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Lord Pearson of Rannoch: My Lords, before the noble Lord sits down, does he agree that even if his noble friend the Minister were to agree on the points that are being put to him, the fact that we still have the veto--I hope that the Luxemburg compromise, as it is known in the jargon, goes slightly wider than the veto on tax matters--does not really help us and does not obviate the need for the Bill? If the Executive go ahead and agree to tax harmonisation in Brussels, the House of Commons and the people will still be stuck with the results. As I understand it, the purpose of the Bill is to ensure that no Minister can agree to any tax harmonisation proposal without the express instruction of Parliament through a vote and of the people through a referendum. In other words, if the Bill were to become law, a nod from the relevant scrutiny committee would be insufficient. No Minister would be able to go ahead and agree, as Ministers have done in the past, if that nod was not forthcoming.

Lord Bruce of Donington: My Lords, the noble Lord has asked me a question. I was concerned with establishing a principle--that there is either a valid veto or there is not. Whether or not the Government decide to exercise a veto can be argued about as and when the occasion arises; and I shall argue my corner. I merely want to be satisfied that the Government themselves consider that they still have the right of veto and still maintain that right.

3.24 p.m.

Lord Taverne: My Lords, time is getting on and I hope that noble Lords will not make two speeches in every debate. First, I wish to address myself to the Bill, which seems to be unworkable. We cannot possibly have a referendum on every tax change that may take place. There would not be many tax changes as a result of harmonisation in Europe, but there may well be some. I hope that the Commission's proposals on the harmonisation of pension taxes will go through. That would be greatly beneficial to fund managers and others in the City of London and elsewhere. If they do, is that the kind of issue that should be brought to a referendum? Even those who are in sympathy with the general tenor of the remarks of the noble Lord, Lord Waddington, recognise that the Bill itself is unworkable and that we cannot have referenda on all these changes.

I want to turn briefly to the general questions that have been raised about tax harmonisation. The case for tax harmonisation in Europe is a somewhat limited one. In so far as it exists, it flows from the existence of the single market, although the arguments might be strengthened, and even more so if we are members of

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monetary union. The case is strongest, and is only really acceptable, where the subject to be taxed is mobile. Otherwise, taxes can be left to subsidiarity. That is true in the case of indirect taxes, as we see with cross-border shopping. The noble Earl, Lord Dartmouth, seemed to accept that in regard to indirect tax there was a case for harmonisation. That is why we have a common system--

The Earl of Dartmouth: My Lords, I accepted a case for harmonisation only because it would result in lower taxes. What we are seeing is continual disharmonisation, which is resulting in higher taxes.

Lord Taverne: My Lords, the case in which the noble Earl believed it was likely to apply was that of indirect taxes, and we certainly see that in cross-border shopping. There would be great benefit if some of the excise duties on the Continent went up. It obviously makes sense that we have a single system of VAT, which was agreed by a Conservative government in the past, within broad ranges. There is presently no proposal that the ranges of corporation tax should be narrowed or changed.

The case is at its weakest in relation to income tax. There are no present proposals for the harmonisation of income tax. There is currently very little mobility. Some people move from one country to another, but they do not on the whole move for tax reasons. There are all kinds of other considerations that matter more than tax.

On the question of corporation tax, one should always distinguish between the rhetoric and the reality. It is true that Lafontaine, when he was Finance Minister, called for the harmonisation of income tax at a common level. There is a case for a common tax base. It would have considerable merits in a single market. However, it is a rather academic case, because it is practically impossible to achieve any agreement on the harmonisation of a tax base. The Ruding Committee examined that possibility and made complicated proposals which have totally withered on the vine.

Harmonising tax rates is totally irrelevant. One has only to look at the difference between Britain and Germany. Germany has much higher nominal tax rates--they average something like 45 per cent--while the UK has much lower tax rates, at 30 per cent. Our corporate tax burden is much heavier. Our corporate taxes yield something like 3.6 per cent of GDP; German corporate taxes yield 1.9 per cent of GDP. It indicates how irrelevant are proposals for a common rate if we do not have harmonisation of a tax base, which is an academic question.

