Getting down to brass and tax

When a tale about cows with regional accents burst on to the Today programme last week, the silly season was clearly in full swing. But while Tony Blair was cavorting in his flowery shorts, the worthy Liberal Democrats were busy with a subject better suited to the depths of winter than the summer lull - tax.

For reasons known only to themselves, the LibDems chose the middle of August to release their proposals for the future of the tax system. These went virtually unnoticed except for a rebuttal from Dawn Primarolo at the Treasury, who said, predictably, that the sums didn't add up.

The plans, worked up by the ultra-sensible Vince Cable and to be discussed at the party's conference next month, are surprisingly radical, slashing a mouth-watering 2p from basic-rate income tax and swiping polluters with £8bn of new green levies.

Even before they were published, it was clear that the tax and spending debate at the next election will be very different from past tired exchanges. ('We're going to cut taxes!'; 'How many nurses are you going to sack?'; Or 'We're going to find extra money by slashing waste!'; 'So are we...').

No one is sure whether there's an upper limit to the tax burden we are willing to bear; but Cable's decision to sidle away from the LibDems' unenviable position as the only party promising a tax rise, coupled with the Treasury's long-term budget projections, showing public spending growing more slowly than GDP over the period of the next spending review, suggests that even politicians on the left think there's probably not much more cash to be squeezed out of the public.

George Osborne, the Tory shadow Chancellor, has already appalled die-hard tax-cutters on his party's right by saying he would put 'economic stability' before tax cuts. With the LibDems' cards on the table, it now looks increasingly likely that all three major parties will go into the next election with a 'revenue neutral' package: they won't change the amount of money the government raises from us, they'll just shuffle the burden about a bit.

It may be a forlorn hope, but the prospect of the three parties facing each other with plans to raise the same amount of cash could spark a more wide-ranging, rational discussion about taxation than Britain's political parties have managed for years. The focus is likely to shift from headline-grabbing promises on income tax rates, to who should pay what, and why. Voters have sent plenty of signals on this one over the years: there's almost nothing more likely to bring Brits on to the streets than taxation - poll tax riots in the Tory years and the fuel duty blockades six years ago spring to mind.

Cable, who has yet to persuade his LibDem colleagues to adopt his plans, will argue for them on grounds of social justice. He points out, for example, that where taxes such as VAT and duty on cigarettes are concerned, the bottom 20 per cent of earners pay a bigger proportion of their earnings in tax than the top 20 per cent (though they receive some of it back in tax credits).

Taxation has long been an impossible subject for straight political debate. Seared in the Labour party's collective memory is the loss of the 1992 general election which, apart from the odd slip-up by Neil Kinnock, was blamed on their fiscal proposals, which the Tories cleverly derided as a 'tax bomb' about to drop on middle Britain.

Labour's supporters still argue about whether the party could have won in 1997 without its dramatic pledge not to increase income tax rates; but the result of that promise (and the decision to repeat it in 2001) has been to sink the party - and to some extent the opposition parties - into a collective neurosis.

That's why, despite making a strong moral and practical case for boosting investment in the health service, which the voters seemed to buy, Gordon Brown was forced to reach for National Insurance contributions, instead of income tax, to find the money (though it did allow him to dip into the pockets of employers at the same time).

Brown has also relied increasingly on 'fiscal drag' - quietly raising tax thresholds more slowly than incomes, so that more people fall across them and into paying higher rates. Labour behave as though they believe that by leaving the main income tax rates alone (and talking about them a lot), they can mesmerise us.

Noises across the political spectrum suggest that won't work much longer. There have been many unusually florid fiscal fantasies over the past 12 months. Osborne has flirted with the right-wing utopian plan of a flat tax, and Cable, too, would like to make tax rates 'flatter', abolishing Brown's 10p starting rate and lifting 2 million people out of paying tax altogether.

Meanwhile, the Tory Bow Group has suggested a 1 per cent tax on properties worth more than £70,000, which it believes would be a fairer way of taxing homes than stamp duty and council tax. And arch-Blairite Stephen Byers has called for the abolition of inheritance tax, which creates controversy well out of proportion to the 6 per cent of estates that pay it. He was slapped down, thank goodness, but it demonstrated an increasing appetite by all three parties to think the unthinkable.

Many of these alternative proposals face formidable practical and political obstacles: most versions of a flat tax imply a large windfall for the rich, unlikely to win much support at the ballot box, for example. But they do help to make a point. As a Chancellor who has frequently used the tax system to create complicated incentives for businesses and families, while shying away from getting to grips with anomalies like council tax, Brown may find it hard to explain the rationale for some of his policies. If the Tories are sly enough to avoid promising tax cuts, and dodge Brown's favourite charge that they would slash public spending, while Cable is busy promising to hand cash back to the poor, the tax battle may be harder fought than for many years.