Hello Casper 4 Dogs!
By far the most common cause of dogs biting/chewing in that area - at the tailhead - is fleas. The first thing you need to do, and perhaps already have done, is to get your dog on some flea preventative. Flea baths really do not do a great job at killing fleas - I have personally found fleas on dogs right after flea baths. Fleas are resilient little guys. I recommend using Frontline and/or Comfortis. Both of these products kill fleas within 30 minutes of them hopping onto your dog and last a month. If a cycle has started in your yard or house, it may be a good idea to call the pest control man and have him spray the areas - even then it is going to take a few months for a small flea problem to go away. Also, all animals within the household need to be treated. There is no sense in treating the dog when cats could be going in and out of the house carrying fleas.It may also be a good idea to use Sentinel as well - Sentinel inhibits flea reproduction.
Say you have taken all those measures to ensure that fleas are not infesting your dog - then your dog may have a flea allergy. A flea allergy differs from flea infestation.
Flea infestation = fleas are on your dog, and cause mild to no discomfort, the occasional bite makes them uncomfortable.
Flea allergy = One flea takes one bite on your dog (before the preventatives have time to kill it) and this sends your dog into an allergic fit - he will tear up his backside, maybe even his inner thighs and develop skin infections and all the rest. Odds are this is what your dog has.
The only other cause of recurring tailhead biting and dermatitis would be psychogenic tail biting - but if this were the case, your dog should not go through a period of getting better. If this is what your dog has, it will take behavior modifying drugs to help out.
Also, it could be ringworm or mange. In people, ringworm usually form a ring, however in dog it rarely forms a rings - so just because it is in a U shape, does not mean it is not ringworm. Mange is another cause of recurring dermatitis. Both are easily tested for at your vet.
Talk to your vet - this sounds alot like a flea allergy. You treat flea allergies by using plenty of flea preventatives, limiting your dog's access to areas with lots of fleas. You could also use a little bit of steroid (prednisone) to get him over the allergic fits. If you wanted to go all-out - you could have him allergy tested (to confirm a flea allergy) and then bring him once a month to get hyposensitization injections - altogether runs about 1000 dollars.
let me know if you have any other questions. Dr. Dan