:
  - Suppose a general price elasticity of demand of –2/3.
  - The revenue from a global ticket tax falls from about US$10 billion to around US$9.87 billion.
  - The revenue from a ticket tax in Europe falls from US$3 billion to about US$2.96 billion.
- Aviation fuel tax behavioral responses operate at two stages:
  1. Short run: airlines increase fuel efficiency by utilizing energy-efficient planes more intensively and increasing average airplane load factors (reducing seat vacancies and closing lowest-utilization routes).
     - Empirical indication: the 2002–03 aviation fuel price hike (16 percent) resulted in a 3 percentage point increase in average airline fuel efficiency worldwide.
  2. Long run: further opportunities for improved fuel efficiency may arise with a more rapid phasing out of less energy-efficient planes.
- The text suggests that the 10 percent increase in fuel costs implied by the Pigovian tax would lead to a greater long-run increase in fuel efficiency, possibly as much as (text continues beyond excerpt).

*Source: Box 3, _wp06124 - Box 3. Optimal Aviation Tax Rates for Alternative Parameter Values*

### 3.5 percent. The second effect arises as final demand responds to increased ticket prices as a

### _wp06124 - 3.5 percent. The second effect arises as final demand responds to increased ticket prices as a

### Revenue effects and estimates
- Two offsetting effects reduce projected revenue: a direct tax yield and a demand response to increased ticket prices driven by a (mitigated) increase in fuel costs of 1.5 percent.
- Combining these effects, revenue from the global tax is reduced from US$10 billion to US$9.5 billion, and for Europe alone from US$3 billion to US$2.85 billion.
- The revenue from a fuel tax is somewhat lower than from a ticket tax because fuel taxes induce a “distortion” of production decisions toward less aviation fuel use (a beneficial environmental effect) that reduces the tax base.
- Estimated optimal environmental tax level cited: about US$0.20 per gallon, or 2.5 percent as a ticket tax (noting the figure is subject to considerable uncertainty).
- At that tax level, projected revenue is:
  - a little under US$10 billion if levied worldwide;
  - a little under US$3 billion if levied in Europe alone.
- Historical cost context: increased fuel costs added at least US$40 billion to airlines’ gross expenses in 2005 over the previous year.

### Incidence: who bears the burden
- General assumptions for incidence analysis:
  - Competition is sufficiently intense and returns to scale close to constant, implying very elastic supply of aviation services.
  - Oil supply is relatively fixed in the short run but highly variable over the longer term.
  - Under these assumptions, a tax on aviation fuel will most likely be almost fully passed on into the input prices faced by airlines, and any increase in ticket prices will be fully borne by travelers.
- Distribution by travel class:
  - Worldwide traffic and revenue shares (Table 8):
    - Economy class: 89.6 (passenger number), 90.4 (traveled km), 73.1 (airline revenue)
    - Business class: 9.6 (passenger number), 8.2 (traveled km), 20.1 (airline revenue)
    - First class: 0.8 (passenger number), 1.4 (traveled km), 6.7 (airline revenue)
  - Implications:
    - A uniform departure tax (or fuel tax charged equally by distance) would place about 90 percent of its incidence on economy-class travelers and about 10 percent on business- and first-class travelers.
    - A uniform ad valorem ticket tax would place almost 30 percent of its burden on premium travelers.
  - With fuel taxes, allocating fuel costs to travel classes is somewhat arbitrary because fuel is a fixed cost per flight; airlines may recuperate increased fuel costs across passenger segments according to segment-specific demand elasticities.
- Distribution by region:
  - Allocation of global aviation fuel tax in proportion to passenger kilometers flown (IATA-based):
    - North America: about 36 percent of the tax burden
    - Europe: about 28 percent
    - East Asia and the Pacific: about 24 percent
    - Other regions (South and Central America, Africa, the Middle East and South and Central Asia): about 12 percent
  - Departure tax allocation proportional to departing passengers would be approximately:
    - Europe: about 31 percent
    - Asia-Pacific: about 26 percent
    - North America: about 29 percent
  - Ticket taxes tend to fall more heavily, relative to fuel taxes, on regions with shorter average international trips (e.g., Europe) because ticket prices per kilometer are typically higher for short-haul flights; this also increases the average burden on regions with larger premium-class shares.
- Specific regional/travel-class distribution (Table 9 excerpts):
  - Shares of total numbers of air passengers by class for traffic originating in major regions (percentages of total traffic):
    - Traffic originating in Europe: Economy class 85.0, Business class 14.6, First class 0.4
    - Traffic originating in North America: Economy class 89.0, Business class 9.3, First class 1.7
    - Traffic originating in Latin America: Economy class 91.1, Business class 7.3, First class 1.6
    - Traffic originating in Asia and Pacific: Economy class 90.5, Business class 8.7, First class 0.8
    - Total traffic (aggregate): Economy class 89.6, Business class 9.6, First class 0.8
  - Region’s overall share of traffic, traveled kilometers (row totals): 28.4, 35.5, 5.0, 23.9, 100
- Exemption scenarios and their effects on the tax base:
  - Exempting all of Latin America and the Caribbean, Africa, and Asia (except Japan and other high-income countries) would eliminate approximately 25 percent of the global tax base (somewhat less for ticket taxes, somewhat more for fuel taxes).
  - Exempting only economy-class travel within and from such destinations would reduce the tax base by on the order of 15 percent.
  - Note: such exemptions may be appealing distributionally but are unwarranted environmentally and require higher overall tax rates to achieve a given revenue target.
- Additional incidence notes:
  - Domestic flights carried about twice as many passengers as international, but international flights are on average about three times longer; thus almost 60 percent of total passenger kilometers are flown internationally.
  - Passenger load factor in 2003 was about 71 percent and increased by 1.2 percentage points from 2002–03.

