Don’t Fly the Unfriendly English Skies

One of the benefits of tax competition is that there is a feedback mechanism that tells politicians they made a mistake. If taxes are too high in one jurisdiction, politicians lose money as economic activity shifts to another jurisdiction. The latest example of this liberalizing process comes from the United Kingdom. The Labour government just imposed new taxes on airline travel that will boost ticket prices by as much as $159 – even if London is the hub for travel elsewhere. As the Wall Street Journal explains, this is good news for other nations since airline customers now are looking to use cities such as Amsterdam as their gateway to Europe:

You may want to steer clear of London. Thanks to a new U.K. ticket tax that took effect February 1, passengers who fly into or through London airports will pay new taxes and fees that can add up to $159 to the cost of a ticket. This levy was the brainchild of Chancellor of the Exchequer Gordon Brown and is being applied retroactively. So even if you bought your plane ticket last year, you’ll get socked with the tax surcharge. The tax has infuriated both U.S. and British airlines, to say nothing of their passengers. “It’s a major league headache for all our air carriers who fly to London and are trying to collect this retroactive tax,” says Jim May of the U.S. Air Transport Association. A spokesman for British Airways, which has been struggling financially, calls the new tax “completely unfair.” Ryanair’s Web site describes Mr. Brown as “greedy Gordon” and his tax as “the great plane robbery.” The new tax comes on the heels of other highly publicized problems at Heathrow, including a breakdown in the baggage handling system and security delays. Consumeraffairs.com reports that one consequence is that more and more American travelers are investigating Amsterdam as an alternative hub for discount flights in and out of Europe.

Swiss People and Swiss Cantons Reject Fiscal Interference from Brussels

The Neue Zuricher Zeitung reports that an overwhelming majority of Swiss voters are opposed to attacks on their nation’s fiscal sovereignty. The story also quotes Switzerland’s Finance Minister, who notes that the European Union would have a hard time getting unanimous agreement in order to impose sanctions: 

A new survey shows that…[t]hree-quarters said they opposed any interference from Brussels… The poll of more than 1,000 people was commissioned by the SonntagsZeitung newspaper. …Many EU countries are angry that tax revenues are being lost as companies relocate to Switzerland - mainly to small cantons which offer low levies. …The survey results also hinted that the latest dispute has put the EU in a worse light among the Swiss. Only 41 per cent said they favoured providing financial aid for the latest EU member states, Romania and Bulgaria, as requested by the EU earlier this year. …[Swiss Finance Minister Merz] said Brussels would need unanimity from its member states to succeed with its attack on Switzerland’s tax regime, but that, he said, was unlikely since some EU countries also offer similar tax breaks. Merz said Switzerland did not want to set a dangerous precedent. “It could reach the point where the EU demands that we double the rate of our Value Added Tax so it’s in line with the EU average,” he warned.

Equally important, Swissinfo.org reports that cantonal governments also reject meddling by the European Commission. And since any change to Swiss policy would require approval from a majority of voters and a majority of cantons, the Euro-crats face an uphill battle in their campaign to hinder tax competition:

Swiss cantons say the latest European Commission attack on Swiss corporate tax breaks will fail without a referendum to end the cantons’ financial independence. …The report was presented to the Swiss federal authorities, but central government would be powerless to make the cantons cooperate even if ministers changed their position of defending the system. “The Commission clearly does not understand our political system. The federal authorities have no say in this matter,” Kurt Stalder, secretary of the Conference of Cantonal Finance Directors, told swissinfo ahead of the EC report. “It is written into our laws that cantons set their own taxes and there must be a national referendum to change this. The people have had numerous invitations to make a change in the last few years but they have always voted to accept the system.” Stalder added that the 26 cantonal finance heads had voiced a unanimous resolution to resist pressure from Europe during a recent meeting of the Commission.

Travelin’ (Jet) Blues

JetBlue CEO David Neeleman issued a mea culpa yesterday in an attempt to explain why hundreds of JetBlue passengers were stuck in nine of their planes on the tarmac at John F. Kennedy International Airport for six hours last week.  He partly blamed a “shoestring communications system” that was insufficient to assist airline managers during the confusion caused by a massive ice storm.

