Andrew Grice: The Week in Politics

Tax remains 'toxic' for Labour

Tax is back. The issue never really goes away, even though our politicians often go to great lengths to avoid talking about it. In the past week, it suited some of them to be a little more candid than usual.

David Cameron warned that an incoming Tory government might inherit such an economic mess it would be forced to raise taxes. He had three aims: a "blame Labour" insurance policy in case he actually has to do it; to lower public expectations on tax cuts, in case they prove impossible in a first term; and to tell Tory traditionalists the nation's finances are in such a parlous state that he will not bow to their demands to promise immediate tax cuts.

The Tories' refusal to promise upfront cuts left a gap in the market which Nick Clegg, the Liberal Democrat leader, tried to fill. In a mission statement, he pledged to lower the overall tax burden, while cutting taxes for low and middle-income earners and raising them for the better-off.

Labour's signals on tax were more coded. There is a growing debate, from constituency parties to the Cabinet, over whether Gordon Brown should revamp the tax system as part of the "fairness agenda", which will be the centrepiece of his attempted fightback in the autumn. At a meeting of Labour's national policy forum next week, Mr Brown will quash demands by trade unions and constituency parties for tax cuts for the low-paid, funded by higher National Insurance contributions for the better-off or a 50 per cent top rate of tax for those earning more than £100,000 a year.

Tax is toxic for New Labour, perhaps the biggest negative Tony Blair and Mr Brown had to eliminate when they detoxified the party. They still bear the scars from 1992, when Labour lost an election after pledging to raise taxes. The lesson was that such promises did not only alienate the people at the top who would be directly affected but also those who aspired to go up the earnings ladder.

A younger generation of Labour politicians believes the party no longer needs to fear the ghosts of 1992. They say Mr Brown can win an election only by being bold. They insist that doesn't mean a return to Old Labour. To avoid putting a "cap on aspirations", some suggest hitting millionaires, others a major crackdown on tax avoidance by the super-rich. In the Fabian Society's magazine to be published on Thursday, Chris Leslie, a close Brown ally, will propose a 10p in the pound extra "super tax" on incomes over £250,000, to fund a £200 cut in council tax for every householder. Others call for a windfall tax on the oil companies, with the money spent on tackling fuel poverty – a neat idea which would certainly be popular.

That's not Old Labour but New Labour, say its backers, recalling that Mr Brown proposed a levy on the privatised utilities in 1997 to fund his New Deal for jobless youngsters. Supporters of a "be bold" strategy argue that it would test Mr Cameron's attempt to claim the Tories are now the true progressives of British politics. They say it is no use attacking the Tories from the right, as Mr Brown did over 42-days detention for suspected terrorists, since that allows Mr Cameron to claim to be the great defender of civil liberties. Much better, they say, to put Mr Cameron on the spot by attacking from the left, forcing him to will the means as well as the ends to achieve his new-found "aspiration" to abolish child poverty. That would keep Labour united, too.

Dreamland or good politics? Most Blairites are not convinced. One cabinet minister told me that any suggestion of tax rises would be a "suicide note". Imagine the headlines, Blairites say, adding that the economy needs tax cuts, not increases.

Blairite ministers are warning Mr Brown that his favourite dividing line – Labour investment versus Tory cuts – is past its sell-by date as the public mood has changed. Five years ago, more people (35 per cent) believed that health, education and welfare should be extended even if it meant some increase in tax, than wanted tax cuts even if meant some reduction in these services (22 per cent). Today the figures are reversed.

Perhaps Mr Brown is getting the message. I'm told there is a piece of paper in Downing Street detailing a list of desirable tax cuts in one column – but very little in the column on the right-hand side of the page on how to fund them.

No wonder Alistair Darling is preparing to relax one of the Treasury's golden rules to let borrowing take even more of the strain during the downturn, further tarnishing Mr Brown's once-golden economic reputation. To become an overt tax-riser at the same time will probably be a step too far.