### Administration and compliance issues
- Collection feasibility:
  - Little technical difficulty in collecting taxes on aviation fuel, tickets, or departures; established excise and departure tax procedures already exist in most countries.
  - Levying tax on fuel used in international aviation might facilitate administration by narrowing the tax differential between fuels used internationally and domestically.
  - Key concern for ticket taxes: ensure tax is levied on final sales to the consumer, not on sales from airlines to agents (to avoid transfer-pricing avoidance).
- Incentive and enforcement problems when revenue accrues elsewhere:
  - If proceeds do not accrue to the collecting country (e.g., used for international development), incentives to collect may be blunted.
  - Mitigation example: allow collecting authorities to retain some proportion of receipts, perhaps on the order of 10 percent (an EU customs-collection analog).
  - Even with retention, marginal retention less than 100 percent leaves a reduction in collection incentives.
  - Countries may enforce taxes less intensively for national self-interest reasons (protecting carriers, tourism); this can take forms such as lengthened payment periods or infrequent inflation adjustments.
- Need for coordination and verification:
  - Participating countries will likely insist on detailed agreement on base, taxpayers, payment periods, interest, and penalties.
  - Verification options include joint audit activities or independent monitoring of aviation activity to estimate tax due.
  - Pressures for mutual oversight grow with the number of participants.

### Policy conclusions and recommendations
- From pure tax policy grounds, a generalized increase in taxes on international aviation is strongly warranted:
  - Current rates of tax are low.
  - Persuasive evidence exists of significant cross-border environmental damage from international air travel.
  - International air travel is an appropriate object of indirect taxation and is administratively similar to existing excises.
- Optimal aviation taxation likely involves a combination:
  - An excise on aviation fuel to address principal cross-border environmental harm.
  - A tax on tickets focused on raising revenue, with the ticket tax best taking the form of a VAT to exclude business use (including cargo); if environmental costs must be reflected for business and cargo, use a non-creditable excise or an additional excise.
- Legal and political considerations:
  - Main legal obstacles to a fuel tax are mutual exemptions in bilateral air service agreements; the Chicago Convention does not prevent countries from taxing aviation fuel bunkered in their own borders.
  - Such legal restrictions can, in principle, be overcome regionally (e.g., within the EU).
  - In the absence of cooperation, tax competition may drive rates inefficiently low; regional schemes can still be effective because the tax base is not perfectly mobile.
- Development-finance potential:
  - Indirect aviation taxes have appeal as a prospective source of development financing because aviation activity is mostly international and thus a charge on use of a common resource.
  - The tax base is buoyant and projected to grow strongly in international airline traffic.
- Political timing and resistance:
  - Many countries (large high-income marketholders and smaller low-income tourism-dependent countries) strongly oppose aviation taxes.
  - Current high and uncertain fuel prices and financial pressure on many airlines reduce political feasibility in the short term.
  - Nevertheless, some countries (e.g., France and Chile) have committed to introducing new aviation departure taxes for development finance, and regional implementation is feasible.
- Overall recommendation:
  - The case for strengthening indirect taxation of international aviation is strong enough to warrant continued attention and closer analysis.