That’s not the whole story, although you wouldn’t know if from reading most news reports of the incident.  It turns out that Federal Aviation Administration regulations had a role, too.  The FAA presides over a system of rules that virtually guarantees flight delays by encouraging pilots to stay on the tarmac instead of losing their place in the take-off queue.

As Scott McCartney of the Wall Street Journal reports today (subscription required):

Part of the problem is that airlines, pilots and often passengers are reluctant to throw in the towel. Planes wait in line hoping for a break in the weather. And wait. And wait …

The FAA’s air-traffic-control system can penalize flights that go back to a gate, even for a temporary bathroom break. Air-traffic controllers generally take flights first-come, first-serve, unless the airline can badger officials into giving a flight higher priority, or trade places in line with another of its own flights.

Indeed, last month a JetBlue flight ended up on the ground for eight hours at JFK because it returned to the gate and then was required to file a new flight plan, the FAA says.

It’s enough to make you wonder if there is a better way to allocate take-off and landing slots at our nations airports.  And, indeed, there is.  Nobel economist Vernon Smith has proposed an auction system that, like the stock market, would allocate scarce resources – like the use of a runway – much more efficiently than current practices.

As Smith explains in a 2002 interview with Reason magazine:

We’re doing work on creating a market for the exchange of landing and takeoff slots at airports. In normal circumstances, those rights have been fully allocated among the airlines at a given airport. But let’s say a bad weather front moves in, so there’s a ground delay. They’ve been doing maybe 60 landings and takeoffs per hour, but now they’ve got to reduce that to 30. What airports tend to do is just stretch out the existing schedule, which leads to cancellations and other problems. What you need is a market mechanism so that the flights that have higher priority get out. What would be a higher priority? Bigger planes, probably, but also full planes and planes with a lot of passengers who have connecting flights.

Suppose we’re talking about planes leaving LaGuardia in New York. If a plane’s going to Los Angeles, it’s probably the final destination for a lot of the passengers. Planes going to Chicago or Dallas probably have a lot of passengers who are catching connecting flights. Maybe those flights should have a higher takeoff priority in bad weather. In any case, you need a market mechanism where the airlines can compensate one another-and their passengers-to cancel their flights and trade takeoff slots.

The power of market forces unleashed by federal deregulation of the airlines has put air travel – once a luxury – within the reach of virtually everybody. Now perhaps it’s finally time to deregulate the act of actually taking off. 

Putin’s New Deal

According to David Ignatius of the Washington Post,

To explain the Putin phenomenon, the Kremlin’s chief ideologue, Vladislav Surkov, recently compared him to Franklin Delano Roosevelt, another president who brought his country back from economic disaster and restored its pride. Like FDR, Putin is using “presidential power to the maximum degree for the sake of overcoming the crisis,” Surkov said.

Inasmuch as FDR’s economic policies were a failure until after World War II, let’s hope that Putin and Surkov aren’t planning to emulate him too closely.

U.S. to Comply with WTO Ruling on Zeroing

I have been warning on this blog that U.S. failure to comply with the latest WTO ruling against the antidumping calculation technique known as zeroing could open a Pandora’s box that could undermine and eventually destroy the rules-based trading system.  Well, in the words of the old Gilda Radner character from SNL, Emily Litella, “Nevermind!”

The U.S. mission in Geneva announced yesterday that, despite its view that the Appellate Body’s decision was intrusive and wrongheaded, the United States intends to comply.  That is very good news, for at least two reasons. 

First, zeroing severely and unjustly inflates antidumping duty assessments and collections, creating bigger trade barriers.  Depriving the Commerce Department of that methodological trick will undoubtedly lead to lower dumping margins overall.

Second, it is important that the United States show some respect for the outcomes of dispute settlement.  Berating and disregarding those outcomes only serves to erode support for the system.  And if the United States expects to get some mileage as a complainant out of its likely string of cases before the WTO (a subsidy case against China was filed two weeks ago, and the Democratic congress is at least rhetorically fixated on enforcement, enforcement, enforcement), it should show some deference to the rules.

