Essays on the impact of changing tax rates and welfare spending

  • Daniel Borbely

Student thesis: Doctoral Thesis


This thesis examines how changes in tax rates and welfare spending affect the behaviour of markets, households and individuals. In three distinct essays, we make use of applied econometric methods to examine both intended and unintended consequences of changes in tax and welfare policy, their impact on efficiency and equity in the economy, and the way in which they influence people's behaviour. Our findings are intended to contribute to the wider policy debate on the optimal use of tax and spending instruments to achieve policy objectives. Chapter 1 is titled "A case study of Germany's aviation tax using the synthetic approach". This chapter is a case study on the German Aviation Tax, a tax levied on departing passengers from German airports1. Aviation taxes receive considerable attention as they have been introduced recently in a number of European countries. Policy makers often motivate these taxes as environmental measures implemented to minimise negative externalities from air travel, or as tools to raise revenues from an otherwise undertaxed sector. Conversely, many experts claim that single-country aviation taxes are inefficient both as environmental measures and revenue-raising tools, due to tax avoidance opportunities presented by tax-exempt airports in neighbouring countries. Critics also point to the adverse effects aviation taxes have on demand, competitiveness and connectivity at domestic air-ports. Despite their policy relevance, empirical evidence on the effects of aviation taxes is sparse. Only a few studies focus on the issue of aviation taxation, and only a handful of these studies examine the ex post effects of newly introduced aviation taxes on passenger flows at tax burdened airports. A key methodological challenge in this small literature stems from the fact that the ex post effects of aviation tax changes can only be analysed in quasiexperimental settings, where airports with changes in aviation taxes (treated airports) are compared to a group of airports (controls) not affected by the same policy. Since passenger trends at airports are affected by a wide variety of factors, and are often times highly idiosyncratic, the methodological challenge is to find the appropriate group of control airports to compare treated ones to. Consequently, our main methodological contribution to the literature is to make use of a novel approach, the synthetic control method, to optimise the selection of control airports. In this chapter, we investigate the impact Germany's aviation tax has had on passenger numbers using the synthetic control method to generate counterfactual passenger numbers for German airports, and for airports outside Germany but near the German border. Our results suggest that passengers engaged in cross-border substitution in response to the aviation tax. Most tax-exempt airports near German borders have made sizeable gains in passenger numbers since Germany introduced its aviation tax. Within Germany there appears to be a clear distinction in the impact on small/regional airports and that on larger hubs - while we find a negative impact on traffic at regional airports, passenger numbers at hubs were largely unaffected (or were even positively affected). From a policy perspective, the finding of a cross-border substitution effect implies that the aviation tax might not be effective in curbing overall emissions from air travel, whilst also leading to lost tax revenues through the displacement of passengers to neighbouring countries. Considering the dual objectives of the policy, the optimal policy outcome from the imple-mentation of AT would be 1) a reduction in overall air travel demand (to cut emissions) and 2) no cross-border substitution effect in order to avoid the loss of the tax base. The findings in this chapter provide evidence
Date of Award8 Apr 2020
Original languageEnglish
Awarding Institution
  • University Of Strathclyde
SponsorsUniversity of Strathclyde
SupervisorGraeme Roy (Supervisor) & Julia Darby (Supervisor)

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