As regards labour taxes, there is not a great deal of mobility of labour, and all the pressures in Europe are presently for downward pressure on labour taxes. Most countries now recognise--it is recognised in, among other things, the new agreement with Chancellor Schroeder--that labour taxes in Europe are too high and that it is one of the many causes of unemployment. A recent study by the World Bank has underlined what an adverse effect high labour taxes in Europe have had on employment.

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We then come to the more controversial areas, where there are proposals for harmonisation. First, there is the code of conduct to deal with unfair tax competition. It has been accepted by the Government. It is almost self-evident that there can be cases of unfair tax competition. That no longer applies to whether our labour taxes are unfair--that is not what the code of conduct is about--or whether we should harmonise corporate tax rates. It is about individual cases of harmful tax competition.

We all accept that there are cases of harmful state subsidies that distort competition and are unfair. In principle, there is no great difference between a state subsidy and a tax incentive. There is some difference--

The Earl of Dartmouth: My Lords, I find it absolutely astonishing that the noble Lord sees no difference in principle between a subsidy and a tax allowance.

Lord Taverne: My Lords, there is a considerable difference. Certainly, there is a difference in the impact on total spending. There are also considerable similarities. A particular tax incentive can have exactly the same effect as a particular state subsidy. If one has unlimited tax incentives so that instead of giving a state subsidy to a particular company one gives it a special tax incentive, one can achieve exactly the same effect, which can constitute unfair tax competition.

Individual cases have been looked at. I do not believe that we have a great deal to fear. For example, I believe that the Commission has approved the special arrangements for the film industry. There are other cases where we have a great deal to gain. I believe that this must be looked at case by case, as has been done. In some cases action will be justified; in others not.

That brings me to the question of the withholding tax. I believe that these proposals are deeply flawed. This concerns not just the bond market, although that is of considerable importance to the City of London. There is concern about the whole idea of a withholding tax on interest which does not extend to the whole of the OECD but is limited to the European Union. The Germans tried a withholding tax and it was a disaster. Billions of deutschmarks flowed into Luxembourg. They had a second go because of a ruling of the constitutional court in Karlsruhe. Again, the yield was very disappointing because there was a great outflow of savings. Now the Germans, the Commission and a number of other member states want to see an EU-wide withholding tax. It would make no sense. There could be easy withdrawal of savings to Switzerland, the United States or other various tax havens.

The proposal has been criticised not only by people in Britain but by a very prestigious French institute. The most devastating criticism that I have seen of the withholding tax is contained in a report prepared for the Edmond Israel Foundation by the Promethee Institute which is one of the foremost institutes in Paris. To my mind, those arguments are overwhelmingly persuasive.

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I believe that this is a deeply mistaken proposal, and I am glad that the British Government are beginning to win allies in opposition to it.

Finally, I deal with the perpetual refrain about the coming of a European superstate. There is a lot of rhetoric about this. We must distinguish the rhetoric from the reality. There are many German politicians who always talk about a federal superstate. Their actions tend to contradict their words. One cannot have a federal superstate if one has a veto. It is very interesting that at Amsterdam it was the German Government who opposed the extension of qualified majority voting which the British Government supported because of the pressure of the Lander who have no enthusiasm for a federal superstate.

Of even greater importance is the question of taxation. One cannot have a strong federal superstate without substantial central revenues. Who are the great opponents of central revenues? The Germans. They are not alone in their opposition. They are just as opposed to a greater contribution to the centre as are we and other countries. It is clear that 1.27 per cent of total GDP resources--half of which at least is spent on agricultural policy--is no basis for a federal superstate. The Germans insist not only that that should apply until the year 2006 but that after that the budget should be frozen altogether. The rhetoric is totally contradicted by their actions. This great federal superstate is a wonderful bogeyman with which to frighten children, but it is not a realistic prospect.

3.33 p.m.

