Recent public discussion of tax harmonisation in the European Union is deeply confused. Harmonisation is an inevitable consequence of euroland membership, British Eurosceptics thunder. Yet American states have their own tax rates within a single currency area with no apparent ill-effects. Arguments suggesting that monetary union requires curbs on deficit finance should not be confused with discussions about the structure and mix of taxation in individual countries.
But Eurosceptics are not the only woolly thinkers. A view propounded vigorously by British drinks manufacturers is that harmonisation is needed for lower excise duties. It is the only way, they contend, to reduce the loss of revenues from alcohol and tobacco to other EU members. In fact, this can be done without harmonisation. The issue is not convergence: tax competition provides strong incentives for convergence anyway. It is whether to converge up or down - whether current EU tax rates are above or below their desirable long-term level.
Even at the European Commission there are unsubstantiated claims about harmonisation. Low business taxes should be treated just like illegal state aids, it is said - as 'unfair' subsidies to domestic firms. But take the case of Ireland, which has enjoyed an average growth rate of around five per cent a year for the last decade and a half, and has also been spectacularly successful at attracting foreign direct investment. It seems likely that low taxes have played a significant part in Ireland's success. But has this harmed other EU members?
The answer is unclear. Some investment has perhaps gone to Ireland that might have gone elsewhere in the EU. But some has come that would not otherwise have come at all. The investment in Ireland has probably been more productive than it would have been elsewhere. And Ireland's growth has probably had some modest yet positive spillover effects on other EU members. Arguably, the Irish experience has also had an important demonstration effect of the value of creating a business-friendly climate.
Many of the central questions about tax harmonisation have not been properly asked, let alone convincingly answered. The incoherence of the debate suggests that hard-headed research on the appropriate level of business taxation and the precise nature of competition between EU members is both necessary and capable of delivering valuable policy payoffs.