Steady hands can defuse a bombshell

The mists are clearing. Amid the new Labour rhetoric and the name- calling among economists one big fact stands out from the past few days. Progressive taxation is back. Gordon Brown's proposal to cut taxes for the poorest workers is only the start. Unless the English language is in terminal decline, fair taxes must mean higher taxes for wealthier Britons.

What Labour is trying to do is to win the propaganda war it lost in 1992 before the next election campaign gets going. Last time, Labour's tax plans would have meant most people paying less; but the higher paid would have been hit hard. The Conservatives, however, persuaded the country that most ordinary people would be hit by ''Labour's tax bombshell''.

Shadow Cabinet people tramping round doorsteps were confronted by low- paid or even unemployed voters who were convinced that a Labour government would require higher taxes from them. It shook them rigid. It reminded them of what they ought to have known all along, which is that opinion formers are well paid and voters are mostly innumerate.

So now we have Brown the tax-cutter, the VAT-slasher, the enemy of income tax. This time round, Labour is trying to get the good news in first, to imprint so firmly in people's minds the idea that the poorer will be taxed less that not even the combined might of Conservative Central Office, Maurice Saatchi and the Daily Express will be able to shake it.

Then, and only then, will the infinitely more sensitive issue of higher- rate taxpayers be addressed. But it will be. One piece of unequivocally good news is that Labour has decided it cannot try to hide its plans; Tony Blair's promise to ''say what we mean and mean what we say'' necessitates the great gamble of being honest with the public.

One of the great ironies of Labour's new tax position is that it was made possible by Norman Lamont's last pre-election Budget, in which he wrong-footed the Opposition by introducing a new, low-rate, 20p income tax band. It is this Gordon Brown now wants to halve. Having done so, he would have the bottom steps of a taxation ladder - 10p, 25p and 40p - which would then surely be extended upwards.

Tony Blair has recently promised that there will be no penal taxation for higher earners or entrepreneurs. The Brown team say they are equally against ridiculously high taxes for the rich and poverty traps for the poor. But the money must come from somewhere; and it is pretty clear where. It will come from the sort of people who write, and mostly read, this newspaper.

You can tell a lot about how a party is thinking by watching the statistics which obsess it. The current favourite is the proportion of income that goes in tax for the bottom fifth of families (around 41 per cent) as against the top fifth (34 per cent). Gordon Brown is a Labour moderniser, but he is also the political heir of the staunchly redistributive John Smith. Were that statistic to be the same after five years of his stewardship at the Treasury, I guess that Brown could not live with himself.

The scale of the higher-rate increase will depend on the outcome of a conflict between John Smith's spirit, and failure in 1992, and Tony Blair's presence and ambition for 1997. But that it will be proposed, we should have no doubt.

First, though, Brown is turning to the people at the bottom. The effect of his proposed 10p rate is actually quite simple; it would make work a little more attractive to them. If you are in work and on the main means- tested benefits - family credit, housing benefit and council tax benefit - you are facing a marginal tax rate of 80p in the pound. And in the most extreme cases, 97p.

Astonishing, isn't it? The incentive-sapping, high marginal tax rates that existed under Labour in the Seventies, and which most people in the country assume are long gone, are still around. But, like tuberculosis, only among the poorest workers. Labour wouldn't only have to cut the lowest tax rate to 10p. It would also have to make the ''tapers'', which determine how much benefit people in work get, more generous.

We are not talking about a fiscal revolution. This pounds 6.5bn package would only take the marginal rate for low-paid workers down to around 60-70p in the pound. But it would help. Paul Gregg of the London School of Economics calls the Brown plan ''tax cuts with a conscience ... trying to take the temporary and low-paid jobs generated over the last 15 years and make them a viable vehicle for getting from unemployment into work".

It marks, at least on the surface, a transformation in Labour's attitude to what are sometimes called the hamburger-flipping jobs. Up to now, the mix of trade union-inspired hauteur and angry political derision about the kinds of employment generated in the Eighties and Nineties led old Labour to act as if these jobs were too disgraceful to be included in policy-making - facts that shouldn't be spoken of in polite society.

Now, with this tax proposal and the minimum wage coming in below the unions' preferred figure, new Labour is seeking, instead, to make the most of them. It could signal the beginning of a genuinely new Labour economics, breaking with trade union-dominated attitudes to the labour market and with the present corporatism. But it all depends on how the party dealt with public spending.

An intriguing new pamphlet by Professor Nick Bosanquet of Imperial College, London, published by the Social Market Foundation, argues that the changes to the public sector introduced over the past 15 years may actually lead to higher, not lower, pressures on public spending. Contracting-out and arms'-length agencies may have been intended to lower costs. But Bosanquet argues that they hand more power to big corporations and well-organised interest groups.

He singles out ''the vested interest in rising public expenditure of private contractors undertaking government work ... The nature of government outputs and the official contracting-out process favours large contractors in areas such as defence procurement, road building and capital investment in health and education ... There is a growing divide between large corporations dug into markets where there is often substantial public spending and small firms struggling to innovate.''

However briefly put, these are too-little-recognised truths about what has happened to this country. It has become not an open meritocracy but a land of closed and private deals in which business and politics are too hotly, silently, intertwined. The evidence spills out from those drily censorious reports of the National Audit Office or the Audit Commission.

For Labour, it marks the real challenge. Changing the tax system would only be accepted by the all-important middle classes if they thought the party was genuinely trying to be fair, and was determined to hold down public spending - no special cases, no class of insiders, no group of chums exempt from the general will.

An anti-corporatist party of the left which came into power determined to run its tax and spending policy without reference either to the unions or to the big corporations digging into the rich mine of public expenditure would be in for a rough ride. Tilting the system back to lower-paid people and small businesses would be furiously resisted by the new corporatists of the Nineties.

But by God, it would be worth it.