Pick a fight with the undeserving rich

Lloyd George said he was in favour of people who earned their money, and against people who simply inherited it
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As Gordon Brown overtakes David Lloyd George as Britain's longest-serving Chancellor this week, it's tempting to concentrate on the gossipy tit-bits that link the two inhabitants of No 11 Downing Street.

As Gordon Brown overtakes David Lloyd George as Britain's longest-serving Chancellor this week, it's tempting to concentrate on the gossipy tit-bits that link the two inhabitants of No 11 Downing Street. In 1914, a radical Celtic Chancellor declared "there's no friendship at the top". He impatiently plotted to succeed his old ally - a privately educated, more conservative Prime Minister, Herbert Henry Asquith. Both were keen to promote their philosophy, New Liberalism, but their rival camps each claimed their man was the Real Liberal. Some things never change.

But the ghosts of Downing Street have more interesting stories to tell than the age-old cliché about political rivalry. Lloyd George and Asquith inherited a country scarred by extreme income inequality, just as New Labour has. The Edwardian super-rich consisted of a few entrepreneurs and predominantly the aristocracy and the House of Lords. (Lloyd George described the second chamber as "500 men chosen at random from among the ranks of the unemployed").

The New Liberal government wanted to attack this inequality, but the political climate of the day was dominated by the Gladstonian belief that all government action was counterproductive and doomed to failure. They were also reluctant to bump up taxes because they were afraid of slowing down economic growth.

Today, Blair and Brown have inherited a dilemma eerily reminiscent of their predecessors'. They confront a new aristocracy of multi-millionaires, with surnames like Sainsbury and Barclay as much as Cecil. Thatcher has replaced Gladstone as the inspiration for those who warn that government action is the problem, not the solution. And the eternal conundrum of how to increase taxes without damaging economic growth remains.

So how did the New Liberals overcome this scepticism towards government action and build one of the most progressive governments of the 20th century? The answer lies with intellectual innovation. When Lloyd George needed to raise new taxes fast, he came up with a new idea. Conservatives had long ranted about the difference between the "deserving" and "undeserving" poor. Lloyd George turned this on its head. The Chancellor knew that a crude attack on the rich would be dismissed as socialism and fail to build majority support. Instead, he introduced one of the centre-left's best weapons: the distinction between earned and unearned wealth.

Lloyd George declared the Liberals were in favour of people who worked hard and earned their money, and against people who simply inherited it. "Death," the Chancellor declared, "is the ideal time to tax rich people," and he increased death duties by more than 50 per cent. Why, he asked, should one man acquire millions simply because his father - and likely his grandfather and great-grandfather - were millionaires? The Tories were trapped into defending the inherited wealth of a minority - and the majority backed Lloyd George.

The intellectual weapon Lloyd George handed to the centre-left still works today. Most people can tolerate Bill Gates or Richard Branson, because they can see that they have done something to earn their vast wealth. Yet they feel queasy when they look at James Murdoch and the Duke of Westminster, who seem to be rich because of who their fathers are, not because of their own abilities. There's very little political mileage in attacking the rich per se - but, as Lloyd George showed, there's a lot in attacking the unearned millions handed down to their children. We can deal with George Best being rich - but Callum Best? We can cope with Margaret Thatcher's millions - but Mark Thatcher's?

Until now, the Government has steadily redistributed wealth to the poor on the sly, without any Lloyd Georgian fireworks. The figures are stark - child poverty is down by 25 per cent because of Labour benefit payments (received by many of my relatives) topping up the wages of the poorest. This is real progress, and shows the ignorance of champagne cynics who bleat that New Labour are old Tories.

But the Government is not getting credit for this substantial redistribution - even among the people receiving the extra cash - because it has not been dramatised. Blair and Brown fear that progressive policies smack of Old Labour, so their redistribution has been made deliberately boring and complex.

There are two dangers if the Government continues with this no-fireworks approach to its genuinely progressive achievements. They will be easy to reverse when a Tory government comes to power. No constituency of support has been built up behind them, so nobody except the recipients will notice when programmes like the Working Families Tax Credit or SureStart are dismantled. Sweeping progressive policies under the Middle England carpet in the hope that nobody will complain is not the way to win political arguments in the long term.

And there's another risk, illustrated in last week's catastrophic European elections: the Government's heartland voters - even the estates full of people directly benefiting from Labour policies - do not perceive the Government as acting in their interests, so they won't vote.

Here's where Lloyd George's example calls from across nine decades and a dozen Tory prime ministers. He picked a fight with the undeserving rich on behalf of the deserving poor - and became wildly popular with Britain's wonderfully chippy middle class. Cash that would have been handed from Duke to Duke was diverted instead to creating pensions for poor people who had worked hard all their lives. This policy dramatised the ideas at the heart of the New Liberalism, and gave it both clarity and momentum. (In the 1980s, Margaret Thatcher's sale of council houses was to play a similar role for her Government). New Labour has - despite its achievements - no equivalent, so for all the statistics showing incremental improvements, it seems nebulous and like it is losing direction.

What would Lloyd George - who Blair once described as his political hero - counsel? He would perhaps advise his successors to introduce heavy inheritance taxes for the rich, because, as he said in 1913, "all inherited wealth is unearned by its nature". Taxing unearned income doesn't create a drag on the economy, because it doesn't discourage work. (This is why even some hardcore marketeers like Milton Friedman think inheritance tax is the best form of taxation). Inheritance tax is one of the most effective and popular ways to attack inequality.

Opposition to unearned wealth was the rationale behind one of New Labour's best and most popular policies: the windfall tax on the privatised utilities. Why, Brown asked, should these companies profit from a blatant give-away? He was right - and the principle extends to rich people as well as rich companies. It's time to revive that early radical spirit, and plough the extra taxation into flagship Labour policies: expanded SureStart centres to lift poor children out of inequality before they even start school.

This would provide a symbolic policy that show-cased the best of the current Government. It would remind Britain why - despite all the disappointments - Blair and Brown deserve to join Lloyd George in the record books for more than just longevity.