STEPHEN SMITH University College London
There is considerable diversity across European Union (EU) member states in the taxation of alcoholic drinks. All apply excise taxes, in addition to value added tax (VAT), to at least some categories of alcoholic drink, but the scale of these taxes varies widely. In the Scandinavian member states, Ireland, and the UK, alcoholic drinks are particularly heavily taxed, and alcohol 1 taxes are a significant source of public revenues, contributing over €100 in tax revenue per head of population. Elsewhere in the EU, alcohol taxes are lower, and in the Mediterranean EU countries, alcohol taxes are, in the main, of trivial economic and revenue significance.
This diversity of tax treatment creates problems of fiscally induced cross-border shopping and various forms of illegal tax evasion and fiscal fraud. These problems are mainly experienced in the high-tax countries, and have been amplified by the greater freedom of movement and reduction in fiscal control on cross-border transactions after the abolition of intra-EU frontiers as part of the '1992' programme. The severity of these problems would be reduced by tax changes to reduce the alcohol tax differentials between member states. The key question for EU policy is the process by which greater convergence in alcohol tax rates should arise. It could be achieved without any need for EU coordination as a result of national policy decisions taken by the countries most severely affected. Since the economic costs of the existing differentials are largely borne by high-tax countries, the process of market-driven convergence would then involve tax reductions in high-tax member states, and therefore lower average alcohol taxes across the EU. Alternatively, convergence could be achieved through a less asymmetric process, in the form of negotiated EU coordinated tax rates, with the average level and range of EU alcohol taxes chosen as the outcome of policy choice rather than unregulated tax competition.
The EU has already recognized the potentially unsatisfactory consequences of relying on unregulated fiscal competition to determine excise tax policies. Minimum excise rates, to set a floor to excise levels in all member states, were agreed as part of the 1992 fiscal negotiations. The significance of this floor in the