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European Tax Harmonization and British Taxes
Professor Tim Congdon

In the Politeia pamphlet European Tax Harmonization and British Taxes, Professor Tim Congdon addressed the central issue in the debate about the EMU. Ever since the German finance minister, Oskar Lafontaine, indicated that Germany was looking towards harmonization of taxes, the debate has escalated. Would membership of the single currency lead to common taxes, both personal and on companies? If so, then at what level? Are there any realistic grounds to suppose they might be harmonized at any but the highest level?

Over the last few years, members of the European elite have been forthright in their views about tax and EMU. They have advocated tax harmonization in an increasingly unified European state, not tax competition between sovereign nation states within a European free trade area. But what will be the impact of the Euro on taxes in Britain, a low-tax country by European standards? In this pamphlet, Tim Congdon has considered the three key issues related to European tax harmonization: to what extent taxes will rise, which taxes would be increased, and what the broader economic effects of tax harmonization would be. If the UK participates in EMU, he has argued, it would become a higher-tax country; if it embraces European integration warmly, it might a generation from now be part of a high-tax region in a world where tax competition between regions is intensifying.

Professor Tim Congdon, who is Chief Economist at Lombard Street Research, has been adviser to the Chancellor of the Exchequer and one of the Treasury’s team of wise men. He is one of the country’s leading economists and economic commentators.

Below are extracts from European Tax Harmonization and British Taxes:

Chapter I Introduction, p.1

‘This pamphlet considers the potential impact of European economic and monetary integration on taxes in Britain. After discussing why tax harmonization and the single currency are widely acknowledged to be related parts of the same project, it considers whether and how much UK tax levels might have to rise.

‘One point is clear: taxes are higher in other European nations than in the UK. On present rates the UK’s tax-to GDP ratio would have to rise by one-sixth to bring it into line with the rest of the EU. But if government spending in the UK relative to GDP were to rise to the EU level, and if budget deficits were to be harmonized in accordance with the Maastricht Treaty, they would have to rise by over 20%. Given that in the EU the ratio of government spending to GDP has been on an upward trend, the future increase in UK taxation would be larger, indeed, it might be as much as a third in little more than a decade from now.

‘The pamphlet then considers which taxes would be increased. Surprisingly, the corporate tax burden in the UK is not low by European standards. Indeed, no major divergence in revenue (relative to GDP) is evident from a survey of taxes on personal and corporate income, on indirect tax and taxes of property. Rather, the difference in the tax burden between the UK and the EU is explained entirely by social security contributions, which are about 6% lower (as a share of GDP) in the UK. This contrast is largely explained by the UK’s distinctive pension arrangements, with extensive funded coverage by the private sector.

‘The pamphlet concludes by considering the economic effects of tax harmonization. It argues that full-scale tax harmonization across the EU might result in a special welfare levy designed to equalize labour costs. This would lead to a further shift to low-productivity work in the informal sectors of all European economies, and make for reduced employment, output and living standards in the UK.’

Chapter VI Conclusion, p.16

‘Europe's leaders deserve to be judged by their rhetoric as well as by their actions. Whatever the weaknesses in the single currency project, the rhetoric has in the end led to action. Over the last few years members of the European élite have been forthright in their views about tax and EMU. They have advocated tax harmonization in an increasingly unified European state, not tax competition between sovereign nation states within a European free trade area. Largely because it had almost 20 years of continuous rule by a political party which believed in the free market and a reduced economic role for the state, the UK is nowadays a low-tax country by European standards. If it participates in EMU, the UK would become a higher-tax country; if it embraces European integration warmly, it might a generation from now be part of a high-tax region in a world where tax competition between regions is intensifying.’

 
Available from Politeia

European Tax Harmonization and British Taxes

Publication Date: May, 1999

Price: £7.00

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