Memo to Mr Blair: we need to talk about raising taxes

Discussion of any area of taxation within New Labour's ranks has been seriously inhibited

FOR NEW Labour, taxation is an issue of particular sensitivity. Among the party leadership it is received wisdom that Labour owed its defeat in the 1992 election to John Smith's "shadow budget". However small the actual tax increases proposed, they enabled Tory propaganda once again to portray Labour as a party of high taxation. Getting rid of this image was one of the first tasks that Tony Blair and the creators of "new Labour" set themselves. The result was the commitment of the party's 1997 manifesto: that there would be no increases in either the basic or the higher rate of income tax in the lifetime of this parliament.

So central to New Labour's identity is this commitment that discussion of any area of taxation within the party's ranks has been seriously inhibited. This is not healthy. In the first place, Labour has not solved the basic problem of the British tax system. For nearly 30 years British governments have only managed to finance their public spending commitments through the expediency of one-off and short-term injections of funds into the Exchequer: first North Sea Oil revenues, then privatisation receipts, and most recently the windfall tax. The underlying tax system is simply not generating sufficient, sustainable revenues.

Even more importantly, the lack of debate about taxation policy leaves New Labour politically vulnerable. For the ideal of generalised low taxation is an essentially Thatcherite one. To the New Right, taxation is a form of theft, an illegitimate appropriation of income rightfully belonging to individuals. (Hence Mrs Thatcher's insistence that public funds remained "taxpayers' money".) The Tories' constant desire to cut taxation is not simply a form of electoral bribery; it is the corollary of the neo-liberal belief that the state should be reduced in size.

For those on the centre and left of politics this cannot be the basis for public action. One may argue about the appropriate level of taxation - there need certainly be no commitment to high levels of tax - but the essential legitimacy of taxation must be maintained. Public expenditure is good, providing services which private spending cannot do. Paying taxes, as Keynes remarked, is simply the membership fee for living in a civilised society.

One task of the Commission on Taxation and Citizenship which the Fabian Society launches today will be to articulate these basic centre-left arguments for a new political era. We hope to shift debate finally off the Thatcherite terrain. But more importantly, the Commission will be examining how the structure of the tax system could be reformed.

First, there is the whole question of the relationship between the public, the taxes they pay, and the uses to which such taxes are put. The British system is highly centralised. We pay almost all our taxes into a single central pool, which then gets distributed by government in the Budget - with extraordinary little prior public debate - to all its various forms of spending. For the ordinary citizen, this process obscures any connection between what one pays in to the system and what one gets out. It is hardly any wonder that opinion polls reveal what would otherwise look like a paradox; there is little support for higher taxes per se, but a majority is willing to pay more for particular kinds of spending, such as health and education.

But why shouldn't taxes be more closely connected to the benefits they pay for? By "hypothecating" or earmarking particular sources of revenue to particular expenditures, the government might substantially increase the public acceptability of taxation. Indeed it has already recognised this principle in the transport White Paper, which allows local authorities to levy road congestion charges for the specific purpose of funding public transport. It could similarly earmark other taxes; duties on cigarettes and alcohol to fund the National Health Service, pollution charges to fund environmental improvements, a tax on child benefit to fund nurseries.

Hypothecation has clear limits - government needs flexibility in its spending decisions - but the principle of transparency it represents is surely legitimate. A second means of achieving this might be to allow taxation on a sub-national level. Again, the principle has already been accepted, with the Scottish Parliament soon to have tax-raising powers. But why not in local government? It is time to re-examine the financing of local expenditure. Indeed, if local people could vote directly on how their councils spent their money, this might help to re-invigorate local democracy.

A third issue which needs a new look at is that of how fair the tax system is. The principle that those who earn more should contribute proportionately more was seriously eroded under the Tories. The obvious areas for reform here are the systems of tax banding and of reliefs and allowances. It seems odd that when an individual's earning level reaches pounds 30,000, the rate of income tax leaps by more than half (24% to 40%) but then stays exactly the same, however much more one's income rises.

It is surely not beyond our intelligence to devise a more differentiated system. We might also examine whether the very large sums of public revenues which are currently given back in reliefs and allowances - disproportionately to higher income earners - might not be more efficiently and fairly spent in other ways.

Finally, there is the question of what is taxed. The argument over the relative merits of income and expenditure taxation have been well rehearsed in the past. But new issues are emerging too. As businesses become increasingly multi-national and as electronic (Internet-based) commerce expands, it will become easier for firms to evade national taxation by shifting the apparent location of their businesses. This may increase the attractiveness of "unevadable" forms of taxation such as energy and land. Other forms of environmental taxation are already under discussion. There is a good case for the taxation of international currency speculation, which might help dampen volatile money markets.

These are just some of the issues which the Commission on Taxation and Citizenship will be examining over the next year. Taxation is at the heart of the relationship between the citizen and the state, a relationship subject in recent years to a significant loss of trust. The challenge is not just to devise a better tax system, but in the process to help rejuvenate the process of democracy itself.

Raymond Plant (Lord Plant of Highfield) is a Labour peer, Master of St Catherine's College, Oxford and Chair of the Fabian Society's Commission on Taxation and Citizenship.