There is no need to impose a high-tax culture across Europe

Click to follow
The Independent Online

Single market, single currency, single tax system. The progression seems natural enough. The Single European Market, completed in 1992, can only function efficiently if transaction costs are minimised and transparency maximised. That implies a single currency, so that citizens can compare prices across borders, and a single monetary policy with a single central bank to run it. And for a single monetary policy to work, governments of individual member states must behave responsibly and not run huge budget deficits that undermine the currency.

Single market, single currency, single tax system. The progression seems natural enough. The Single European Market, completed in 1992, can only function efficiently if transaction costs are minimised and transparency maximised. That implies a single currency, so that citizens can compare prices across borders, and a single monetary policy with a single central bank to run it. And for a single monetary policy to work, governments of individual member states must behave responsibly and not run huge budget deficits that undermine the currency.

Hence the Growth and Stability Pact, which, although flawed, sets out a consistent framework within which finance ministers are more or less free to work. If a state runs a deficit that is too large, then it should not matter to the European Central Bank if it remedies matters by, say, increasing fuel duty or raising income tax or introducing charges for dental services.

Within broad limits, nations still enjoy a remarkable freedom on levels of duty and VAT, with smugglers and arbitrageurs making sure that prices do not get too far out of line. Just ask Gordon Brown and the Customs and Excise about the booze cruisers.

Such a relatively settled fiscal environment is not satisfactory to the French and German governments, however, who are to table proposals for greater harmonisation of EU tax policies. No doubt to the relief of the UK, Ireland, Luxembourg and some applicant countries such as Estonia, it explicitly rules out personal taxation, (eg income tax) and property taxes. But the two governments do want to end "tax competition" in the Union, and they do want to see much closer harmonisation of corporation tax.

This would do great harm to the Union's competitiveness. For the almost inevitable effect would be to ratchet up corporation tax rates in the Union, which would make it much more difficult to attract investment from outside the EU. For Poland, Hungary and the other eastern countries, that would be a severe blow to their ambitions to catch up with their western "partners". Nor is it essential or inevitable: the example of the United States shows how corporation tax regimes can vary greatly from state to state in a market with a single currency. Institutionalising a high-tax culture should not be a priority for a continent on the verge of recession.

Comments