I thought the Treasury was going to get its comeuppance in a spectacular way with the European Court of Justice ruling this week on where tax should be paid (the country of the seller or the country of the buyer) for internet orders, notably alcohol and tobacco, across national borders in the European Union.

For years, the Treasury has argued the merits of "tax competition" between countries, and has opposed any suggestion of harmonising tax rates within the single European market. Well, they would have had tax competition in spades had the Court of Justice ruling gone the other way, as much of the media had anticipated. As it is, there will still be opportunities for people to purchase goods in countries with lower rates of taxation whenever they travel, although they will not be able to do it from their arm chair over a computer.

But let us be clear. These different rates of indirect tax within a single market do mean that British tax rates on, say, alcohol and tobacco can be undercut by our neighbouring countries. This means that millions of pounds and thousands of British jobs have been lost by the white van run to Calais, stocking up on cigarettes and alcohol to bring back to Britain for personal consumption (legal) and sale (illegal). It also means that the Treasury has lost billions of pounds in revenue, in turn meaning either a cut in services or a rise in the rate of other taxes.

"Tax competition" between countries inevitably means a race to the bottom in terms of what tax rate you set. This may have superficial attractions in some quarters, but in reality undermines the ability of governments to find a suitable balance between different forms of taxation and undermines their ability to use tax as a disincentive for smoking and excessive drinking.

Surely it is not totally unreasonable to suggest that, in a single market, a single rate (or at least a minimum rate) of excise duty and VAT is sensible? No one is suggesting common rates of direct taxation (income tax) - only of indirect taxes where variable rates can create market distortions.

This view is gaining ground in Britain. The British Retail Consortium has called for excise duty rates to be harmonised across the EU to create "a level playing field". The Chartered Institute of Taxation has referred to "the long-term unsustainablity of significantly different excise duty rates is self-evident in a union which allows free movement of goods and people". The Association of Licensed Multiple Retailers says problems "arise because of duty differentials across Europe. All sides need to work towards greater parity". (all quoted in YP 24 Nov)

Indeed, the EU treaty provides for harmonisation of indirect taxation (though not direct taxation), but by unanimous agreement among the member states. In other words, there is no question of any tax rate being set that does not meet with the approval of the British government. In those circumstances it would seem sensible to agree to discuss this matter with other countries to see if there is any possibility of agreeing on harmonised rates, or a higher minimum rate, precisely to
avoid major domestic policies being undermined.

The Court judgement has made this problem less acute than would have spectacularly been the case had it gone the other way. Nonetheless, the problem has not disappeared altogether. We should have the courage to address it.