Steve Richards: The tax wars have just begun

I cannot recall a period since 1992 when the politics of taxation has been so highly charged and potentially divisive

For political leaders, an upside of unexpected crises is that they have little time to agonise. When riots erupt, tyrants totter or fearsome media moguls become suddenly vulnerable there is no space for lengthy calculation.

Another upside is that self-interested agonising would be pointless. Hacking, Libya and violent disorder in cities dominated the summer in ways that could not have been anticipated. All are stories of considerable significance, but their political impact will be limited. Libya is emblematic. I read speculation about whether the fall of Gaddafi is the equivalent for David Cameron of the Falklands for Margaret Thatcher. Leaving aside the huge differences between the two events, the Falklands factor is exaggerated as a reason why Thatcher went on to win in 1983. She won a landslide because Labour had suffered a fatal schism.

If the Falklands was not a significant factor in 1983, Libya will not be at the next election. Nor will the riots, an event not easily tested by debate or judged by specific policy responses. The hacking saga will change newspaper culture for the better, but it is largely a media story, not a political one.

The issue that will determine political fortunes is the economy. It always is. The upside for leaders is that they do have time to plan their policies. The downside is that the space for agonising is much greater. The contours of the agony are well known. With good cause, both sides of the Coalition are alarmed by the lack of growth in the economy, while Labour struggles to win the argument that its policies would be more effective. These contours will stay in place for some time to come and perhaps will form the broader landscape when an election is called.

What will require far more precision, and be a source of more immediate tension, is the related issue of tax. This is an area where the heat will rise to unfamiliar heights in the next few months. I cannot recall a period since 1992 when the politics of taxation has been so highly charged and potentially divisive, between parties and within them.

Compared with most policies the tensions within the Coalition over tax are not easily resolved. To his credit, Nick Clegg was the only leader at the last election to openly deploy the term "redistribution" in relation to taxes. Gordon Brown never uttered the word while his policies sought to redistribute without Middle England noticing. Clegg and Vince Cable are more overt tax radicals. They will prevail easily in their wish to exclude more low earners from tax. Cameron and George Osborne support the objective, too.

The tensions arise from Osborne's desire to cut the top rate of tax from 50 per cent and what policies will be announced in conjunction. Liberal Democrats are not opposed to reducing the top rate, although opinion polls suggest that the higher top rate remains popular. However, with growing determination they seek other forms of wealth taxes to compensate.

Osborne has other priorities. Each August he makes an attempt to woo a more progressive audience. These are as regular as Father Christmas's appearance in the bleak midwinter. Usually he delivers a speech at the think-tank Demos. This year, he opted for an article in The Observer in which he pledged to clamp down on tax avoidance, a familiar device for chancellors wishing to appear tough on the very wealthy without wanting to worry them too much. A new land tax would be a much bigger worry for them and would alarm Conservatives, too. I cannot see it happening, in which case what can the Lib Dems wear as protective armour when the top rate is cut?

Eds Miliband and Balls also have some big decisions to make. They are trained in the politics of tax, having spent most of their adult lives agonising with Brown over how to raise money for public spending and still win elections. While both recognise the need to move on, they are conditioned to proceed with extreme care. On tax, they will be subtler opponents than Cameron/Osborne perhaps realise. On the night Miliband offered Balls the job of shadow Chancellor, Balls said they needed to discuss tax cuts. His first proposals was a temporary cut in VAT.

But Labour's response on the top rate is the tricky one for the duo. Senior Labour people will support its abolition. Even rooted figures such as Miliband's first shadow Chancellor, Alan Johnson, stress its temporary nature. In contrast, Miliband wants it to be a permanent part of the political landscape and at the beginning of his leadership, in private at least, identified support for the top rate as one of his defining objectives. Labour's divisions are another reason why Osborne will scrap it at some point, although he will struggle to explain how the move equates with his increasingly incredible claim that "we are all in this together".

There is a bigger story this autumn about the overall state of the economy, but the political argument that will arise from it is already well rehearsed. The policies in relation to tax are fresh and the political consequences much harder to predict than in the 1980s and 1990s. They will define more clearly than any other policy area the evasive personalities that have shaped British politics since the last election, and will decide their fates too.

s.richards@independent.co.uk