Earl Attlee: My Lords, I am extremely grateful to my noble friend Lord Waddington for introducing the Bill this afternoon. I warmly welcome it. My noble friend is to be congratulated on the measured way in which he introduced it. It was in the 1970s that the British electorate saw the advantages of a free trade area, which we have now developed into a single market. The recent Euro elections, despite the low turnout, amply demonstrate that we on these Benches are right to be extremely cautious about the single currency.

I believe that tax competition is highly desirable. We need to have the most favourable tax environment possible. We look at the high non-wage costs of employing workers of our continental friends and then notice that they also have high unemployment. I do not believe that we want to follow their example. We exist in a global competitive environment, as mentioned by the noble Lord, Lord Stoddart. (I see that he is not now in his seat, but I am sure that he will return to hear the Minister.) It is no use having a cosy EU tax cartel, if I may put it that way, when we would be at the mercy of overseas competition. Does the Minister agree with Professor Tim Congdon of Lombard Street Research who has calculated that taxes in Britain would have to rise by at least one sixth to bring them into line with other EU member states? I do not know whether the noble Lord agrees with him on that point. But that works out at £2,000 per taxpayer.

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If all our taxes were harmonised in full economic and monetary union, how could we be sure that we still had a sound fiscal policy? How could we be sure that we still have the best policy in order to maximise employment across the Community?

My noble friend Lord Waddington and others made the point that if one has a single currency, tax harmonisation has to follow--I would say as surely as night follows day. My noble friend's point is that Parliament and the British public should formally agree to any tax harmonisation policies after public debate. My noble friend Lord Waddington and many other noble Lords mentioned the spectre of the withholding tax and the threat of financial markets moving their business outside the EU. The noble Lord, Lord Taverne, covered that point well.

Like the Minister's right honourable friend the Deputy Prime Minister, I am confused as to how the tax will work. However, my confusion relates to why the tax will not severely damage UK business. The tax may be complicated but the outcome is simple. Thousands of jobs in the City of London will be lost to Switzerland and New York.

In the EU we do not have significant labour mobility--and certainly not when compared with the United States. In any case, work undertaken and paid for in Germany is taxed under German tax arrangements. If the same work is carried out and paid for in the UK, it is taxed under our arrangements. But when we look at road fuel duties we see that the Government have widened the differential in duty between ourselves and other EU members. Your Lordships will be aware of the difficulties created for road hauliers--a point raised by my noble friend Lord Dartmouth--and the opportunity for large-scale smuggling between the Republic of Ireland and Northern Ireland. The Minister will no doubt point to the higher non-wage costs, to which I have already adversely referred. What is crucial to road hauliers is the marginal cost per mile. Fuel is a major component of marginal costs of road transportation.

It seems to me that we should retain full control of our tax system but at the same time avoid diverging EU tax and duty on goods when it encourages smuggling and other illegal activities.

I am sure that the Minister will draw attention to the annual Budget and the accompanying Finance Act. Can he assure the House that it is not possible to vary UK tax or duty rates by means of secondary legislation in particular under the European Communities Act 1972.

In conclusion, we on these Benches are not in favour of tax harmonisation. We are in favour of tax competition even where that means that our Government may have to cut taxes. We believe in low taxation. The principle of my noble friend's Bill would help to maintain our current competitive position in the world and our relatively low unemployment--surely a commendable objective. That is why I support the principle of the Bill.

We on these Benches want to be in Europe but not run by Europe. If we agree to tax harmonisation we really would be run by Europe.

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3.38 p.m.

Lord McIntosh of Haringey: My Lords, I am grateful to the noble Lord, Lord Waddington, for introducing the Bill which gives us an opportunity to place on record yet again the Government's position on taxation within the European Union. I say "yet again" because when I make absolutely clear and unequivocal statements I find noble Lords behaving as though they had not been made, or, more importantly, as though the Chancellor, Chancellor Schroder and former President Santer had not made clear statements. Noble Lords simply brush them aside and say, "We don't believe that so we'll go on regardless".

I congratulate the noble Lord, Lord Waddington, on rounding up the usual suspects. He has got together virtually the full gang of Europhobes to whom we listen. I have the battle honours, too--

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