Harmonisation of taxes: Is this the most dangerous issue for Europe?

JUST WHEN you thought it was safe ... Just when it seemed that Tony Blair's plan to put the issue of Europe to sleep was working, the Eurosceptics are back. This week, the Prime Minister's strategy of trying to make the euro seem both unthreatening and inevitable was ruined by the return of a frightening spectacle: the anti-European press in full cry and John Redwood on daytime television.

The sceptics are back, and this time it's personal - or personal taxes. They warn of a new European Union plot to impose tax increases from Norway to Crete and from the Shannon to the Oder. On Tuesday this week the Daily Mail's front-page headline was "March of the Euro Tax Man". On Wednesday, The Sun asked (in English and German) of the new German Finance Minister, Oskar Lafontaine: "Is this the most dangerous man in Europe?" On Thursday, the Daily Telegraph took a darker tone, with a leading article entitled simply: "The German Menace."

And all week the undead of the Tory party have brought back vivid memories of the Major years, with Mr Redwood, the Conservative trade and industry spokesman, intoning: "Europe is after our money."

So what is really going on? The fact is that harmonisation of European tax rates has long been an ambition of the architects of the single market.

The argument, which we heard again this week from Yves-Thibeault de Silguy, the European commissioner responsible for monetary union, is that big differences in tax rates could disrupt "the smooth operation of the single market". But, so far, all that has been achieved is a law that prevents VAT rates, once introduced, being cut below a certain level. Further harmonisation, of course, implies that taxes in Britain, which are relatively low, would have to rise toward the EU average.

The issue hit the headlines because Mr Lafontaine came to call on his opposite number Gordon Brown last Thursday. They discussed the final draft of a policy statement agreed by the finance ministers of the 11 EU countries with socialist or social-democratic governments.

Although the document, The New European Way, did not explicitly call for tax harmonisation, Mr Lafontaine and the French finance minister, Dominique Strauss-Kahn, did. Mr Brown immediately said "we will not hesitate" to use the British veto to stop any such proposals, only for Mr Lafontaine to insist that the German government would "push" for tax harmonisation during its presidency of the EU, which starts in January.

It is worth noting, however, that harmonising taxes was also one of the "priorities" of the Austrian presidency, which is just drawing to a close - with no concrete results.

But there is a fundamental difference of view on the issue, which means that it will keep coming back, and pressure will continue to be put on the British to make concessions. Already it is clear Mr Brown has upset his European partners by using the "veto" word, which he cannot do too frequently if he and Mr Blair want to present themselves as being at the constructive heart of debate.

So far, there are three proposals in development. The European Commission has proposed a minimum tax on savings, called a "withholding tax", which the British Government says it will not accept. The commissioner responsible for the single market, Mario Monti, says he wants further harmonisation of VAT, but there are no firm proposals yet. And some European socialist parties, in a discussion paper not agreed by Gordon Brown, want a minimum rate of corporation tax to prevent "harmful tax competition". Mr Lafontaine does not like Germany being undercut by low taxes on business, especially in Britain and Ireland, which attract new and inward investment. All the commission has proposed on this is a "code of conduct" under which member states agree not to use low taxes to poach new plants.

The Eurosceptics argue that Britain is bound to be pulled into a unified Euro-tax regime by a ratchet effect. But there is a strong argument against this in the form of the United States, which is a much more unified market than the EU, and yet within which states continue to be free to set their own taxes.

When people such as Mr de Silguy talk about the need for tax harmonisation to ensure the "smooth operation of the single market", Gordon Brown's officials privately say this is contradicted by the American experience.

Old-style socialists such as Mr Lafontaine do not like the American model, because in a free market the pressures of competition keep business taxes low. Nor do the new-style Greens like it, because they - and they are partners in Mr Lafontaine's government - want to shift the burden from income taxes to taxes on pollution, which is difficult to do in just one part of a single market.

But Mr Lafontaine's boss, Tony Blair's friend Gerhard Schroder, is wary of attempts to keep business taxes high. This contradiction between the reds, Greens and business-friendly Blairites has not been resolved in Germany, where the new government looks hopelessly divided already.

The real situation, then, is more complicated than a simple drive by high-taxing continental socialists to use the EU to destroy the British way of low-tax life. But the Eurosceptics are right about one thing: the issue will not go away. It will arise most sharply in the drafting of the socialist parties' manifesto for next year's elections to the European Parliament. It will be a test of Mr Blair's and Mr Brown's negotiating skills if they manage to avoid a New Labour "note of dissent" on policies for more uniform European taxes.

Oskar Lafontaine profile,

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