Compliance with the zeroing ruling will likely take at least one year (and probably more), so it’s not entirely out of the question that sentiments could change in Congress or the administration before then. 

On the broader question of whether the WTO dispute settlement system is fair, please check out the online debate between Robert Lighthizer and myself, hosted by the Council on Foreign Relations.

European Union Wants One-Size-Fits-All Regulation

European bureaucracies such as the Organization for Economic Cooperation and Development and the European Commission are infamous for their anti-tax competition campaigns, but the zeal to harmonize is not limited to fiscal policy. The European Commission has set an explicit goal of exporting EU regulation to the rest of the world. If successful, this would be an unfortunate development. Competition among regulatory regimes helps control excessive government. But if an international bureaucracy succeeds in becoming a global “standard setter,” then politicians will exploit that monopoly position to impose more onerous regulatory burdens. That certainly will be the case if the bureaucrats in Brussels succeed in this latest push for regulatory harmonization. As the Financial Times indirectly notes, the Euro-crats are not very sympathetic to markets:

Brussels wants the rest of the world to adopt the European Union’s regulations, the European Commission will say this week. A Commission policy paper that examines the future of the Union’s single market says European single market rules have inspired global standard-setting in areas such as product safety, the environment, securities and corporate governance. …The paper calls on the EU to encourage other jurisdictions to follow suit – for example by “promoting European standards internationally through international organisation and bilateral agreements”. …The EU’s drive to establish itself as the pacesetter for worldwide business regulation could well lead the bloc into conflict with the US and other trading partners. US officials have often voiced concern about the Union’s growing clout as a global standard-setter, and the two sides have clashed over issues such as rules for the chemicals industry and the EU’s stance on genetically modified foods. …The two sides have very different regulatory philosophies, with the EU placing a heavy emphasis on consumer protection and environmental legislation while the US tends to promote a more market-based approach. Some critics of the European approach argue that the Union’s stance on issues such as GM foods may also reflect a desire to protect the region’s commercial interests.

Kapuscinski Encounters Capitalism

The Polish journalist Ryszard Kapuscinski, who died in January, published an article in the February 5 New Yorker on his first trip outside Poland. Kapuscinski became a legendary foreign correspondent and travel writer, but this was his first international trip, in 1955 at the age of 23. His reminiscences are a useful reminder of the differences between capitalism and communism. Flying into Rome, he recalls:

I was dumbstruck.

The entire length and breadth of the blackness over which we had been flying was now filled with light. It was an intense light, blinding, quivering, flickering. I had the impression of a liquid substance, like molten lava, glimmering down below, a sparkling surface that pulsated with brightness, expanding and contracting. The entire shining apparition was alive, full of movement, vibration, energy.

It was the first time in my life that I had seen an illuminated city. What few cities and towns I had known until then were depressingly dark. Shop windows never shone, there were no colorful advertisements, the street lamps had weak bulbs. Who needed lights, anyway? In the evenings, the streets were deserted, and one encountered few cars.

The next day his seatmate from the airplane took him shopping in Rome.

We started making the rounds of the shops, accompanied by Mario’s wife. For me, these were expeditions of discovery. Three things dazzled me in particular. First, that the stores were brimming with merchandise, the goods weighing down shelves and counters, spilling out in colorful streams onto sidewalks, streets, and squares. Second, that the salesladies did not sit, but stood looking at the entrance; it was strange that they stood in silence, rather than sitting and talking to one another. The third shock was that they answered the questions you asked them. They responded in complete sentences and then added, Grazie! Mario’s wife would ask about something and they would listen with sympathy and attention, inclining forward with such focus that it looked as if they were about to start a race.

Now remember, this is Italy in 1955, only 10 years after its military defeat. Apparently it took only a decade for communism to produce shortages, indolence, and poor customer relations in Poland, while capitalism produced abundance and customer service in post-Mussolini Italy. Not to mention the difference in nighttime lights that anticipated today’s famous image of the two Koreas at night.