Date of Award

Fall 2006

Project Type


Program or Major


Degree Name

Master of Arts

First Advisor

Robert Mohr


The United States is currently witnessing a vigorous debate on public funding of air transportation and the role of taxes and fees levied on airline tickets. Yet, there is remarkably little economic literature on taxation in the U.S. airline industry. Analysis of a large sample of tickets for travel in the continental United States shows that the effective tax rate has increased from 11% in 1993 to 16% in 2005. While the tax structure and levels have changed over time, this increase is largely due to a historical decline.

The theory of tax incidence asserts that economic incidence is a function of price elasticity and market power and is independent of statutory incidence. The U.S. ticket tax structure is a mixed policy of ad valorem and unit taxes. Under perfect competition, the incidence of these two types of taxes is identical. The incidence is bounded by the two extremes of the tax burden being shifted entirely onto the producer or entirely on the consumer. Under imperfect competition, incidence of the unit tax and that of the ad valorem tax need not be identical and overshifting is possible.

Empirical analysis of variations in the ad valorem and unit taxes for United States domestic air travel during the 1994-1997 and 2002-2005 periods indicates that the burden of the ad valorem tax is shared by consumers and producers. For the same periods, there is weak evidence of overshifting of the unit tax. The empirical analysis is hindered by the multiplier effect of ad valorem taxes, the lack of simultaneous variation in the ad valorem tax rate and unit taxes, the functional relationship between the two types of taxes, and a number of political and institutional details inherent to the airline industry which are difficult to capture in an econometric model.