Leading Article: Let's keep all this talk of harmonising in perspective

SUCH IS the reaction to proposals for further harmonisation of taxes across the European Union that it is difficult to separate fair comment from hysteria. A group of Europhobic British newspapers seem preoccupied with the "threat" to Britons' hard-earned taxes from a cast of greedy foreigners. Inevitably, this gets in the way of a real and necessary debate.

Of course, EU nations have long been harmonising economic policies. The social chapter and Europe-wide competition policies are examples. Large inward investments are handled by the European Commission; certain categories of VAT cannot be lowered below a EU "floor". A right-wing press desperate for an issue with which they can beat New Labour have latched on to an old story.

VAT exemptions for children's clothes and food, both popular issues that have been seized upon, are anomalous as rare examples of Britain's difference from the Continent. British tax rates are lower than those in other EU nations: the state takes 38 per cent of UK national incomes, compared to an EU average of 45 per cent. But what divergence does exist is clearly not under sustained threat: EU ministers are concerned with setting minimum rates of tax along the lines already established, rather than setting in stone absolute levels of tax.

The real driving force behind harmonisation is not a power-hungry European Commission, determined to take financial powers away from governments. It is the election of a new left-leaning German government that has forced the pace, worried that lower tax rates in other EU countries represent "unfair" competition. Commissioners, on the other hand, are concerned that all European tax rates are too high, and especially that EU members should manage a transition from direct to indirect taxes, a transition in which Britain has shown the way.

To some extent, further harmonisation is inevitable. Beggar-my-neighbour tax cuts designed to attract investment could threaten social security systems with bankruptcy. There is, though, no need for total uniformity. The US allows individual states a wide measure of discretion over taxation: this acts as a valuable break on irresponsible overspending on the part of state governments. If taxes go up too much, then the tax base shrinks as middle-class citizens vote with their feet, and move to lower-tax regions. States dare not waste money in that situation.

Many of the specific proposals for EU taxation should be resisted. A "withholding tax", taxing at source income moved across borders to avoid tax, would be a grave blow to London's lucrative Eurobond market. No British government should allow such an attack on our interests. But Britain still has a veto; and officials privately accept that some compromise will be reached demanding more disclosure, and exempting Eurobonds. No one contradicts the Chancellor, Gordon Brown, when he argues that the best institutions to mobilise in tackling tax fraud are more international, such as the OECD and G7.

Britain should not agree to one single European rate of tax. A single tax code, however orderly, may stifle European economic reform, which depends on lowering the costs of employment and manufacture. Given Britain's own regional policies, and the "enterprise zones" established in the Eighties, we recognise the impossibility of one effective rate of tax within our own borders, let alone Europe's.

But the best way to resist such proposals is to realise that the radical connotations they are supposed to carry are a chimera, summoned up by New Labour's enemies to frighten them into a Eurosceptic tone that sits ill with their positive European policy. Nations with efficient economies should not have higher taxes foisted on them to support welfare states elsewhere; but nor will that outcome be averted by hysteria.