Indirect Taxes on International Aviation

IMF Working Papers, May 1, 2006

Source details

Examines the case for internationally coordinated indirect taxes on aviation as a source of general revenue (not necessarily as a source of development finance).
Argues the tax burden on international aviation is currently limited, while aviation contributes significantly to border-crossing environmental damage.
Identifies three tax instruments:
- A tax on aviation fuel would address the key border-crossing externalities most directly.
- A ticket tax could raise more revenue.
- Departure taxes face the least legal obstacles.
Recommends deploying both fuel and ticket taxes as optimal policy.

A fuel tax of 20 U.S. cents per gallon (10 percent, at today's fuel prices, corresponding to assessed environmental damage) would raise about US$10 billion if imposed worldwide.
Alternatively, ticket taxes of 2.5 percent would raise about US$10 billion if imposed worldwide.
If applied only in Europe, either the fuel tax of 20 U.S. cents per gallon (10 percent) or ticket taxes of 2.5 percent would raise about US$3 billion.

International coordination strengthens the revenue and environmental rationale for indirect aviation taxes.
Fuel taxes target environmental externalities most directly; ticket taxes have greater revenue potential; departure taxes encounter fewer legal barriers.
Optimal design involves a combination of fuel and ticket taxes to balance environmental effectiveness, revenue yield, and legal feasibility.

Indirect Taxes on International Aviation — IMF Working Paper by Jon Strand and Michael Keen (May 1, 2006).