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Letter: EMU tax shock

Sir: Douglas Ellison suggests that if the UK joined EMU this would lead to higher taxation here (letter, 10 September). It is worth examining the background to his statement.

Most economists believe that, in the long run, taxes will be harmonised throughout "Euroland". In reality it is hard to see how a single currency zone can work in the long term without broad fiscal harmony throughout the zone. This in turn would mean that each Euroland country would be raising roughly the same proportion of GDP in tax.

The average tax/GDP ratio in the Euroland countries is currently around 45 per cent, and it is reasonable to assume that harmonisation would result in an overall Euroland tax/GDP ratio of around 45 per cent. Currently, the UK's tax/GDP ratio is just under 38 per cent. Were the UK, as a future member of EMU, to move its tax/GDP ratio up to 45 per cent, this would be the equivalent of increasing the basic rate of income tax by 30p in the pound to 53p in the pound. The actual tax changes as a result of harmonising the UK tax system with the rest of Euroland would of course be myriad.

Some would no doubt argue against such a tax hike, whilst others would point out that it would enable our run-down public services to be transformed. What is surprising is that the issue has not featured much in the debate on whether or not the UK should join EMU.


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