*Source: _wp06124 (excerpt provided).*

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- IPCC, 1999, Aviation and the Global Atmosphere (Montreal: Intergovernmental Panel on Climate Change).
- Kanbur, Ravi and Michael Keen, 1993, “Jeux Sans Frontières: Tax Competition and Tax Coordination When Countries Differ in Size,” American Economic Review, Vol., 83, pp. 877–92.
- Keen, Michael, 1998, “The Balance Between Specific and Ad Valorem Taxation,” Fiscal Studies, Vol. 19, pp. 1–37.
- Keen, Michael, and Jon Strand, 2005, “Optimal Aviation Ticket and Fuel Taxes with Factor Substitution,” Note, Fiscal Affairs Department (Washington: International Monetary Fund).
- Kolstad, Charles D., 2000, Environmental Economics (New York: Oxford University Press).
- Parry, Ian W.H., 1995, “Pollution Taxes and Revenue Recycling,” Journal of Environmental Economics and Management, Vol. 29, pp. S64–S77.
- Parry, Ian W.H., 2002, “Is Gasoline Undertaxed in the United States?” Resources, Vol. 148, pp. 28–33.
- Parry, Ian W.H., and Antonio M. Bento, 2001, “Revenue Recycling and the Welfare Effects of Road Pricing,” Scandinavian Journal of Economics, Vol. 85, pp. 333–62.
- Parry, Ian W.H., and Kenneth A. Small, 2005, “Does Britain or the United States have the Right Gasoline Tax?” American Economic Review, pp. 1276–89.
- Pearce, Brian D. and David W. Pearce, 2002, “Setting Environmental Taxes for Aircraft: A Case Study of the U.K.,” Working Paper (London: Forum for the Future/University College).
- Pirttilä, Jukka, 2002, “Specific Versus Ad Valorem Taxation and Externalities,” Journal of Economics, Vol. 76, pp. 177–87.
- Sandmo, Agnar, 1975, “Optimal Taxation in the Presence of Externalities.” Swedish Journal of Economics, Vol. 77, pp. 86–98.
- Sandmo, Agnar, 2003, “Environmental Taxation and Revenue for Development,” Working Paper (Bergen: Norwegian School of Economics and Business Administration).
- Selrod, Rolf, 1995, “A Painless Solution? An Analysis of Two Alternatives for Global Taxation for Financing Climate Activities under the United Nations Umbrella,” CICERO report 1995:07 (Oslo: CICERO).
- Sledsens, T., 1998, Sustainable Aviation: The Need for an European Environmental Aviation Charge (Brussels: European Federation for Transport and Environment).
- WBGU, 2002, “German Advisory Council on Global Change, Charging the Use of the Global Commons” (Special Report; Berlin: German Advisory Council on Global Change).
- Edmundson, Duncan, Richard Hancox, Steve Lowe, and Hans Pulles, 2005, “Quantifying the Environmental and Economic Impacts of Market-Based Instruments to Reduce Aircraft Emissions,” Report written for the Civil Aviation Department (the Hague).
- Bleijenberg, A., and R. Wit, 1998, “European Environmental Aviation Charge–Feasibility Study,” (unpublished; Delft: Centre for Energy Conservation and Environmental Technology).
- Pache, Eckhard, 2005, “Options of Introducing a Tax on Kerosene Consumed on Domestic Flights—Legal Opinion by Order of the Federal Environmental Agency, Note” (Würtzburg, Germany).
- Pearce, Brian D. and David W. Pearce, 2002, “Setting Environmental Taxes for Aircraft: A Case Study of the U.K.,” Working Paper (London: Forum for the Future/University College).

