Analysing the tax battle

By BBC News Online's Steve Schifferes

The main political parties begin the third week of campaigning still trading insults over taxation and spending.

And the first News Online 1000 poll during the election campaign shows that Labour and the Tories are running neck-and-neck on the tax issue, with 31% saying Labour have the best polices, compared to 30% for the Tories.

The rhetoric is heated, but the sums involved are in fact relatively small as are the differences between the main parties.

Labour says the Conservatives intend to make massive cuts in public services to fund tax cuts.

The Conservatives say that Labour's "secret agenda" involves huge tax rises hitting the middle class to fund further public spending increases.

And the Liberal Democrats want to increase public spending by raising taxes.

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Small differences - large claims

The difference in the tax and spending plans between the three parties (£8bbn) is less than 2% of the total government budget, or 1% of the whole economy.

But by heightening the differences, each party seeks to play to its strengths and weaken its rivals.

On Tuesday, Michael Portillo accused Labour of planning a "50% tax rate" for the middle class by abolishing the upper limit to National Insurance payments, currently £29,900 per year.

He claimed that millions of middle class earners stood to pay £800 a year more in tax.

Meanwhile Labour has published its "Tory Boom and Bust Cuts Manifesto" subtitled "Why their sums just don't add up," claiming the Tories were now planning to cut spending by £26bn and put economic stability at risk.

National insurance row

Labour is determined not to repeat its pledge in the 1997 general election not to raise National Insurance payments.

Gordon Brown refused to be drawn on his party's further pledges on tax while pointing out that he had taken one million people out of the National Insurance system.

Labour tax plans (according to the Tories)

Petrol duties: £10bn

Higher NI: £2bn-£4bn

Higher rate and self-employed taxes: £1bn

The Tories argue that National Insurance, payable at a 10% rate, is income tax by another name - and could become Labour's biggest stealth tax.

Raising it would mean Labour had abandoned its pledge to keep the basic and upper rate of income tax unchanged, they claim.

The Tory charges were given some credibility by the fact that Labour has already started to raise the NI upper limit by more than inflation.

And it repeats similar Tory charges that there is a "Labour tax bombshell" that formed an effective part of their 1992 election campaign.

The Tories already have targeted their planned tax cuts at higher earners (who make up 10% of voters) and those in the middle class who seek to join them - and want to paint Labour as the party that taxes those with such aspirations.

They say they have an "aspiration" of taking 500,000 people out of the higher rate tax, raising the threshold by £2,500, at a cost of around £1.2bn.

Double counting

Some of the Conservative claims don't stand up to close scrutiny.

Last week, the Conservatives claimed that if Labour increased spending by 3.8% per year in the last two years of the next Parliament, petrol would rise to £6 per gallon.

However, this figure is based on the assumption that all the supposed £10bn in extra spending would be funded by tax on petrol.

Now, by adding in the supposed increases in National Insurance, the Tories appear to be suggesting that Labour's spending ambitions might be even higher.

Many tax experts do suggest that Labour might seek to raise money by abolishing a National Insurance anomaly - but that might only raise £1.1bn.

However, Labour has rejected claims it will need to raise any more taxes beyond 2003-04 when current spending plans run out, saying it will wait to decide on how to fund further public sector growth.

Conservative 'black hole'

Labour claims that the Conservatives plan to make further tax cuts throughout the next parliament.

But the Conservatives deny that there are any such plans, despite last week's Financial Times interview with Tory Treasury spokesman, Oliver Letwin.

Tory taxes (according to Labour)

Real cost of admitted plans:£10bn

Later tax cuts: £4bn

Pension privatisation: £6bn

Extra spending: £6bn

Labour hopes that by highlighting the opposition party's inability to fund its tax cuts, the ruling party's economic competence will become clear.

Labour says the supposed Tory "black hole" to £26bn, up from £20bn last week. This takes into account Tory "aspirations" as well as their announced plans for tax cuts.

However, the Tories say the gap is only £8bn and can be funded by spending cuts.

However, Labour says this £8bn should really be £10bn. It also adds an estimated £4bn for further planned tax cuts, £6bn for Tory pension aspirations and £6bn in new spending commitments.

In effect, both parties claim the other one has a black hole in their future finances.

But the language in which the debate is couched highlights how much both parties have changed since the last election.

Labour, instead of damning the effect of Tory cuts on public services, instead stresses what bad economic sense it makes.

The Tories try to paint Labour as the tax and spend party of old while claiming to be the true tax cutting party. In reality, their strategy of targeted tax cuts is very close to that adopted by Labour.