Red herrings over Euro taxation

News Analysis: The current row with Europe is the fruit of a delusion that Britain taxes companies lightly
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The Independent Online
THE EUROPEAN Commission must have introduced a new subsidy for fish farming. There can be no other explanation for the sudden appearance of shoals of red herrings over tax harmonisation. The fishy tide of Euro- phobic headlines about taxes being set by Oskar Lafontaine, Germany's new finance minister, swept Gordon Brown and Tony Blair into dusting off the classic British threat to veto any new tax proposals.

Yet it is unlikely to be needed. There are three specific tax proposals on the table. First, the German government wants to introduce a 20 per cent withholding tax across the European Union on income from savings and investment.

Germany's attempt to introduce one unilaterally two years ago was a fiasco, as savings simply poured out of the country. Neither the prospect that a community-wide withholding tax would similarly push funds outside the EU, nor the sound economic arguments against taxing savings appear to deter the Germans in their campaign. But, as the UK and Luxembourg forced the abandonment of an earlier withholding tax proposal in 1993, they can do the same again - or at least negotiate an opt-out.

Second, the Commission wants to set a minimum level of taxation on energy products. Member governments all agree on the desirability of taxing energy use for environmental reasons, although the UK Government, for obvious political reasons, cannot agree to higher VAT on domestic fuel bills.

Most of the uproar has concerned a third proposal, a voluntary code of conduct to eliminate `unfair' competition in taxation. This code does not actually address the harmonisation of Value Added Tax at all.

It was in 1967 that the Common Market, as it then was, started discussion of VAT equalisation. The upshot is the current acceptance of a minimum VAT standard and reduced rates of 15 per cent and 5 per cent, with varying national zero-rated items.

Discussions on VAT and excise duties continue in a desultory way. After all, beer duties range from 3p a pint in Spain to more than 30p in Sweden. But market pressures from cross-border shopping are more likely than an inter-governmental agreement to bring these taxes into line.

The active debate at present concerns corporate taxation, but the indignation on both sides is the fruit of the delusion that the UK is a low-tax country for companies. On the contrary, as a new study by PaineWebber published today shows, the burden of tax on business is heavier on this side of the Channel.

The reason for the misapprehension is the low UK rate of corporation tax. As the Chancellor boasted in the Budget, with the main rate at 30 per cent it is the lowest among the big EU economies, whereas Germany has a 45 per cent corporation tax rate. To the Germans this means Britain is luring investors with an unfairly low tax rate, whereas to the UK it is fair competition for inward investment.

Certainly, capital is much more mobile than labour, so competition, fair or not, between countries is likely to reduce corporate taxation. But in fact, as the chart shows, when the burden of tax - including the scale of allowances - depreciation rules and business rates, is calculated on a comparable basis, Britain emerges as a high-tax base for business.

Corporation tax cuts since the late 1980s have merely brought Britain closer into line with the relatively low burden imposed in the rest of Europe.

On the other hand, Britain taxes labour relatively lightly. Germany and France pay for their higher overall tax burden - with total tax receipts amounting to 45 to 50 per cent of GDP compared to the UK's 38 per cent - with much higher taxation of employment and incomes.

So high-tax countries such as Germany and France might end up having to emulate the UK, but by lowering the "social charges" on labour rather than corporate tax. It is not competition for investment but domestic pressure to create jobs that will harmonise taxation across Europe. And if competition does cut the corporate tax burden, it is the UK that has furthest to go.