### Airport Finance, Charges, and Operations
- Ashford, Norman and Clifton A. Moore, 1992, Airport Finance (New York: Van Nostrand Reinhold).
- Doganis, Rigas, 2001, The Airline Business in the 21st Century (London and New York: Routledge).
- Gillen, David W., William G. Morrison, and Christopher Stewart, 2004, “Air Travel Demand Elasticities: Concepts, Issues and Measurement,” Report written for Department of Finance, Canada (Ottawa).
- Hanlon, Pat, 1999, Global Airlines. Oxford: Butterworth Heinemann.
- ICAO, 2000, “ICAO’s Policies on Taxation in the Field of International Air Transport,” ICAO Document 8632 (Montreal: International Civil Aviation Organization).
- Kesharwani, Tulsi, 2001, “Pricing and Charges in Civil Aviation,” Economic Issues 5, (New Delhi: Asian Institute of Transport Development).
- Landau, Jean-Pierre, and others, 2004, Landau Report, by a Multi-Disciplinary Working Group set up by the French Government (draft; Paris).
- NBAA, 2005, Federal Excise Tax Handbook (Washington: National Business Aviation Association).
- Quadripartite Report, 2004, Report of the Technical Group on Innovative Financing Mechanisms (Geneva: United Nations).
- ECON, 2005, “Political Economy of the Norwegian Aviation Fuel Tax,” ECON Report 2005–017 (Oslo: ECON Analysis).
- European Commission, 1999, Resource Analysis (Brussels).
- European Commission, 2005a, “A Possible Contribution Based on Airline Tickets as a New Source of Financing Development: Technical Reflections in the Run up to the UN High Level Event,” European Commission Staff Working Paper 1067 (Brussels).
- European Commission, 2005b, “New Sources of Financing for Development: A Review of the Options,” European Commission Staff Working Paper 467 (Brussels).
- Economist (2005), “Lining Up for Profits,” November 12, pp. 71–73.

### Tax Competition, Fiscal Policy, and Development Finance
- Atkinson, Anthony B., 2005, New Sources of Development Finance (Oxford: Oxford University Press).
- Boadway, Robin, and Michael Keen, 2005, “Notes on the Provision of International Public Goods” (unpublished; Washington: International Monetary Fund).
- Evers, Michiel, de Mooij, Ruud, and Vollebeergh, Herman R. J. 2004, “Tax Competition under Minimum Rates: The Case of European Diesel Excises,” CESifo Working Paper No. 1221.
- Konrad, Kai and Guttorm Schjelderup, 1998, “Fortress Building in Global Tax Competition,” Journal of Urban Economics Vol. 46, pp. 156–67.
- Singh, Damanjit, 2004, “Charging Traffic Congestion: A Potential Source of Municipal Revenue?” (unpublished; Washington: International Monetary Fund).
- Strand, Jon, 2005a, “Optimal Aviation Taxes with Distortive Taxation and Endogenous Labor Supply” (unpublished; Washington: International Monetary Fund).
- Strand, Jon, 2005b, “Optimal Aviation Taxes with Non-Competitive Airlines” (unpublished; Washington: International Monetary Fund).
- Zee, Howell, 2005, “A Note on Global Taxes and Aid for Development” (unpublished; Washington: International Monetary Fund).
- World Bank, 2005, “Aid Financing and Aid Effectiveness,” Board Note, SecM2005–0435 (Washington: World Bank).

### Other relevant economic theory and methodology
- Delipalla, Sofia, and Michael Keen, 1992, “The Comparison Between Ad Valorem and Specific Taxation Under Imperfect Competition,” Journal of Public Economics, Vol. 49, 351–67.
- Dixit, Avinash K. and Joseph E. Stiglitz, 1977, “Monopolistic Competition and Optimum Product Diversity,” American Economic Review, Vol. 67, pp. 297–308.
- Kanbur, Ravi and Michael Keen, 1993, “Jeux Sans Frontières: Tax Competition and Tax Coordination When Countries Differ in Size,” American Economic Review, Vol., 83, pp. 877–92.
- Katz, Michael L. and Karl Shapiro, 1994, “System Competition and Network Effects,” Journal of Economic Perspectives, Vol. 8, pp. 93–115.
- Zodrow, George and Peter Mieszkowsi, 1986, “Pigou, Tiebout and the Underprovision of Local Public Goods,” Journal of Urban Economics, Vol. 19, pp. 356–70.
- Reiss, Peter C. and Pablo T. Spiller, 1989, “Competition and Entry in Small Airline Markets,” Journal of Law an Economics, Vol. 32, pp. S179–S202.

*References list as provided in the source PDF.*

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