Labour may flinch from a new top tax

The party has to confront the ghosts of 1992 - when its `tax and spend' baggage was famously dumped

Luigi's in Covent Garden is a restaurant even more firmly embedded in political folklore than Chez Nico, scene of Ken Clarke's alleged indiscretions last week. It was there that Neil Kinnock, thinking aloud in January 1992 at dinner with journalists, floated the idea of "phasing in" the party's planned increases in national insurance contributions to limit their electoral damage. The story of the retreat hit most of the front pages. A furious John Smith confronted Kinnock, and the idea was swiftly dropped.

All that is well known. Less well known is that after the episode, a still smouldering John Smith went into the Commons smoking room and complained to several Labour MPs about Kinnock raising with journalists a proposal he had not agreed with his shadow Chancellor. The MPs clucked and nodded sympathetically; there was certainly justice in his complaint. But after Smith had left they took out ball-points and paper and worked out, for the first time, just what the planned increases in taxes and national contributions would mean for their own pay packets. And were suitably shocked. Suddenly the fears about tax that Neil Kinnock had been addressing at Luigi's didn't seem so absurd. And they seemed even less so when Labour went down to its fourth successive defeat less than three months later.

The incident serves only to underline how decisive a turning point 1992 was for Labour on tax. Once Smith was leader, almost his first act was to allow Gordon Brown to set about dumping the party's tax and spend baggage with awe-inspiring ruthlessness. In January 1992 the Tories' "tax bombshell" advertising campaign had been clinically effective because it was (loosely) based on a truth. So long as Blair was the leader and Brown the shadow Chancellor, that would never again be so. And they were right: the big lesson of the previous decade had been that Anglo-Saxon electorates, no longer trusting politicians to spend wisely or well, had drawn a line: no new money.

But now the party has to confront the ghosts of 1992 one last time. The biggest (or if not the biggest, then certainly the most potently symbolic) decision it has to take before the general election is whether to increase to 50 per cent the top rate of tax for those earning more than pounds 100,000 a year. The party is committed to announcing any changes to income tax rates before polling day, and will do so in late January or early February.

The case is powerful. It would not raise much more than pounds 1bn. But it would also affect only 0.5 per cent of the population. A new 50 per cent rate would still be significantly less than the 60 per cent that the country's highest earners rubbed along with for eight years under Margaret Thatcher. It would sharpen the credibility of Labour's claim to be the party of the many and not the few. It's absurd, as some have suggested, to argue that New Labour will be failing its last big test if it yields to the temptation to impose a new higher rate. A new higher rate would conform fully to one of the party's principles, that of progressive taxation. And, finally, it would make it easier to pay for a first step towards the party's stated long-term goal of imposing a new lower rate of 10 or 15 per cent. The Institute of Fiscal Studies' data suggest that if it were spent in that way you could tax the first pounds 500 of taxable income at 10 per cent, or the first pounds 1,000 at 15 per cent.

There isn't a raging argument about this; when two people see as much of each other as Brown and Blair it just isn't like that. But, broadly, Brown has been rehearsing the case for an increase. And Blair has yet to be convinced. No one has been braver than Brown in attracting traditionalist flak for modernising Labour's economic policy. But the case is not a weak one. And for once Brown's chancellorial instincts for sound finance sit easily with an idea which would be congenial to the old left. (not to mention the old Labour right)

Strong, but not irresistible. Most of the arguments against are electoral; but in the widest sense. The Tories are known to be preparing a pounds 10m press and poster advertising campaign from the New Year. They would almost certainly like a central theme to be tax - but there are several problems. One is their own tax-raising record since 1992. The other is that Labour has not committed itself to raising a single tax. A top rate hike, so the counter-argument goes, could give them just the opportunity they so far lack. Where will it stop, the Tories will scream. pounds 100,000 today, pounds 50,000 tomorrow? Some Labour politicians doubt whether rich earners with inventive accountants would anyway yield even as much as the advertised pounds 1bn plus. Much more important, so the opponents say, is the threat that the remarkable reverse in the positions of the two parties on tax would be jeopardised.

But there is another point: income tax is not the only progressive weapon in a chancellor's armoury. Particularly in a Labour government prepared to be serious about welfare reform - and reducing some of the universal benefits paid to the better off. It would be surprising, for example, if Labour went into the next election ruling out an end to child benefit for higher rate taxpayers. This matters because Labour will probably have to rule out a new top rate if it doesn't rule it in. Otherwise, it risks all the electoral pain of imposing the tax without the advantages of actually doing so. No decision has been taken. But my sense is that the forces are gathering rapidly against a new top rate.