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Portillo: Europe's tax harmonisation agenda

"This morning, the European Commission discusses its confidential draft Communication Tax Policy in the European Union -Priorities for the years ahead.

Yesterday, Labour's plan to raise the effective rate of tax on middle incomes remained undenied. The Chancellor's hurried statement last night did not commit him not to abolish the ceiling on national insurance contributions. If he wants to do that a simple sentence will do: "I promise not to abolish the ceiling on national insurance contributions"

This confidential document is equally explosive. The Commission's priorities for the years ahead, it seems, are:

1. harmonisation upwards of income taxes across Europe,

2. harmonisation upwards of company taxes across Europe; and

3. harmonisation upwards of VAT across Europe.

The Commission document says 'the last few years have seen some progress being made on tax co-ordination at EU level. While the Commission welcomes this trend, it believes further steps can and should be taken along this path."

It goes on "as far as taxes on personal incomes are concerned…it may be necessary to co-ordinate national tax systems".

Oscar Lafontaine famously said "Our English friends have asked us not to use the word 'harmonisation' and instead the word 'co-ordination'."

So when the Commission says they want to "co-ordinate national tax systems", it means they want to harmonise national tax systems. The one concession Tony Blair has ever won in Europe is that they now use a different word.

This morning, Labour said they would veto the plan, which Robin Cook described as "tosh". Even if it weren't for the implausibility of Robin Cook ever vetoing anything, it appears the veto would be bypassed by routing discussions through an EU tax group chaired by a Labour minister.

The Code of Conduct Group, chaired by Labour's Dawn Primarolo, is to be asked to investigate whether different income tax regimes around the EU amount to so-called "harmful" tax competition.

The Communication says "Given the difficulties in reaching unanimous decisions…the Community should now consider the use of alternative instruments as a basis for initiatives in the tax field."

That means if the EU's tax plans were vetoed by the British Government, they'd be imposed anyway by the back door. It appears that stealth taxes have been Labour's most successful export.

The Commission's proposals mean that the UK would no longer have the power to set income tax rates itself. It will have to set income tax in future with reference to higher rates in other EU countries. The zero-rating of VAT on food and children's clothing is clearly under threat.

Yesterday, Gordon Brown's refusal to rule out to an effective 50% higher rate of tax meant that one of Labour's tax promises had been broken before polling day. Today, the EU's insistence that income tax will be harmonized upwards and VAT extended to books and children's clothes means there is not a single tax promise in Labour's manifesto that anyone could be confident that they'd keep."

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