Andrew Grice: The Week In Politics

With the election safely over, tax is back on the agenda

With independent forecasters predicting an £11bn "black hole" in the Government's finances and a rise in income tax rates ruled out by Labour's manifesto, further backdoor tax rises may be needed - although Gordon Brown may have to scrape the barrel to find any new ones.

Even now, Labour's debate on tax is tentative and being conducted by advisers and think-tanks rather than ministers. There is a growing consensus that taxes will have to rise if Labour is to entrench its changes to help the poorest in society so they could not be reversed by a future government.

Two Blairites, Patrick Diamond, a former Downing Street policy aide, and the academic Anthony Giddens, architect of the "Third Way", set the ball rolling in a joint article written a year ago but deemed too hot to release until after the election. They called for the ceiling on national insurance contributions to be abolished.

Mr Diamond and Lord Giddens pointed out that people make no national insurance contributions on earnings over £32,000 except for the 1 per cent addition introduced in 2003 to raise money for the NHS. "The lowest fifth of taxpayers still pay a higher proportion of their earnings in income tax than the top fifth, and this clearly violates the principle of progressive taxation," they said.

The Institute for Public Policy Research (IPPR) has just published a book calling for a similar national insurance shake-up to raise £6.6bn to close Britain's "social justice gap" by improving child care, cutting child poverty and providing free long-term care for the elderly. In the long term, the IPPR proposed a 50 per cent combined tax and national insurance rate on earnings over £100,000.

A common theme emerging in Labour's debate is that the tax and national insurance systems should be merged, which could get the party off its self-imposed hook of no rise in tax rates. But the move might be judged too explosive unless it had been included in an election manifesto.

Indeed, there is little sympathy at 10 or 11 Downing Street for the demands for Labour to rethink its tax strategy. The Prime Minister and Chancellor suspect that the public are reaching the end of their tether on tax. One insider told me: "People still think investment in public services is more important than tax cuts - but only just. If taxes go up, we could reach the tipping point. Then we couldn't do more for those at the bottom."

Those who support higher taxes hope Mr Brown might prove less cautious over tax if, as expected, he succeeds Mr Blair. I suspect they would be disappointed, at least in the short term. Raising taxes would alienate Middle Britain, which Mr Brown will need to keep onside.

In the longer term, Prime Minister Brown, who wants to create a "progressive consensus" in Britain, might be willing to make the case for higher taxes for a specific purpose - as he did in 2003 to boost the health budget. But he would tread very carefully, and first seek to build public support.

Meanwhile, the Liberal Democrats, who have set up a commission to review their tax policies, are likely to drop their plan for a 50 per cent top rate on earnings above £100,000 and will look at single tax rates for individuals and businesses. It would not be a "flat tax" favoured by free-marketeers but a redistributive package with a high threshold to take the lowest paid out of tax and a crackdown on loopholes exploited by the rich.

There is a very different debate about tax inside the Conservative Party. Michael Howard, the (slowly) outgoing leader, sparked it on Monday in a thoughtful speech in which he argued that tax cuts were not a "silver bullet" that would return the Tories to power.

Tax will be an issue in the Tory leadership election. David Davis, the frontrunner, is an instinctive tax cutter, while David Cameron, who is likely to emerge as his main challenger, supports low taxes but believes the party will not shed its "same old Tories" image if it bangs on about tax cuts and little else.

It is a pity that our politicians didn't talk more openly about tax during the election - particularly on the Labour side. But at least some of them are now.

a.grice@independent.co.uk

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