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Trouble ahead at the Treasury

Unnoticed, the Lib Dems are driving through changes to the structure of personal tax allowances. And

For many politicians, tax cuts are the elixir of politics. In times of plenty they are deployed triumphantly as evidence of a thriving economy; in times of hardship they are handed down by chancellors as a salve to a hard-pressed public. So it should come as no surprise that, even in this parliament - dominated as it has been by arguments about fiscal austerity, tax rises and lower spending - there will be a growing debate about which taxes to cut.

Political gravity will ensure this is the case. As the economy gradually recovers - at the same time as the pain of the deepest and longest wage squeeze in living memory maintains its grip on family bank balances - politicians will be desperate to offer hope of better times ahead. They will know that tax cuts won't solve the structural problem of stagnant wages, nor will they deal with the rising pressures on the cost of living. And there will still be sharply differing views about whether tax cuts for some mean tax rises for others, as opposed to further cuts to spending. But have no doubt: all party leaders will be forced to offer respite to a public whose anger about falling living standards will reach boiling point over the next few years.

So, how will the coming tussle over tax cuts play out? There will be a few early skirmishes following the Budget, which inevitably included a few popular giveaways - such as the cut in fuel duty and support for first-time housebuyers - along with a tax cut for business (and let's not forget that George Osborne has already proved capable of pulling rabbits out of a hat, as with his dramatic promise to raise the inheritance-tax threshold in October 2007 - a move that skewered Labour's plans for an early general election).

Osborne clearly wants to burnish his credentials as a Lawson-like tax reformer as well as a spending cutter, so in the months ahead he'll talk up the radicalism of his long-term ambition to merge National Insurance and income tax. But the challenges involved in this are daunting, and the Conservatives are very unlikely to go into the next election having just raised the basic rate of income tax by 12p, so don't expect this to yield practical policies any time soon.

Indeed, it says something about the topsy-turvy state of today's politics that we need to look first at the Liberal Democrats to understand the shifting politics of tax. It is perhaps the least remarked-upon story in Westminster that the smaller and deeply unpopular coalition partner is driving one of the biggest changes in domestic policy - and in a department it doesn't even control. Not since the days of David Lloyd George have Liberal politicians had such influence over the Treasury's tax policies.

The ambitions of senior Lib Dems are not to be underestimated. Nick Clegg knows what he wants. He has been fighting hard for it internally and he is going to succeed in getting most of it - notably, a £10,000 income tax personal allowance at a total cost of more than £13bn (having already secured a commitment to a rise in the personal allowance from £6,475 to £7,475, increased in the Chancellor's 23 March Budget to £8,105 in April 2012.

Clegg's party has been emboldened by the quiescence of its Conservative partners. That is in part because the £10,000 commitment is a central fact of the coalition agreement, but it has also served the Conservative leadership's purpose to go along with something that deflects irritant calls from Boris Johnson and the Tory right to prioritise the removal of the 50p tax rate for the top 1 per cent of earners - a move that would delight Labour - just as it provides Tory leaders with a ready-made and voter-friendly tax-cutting agenda to talk about.

This context helps explain why senior Liberal Democrats, battered on so many fronts, are more ideologically self-confident than their coalition partners on this naturally Conservative terrain. They are the ones making the political weather on tax. Buoyed by this, they have set about working on what they should be seeking to achieve by 2015; and, more significantly, what their distinct Liberal ambitions for the tax system should be in 2020.

As part of their wider ideological journey, Clegg and those around him view themselves as the authors of a new "fiscal liberalism". This blends the spirit of John Stuart Mill's call for a generous, tax-free allowance sufficient for "life, health and immunity from bodily pain" with the modernising zeal of last year's Mirrlees Review (produced for the Institute for Fiscal Studies), which sets out far-reaching proposals for simplifying the UK tax system.

The priority is to achieve and then surpass the totemic commitment to increasing tax-free allowances. Don't be surprised when Liberal Democrat outriders call for a detailed plan for securing the £10,000 allowance in this parliament and £15,000 in the next.

The belief is that a "liberal tax system" should protect a greater chunk of individual earnings from the state, a sharp contrast with the social-democratic view that support for families, funded through progressive income taxes and tax credits, is the beating heart of a fair tax system. Nor do the Lib Dems' ambitions end here. Clegg is likely to push for further increases in green taxes - putting him on a direct collision course with Conservative backbenchers who want big cuts to fuel duty - and for raising more revenue from "unearned income".

Footloose families

One of the great political advantages of having a single, emblematic tax policy is that, in contrast to many of the tax changes of the Blair/Brown years, it is an easy thing to communicate. Quite simply, people are likely to get it. So where's the rub? The hard truth that Clegg and his team have largely sidestepped is that the simplicity of the allowance policy comes at a sig­nificant price: the distributional effects of the strategy are distinctly odd. Some high-income households (often with no children) gain quite a lot each time the allowance is raised, while many middle-income families with children gain nothing and, indeed, are set to lose a great deal (see chart 1), and the very poorest, who don't pay tax, won't get a penny.

