Tuesday, November 14, 2006

Cheaper Booze And Fags


Lost tax base

The duties on booze and fags have been staples of government revenue for three hundred years. And throughout the entire period smugglers have been trying to find a way round them. A few months ago we blogged the estimated £3bn pa the government already loses to tobacco smuggling, reckoning it illustrates the limits to punitive taxation.

Now the European Court of Justice is apparently about to put the smugglers out of business by making it legal to buy over the internet direct from low duty countries. Which would mean domestic duty rates would soon have to be harmonised with at least the lower French rates. Bad news for smugglers and the government, but great news for drinkers, smokers, and the end suppliers.

As the Taxpayers' Alliance has already commented, taxpayers will have mixed feelings about this. Obviously lower taxes in any shape or form are to be welcomed. But unfortunately- quite apart from the fact we are yet again being forced to follow a European directive- any cut in the £15bn pa revenue from these duties would simply be made up by increases elsewhere. And personally, as a non-smoker, I prefer smokers to pay.

Still, there is a message of hope here for those of us who want to see smaller government: international tax competition is starting to make itself felt all over.

For those unfamiliar with the theory behind international tax competition, there's a primer here. All it really says is that as global integration proceeds, capital and labour become ever-more footloose, and national governments have to become ever-more careful not to "price" their economies out of the market by over-taxing. Which in turn means they can no longer spend as much as they like.

As we've seen from the recent alarm over HSBC and other major companies relocating to lower tax domiciles, such competition is already very real in the field of business taxation. Now, in a European context at least, we can see similar international pressures circumscribing the ability of our government to tax consumer spending.

Some see this as a "race to the bottom", with no government able to risk spending on "decent public services". That might conceivably be true in some poor countries. But in Britain, we're miles away from that situation, and international tax competition could yet deliver the smaller government our first-past-the-post electoral system seems incapable of gripping.

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