Dog's have sebaceous glands and perianal glands at the base of their tails. Sometimes, these glands can become clogged and swollen. A warm compress on the spot and cleaning with Benzyl peroxide gel may help with the problem. I would also use some neosporin or triple antibiotic cream on the area as well. Dogs with this swelling of the sebaceous gland may have a problem with hypothyroidism or a hormonal imbalance, so I would suggest you have your dog seen by your vet if you do not see improvement.
You may want to get an elizabethan collar or no bite neck collar to prevent him from biting the area until it has a chance to heal. Also be sure he is on a good flea preventative in case it was a bite that started it.
It may be that he injured his tail, so you will want to check his tail over well. He could also have a problem with his anal glands which will cause a dog to hold their tail down as well. The anal glands are 2 sacs on either side of the anus at about the 4' o'clock and 8 o'clock positions. So if the rectal area is swollen as well, this may be the problem. If your dog is continually licking their anus and dragging it, it could also indicate that they are full. This problem can usually be resolved by emptying out the glands. To empty them or express them, you will want to cover the area with a tissue and press your finger on the dog's anal glands with an upward motion. A foul smelling liquid should come out. If nothing comes out and your dog appears to be in pain, you should take him to the Vet. Your vet can do this easily, as he is experienced at it.
Excellent site on anal glands
There is a condition "cold tail" that Labradors, English Pointers, English Setters, Foxhounds and Beagles sometimes get which causes them to hold their tail close to the body. You can read about it here.
It is possible that this is what you are seeing with your dog. With cold tail it sometimes takes up to 2 weeks for the tail to recover. Some owners feel the administration of anti-inflammatory medication aid in a faster recovery.
I hope this information is helpful to you.