The mug has pride of place in the Fabian kitchen only, my predecessor tells me, because it was considered for a starring role on the cover of the Fabian Tax Commission report. That report made an immensely important contribution to reshaping the debate about tax and influencing the Government's political strategy ahead of the 2002 decision to increase national insurance by 1p to pay for increased health spending. That was the most significant social democratic moment in British politics for a generation, and one applauded by a clear majority in the opinion polls.

Yet these gains now risk being lost, as much pre-conference commentary reports that Tony Blair and Gordon Brown are preparing the ground to repeat Labour's election pledge not to raise the basic or higher rates of income tax. The residents of Number 10 and Number 11 seem to be fully united on at least one thing: that talking tax remains the great political taboo; that even whispering the T-word in public has the toxic potential to wreck Labour's re-election hopes. Repeating the pledge for a third time will fit easily into New Labour's political comfort zone. But the tactical electoral advantages would mask an important strategic mistake, signalling the potential limits of Labour's third term ambitions to shift the centre of gravity of British politics.

Ministers will no doubt accuse their critics within the Labour Party of making a totemic issue out of tax. Income tax rates should, they will argue, be a means and not an end. They are right: progressives shouldn't treat higher income tax rates or the size of the state as a proportion of GDP as some sort of virility test for progressive politics. Resources matter; but what governments do with the money they raise matters much more. The Prime Minister and Chancellor no doubt think that the gains of introducing, say, a new 50% top rate at £100,000 would simply not be worth the money raised and the political pain it could cause.

But the taxation taboo goes far deeper than tactical debates about the most effective approach to political economy. It strikes right at the heart of the founding fears of New Labour. Not even being able to talk about the politics of tax shows just how far the party's leadership still bear, and share, the scars of Labour's 1992 defeat. It is that moment which still in many ways dominates the psychology of both No 10 and No 11 Downing Street. Even as it apparently coasts towards a third term in office, Labour fears it lacks the legitimacy to even consider changing income tax, and feels it must instead treat tax rates of 40% and 22% as sacrosanct, as if handed down on tablets of stone.

So how to break the taboo? Instead of repeating the income tax pledge, Labour should propose a progressive but revenue-neutral income tax reform - to make the system fairer but to keep the overall tax take the same. This would involve a higher rate of tax (perhaps a 50% top rate on incomes over £100,000). But this would be used to make the system more progressive. It would fund taking more people out of tax at the bottom end, and seeing the higher rate of income tax kick in later. This was something Peter Hain was considering last summer before he was effectively gagged from making what would have been some rather New Labour noises about the senior teachers, nurses and police now within the top bracket of tax.

Winning a mandate for progressive tax reform seven years into power, having demonstrated economic competence, would be quite different from doing it as an untested, untried opposition. Isn't it time to quite consciously lay the ghost of Labour's wilderness years and the shadow Budget of 1992?

Sunder Katwala,

Fabian Review Winter issue 2004/5.

 

Copies of Paying for Progress: A new politics of tax for public spending (388 pages) are available from The Fabian Society at the special price of just £5 including postage and packing (RRP £9.95).