This is not an accident: it is a direct result of tax cuts based on individual rather than household income. Further, because this year's increased tax allowance will be linked to a reduction in the income level at which the 40p tax rate kicks in, an extra 700,000 higher-rate taxpayers will be created in April.

For now, Clegg will shrug off these charges with the broad-brush argument that individual beneficiaries are overwhelmingly basic-rate taxpayers. He will not be so relaxed if a popular sentiment emerges that his prized tax strategy offers little to precisely those working (and politically footloose) middle-income families that hold the key to the next election.

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All of this gives the Labour leadership plenty to reflect on. Apart from airing its internal travails over the 50p rate, and Ed Balls's recent call for fuel to be exempt from the January VAT increase, Labour has said remarkably little about tax. Many on the political right, together with much of the media class - and some former New Labour figures - have already written off Miliband and Balls as big-state high taxers with no "feel" for the concern of people striving to get on in life, nor the discipline to rein in a party hard-wired to tax and spend. That is likely to be a serious misjudgement.

It was Balls and Miliband who came of age masterminding the commitment to stick to Tory spending plans, and showed the steel necessary to peg Labour to pre-1997 basic and top rates of tax. You don't go through that experience in your late twenties only to forget it in your early forties.

Recently Miliband has said that he supports "genuine" tax relief for low-to-middle-income earners but won't back a "tax con" in which a personal allowance giveaway is funded out of a hike in VAT. For now, that is a reasonable position: many low-to-middle-income earners will be worse off once increased allowances and VAT are taken into account; painfully so, once cuts to tax credits are factored in. But stick to this position for too long, and Labour will be badly exposed. Few expect the recent increase in VAT to be reversed come the next election. As chart 2 shows (below), the VAT rate has long been converging on the basic rate of income tax - Labour in power tends not to cut Conservative increases to VAT, whatever it says in opposition. Nor is there much prospect of it reversing the coalition's increased tax allowances and, in doing so, dragging many modest earners back into the tax system.

So, the risk is that Miliband ends up entering an election in 2015 saying little more than: "I now realise that I agree with Nick." Labour strategists with the ear of the leader are well aware of this conundrum and are starting to work out how to respond.

Their belief is that the coalition has made a big mistake in focusing so much of the pain of cuts on working families with children, and above all women. But they are also acutely aware that to make targeted tax cuts, at the same time as they rebuild their reputation for fiscal credibility, will be no mean feat.

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Miliband's team is heartened by private polling that it has seen on how the Obama 2008 campaign managed to break out of the Republican tax trap. With targeted tax cuts for the middle classes, the Democrats were able to change the framing question from whether each party was "for or against tax cuts" (the Democrats typically being "against") to "who do you want tax cuts for?". That freed Barack Obama to outpoll John McCain as a tax cutter for "middle-class America" at the same time as he won widespread support for tax rises for the richest 2 per cent. Labour thinks there are lessons to be learned.

Return of the 10p rate

So what are the likely directions for the different parties? No one should mistake the Conservatives' current focus on measures to boost growth with what is likely to become their agenda as we get closer to 2015. It is almost inconceivable that Osborne won't build up a formidable war chest over the next few years to fund a major commitment to cut the tax burden on families, as well as abolish the 50p rate, should the Tories win the election.

The Lib Dems have the immediate political task of reaping some popular reward for this April's increased tax allowances, and a deeper challenge - perhaps an insurmountable one - in making their strategy more appealing to middle-income families with children. One option would be to attempt to persuade the Treasury to build a child allowance into the tax system for basic-rate payers. But, apart from difficult questions about the administrative feasibility, this would ignite a huge row with the Tories, who still want to introduce a married couple's allowance. Even more significantly, senior Lib Dem strategists whisper that, in the longer term, they may need to open up a debate about moving from independent taxation to a system based on household income - as was the case before 1988. The implications of this should not go unmissed: any public contemplation of ditching one of the proudest achievements of modern feminism in the name of liberal tax reform would be explosive.

And Labour? It will try to home in on the electoral sweet spot - modest- and middle-income families with children, on a household income of between roughly £25,000 and £50,000. Less clear is what it wants to offer this group. There is already scepticism in senior circles about whether it would be enough merely to reverse some of the coalition's cuts to tax credits; a fundamental rethink is needed. This would involve looking at benefits as well as taxes and grappling with thorny problems such as child benefit - something not lost on Labour strategists, who are quick to point out that "we never said all aspects of universalism are sacrosanct".

The idea would be to create a simpler way for the tax and benefit system to support modest-income families that are going to lose from cuts to tax credits, as well as middle-income families that are going to be hit by the axing of their child benefit. At the same time, Labour will have to act to support the very lowest-paid. An intriguing option here, which would also help make peace with Labour's recent past, would be to consider a reduced tax rate for the lowest earners: might we see the return of the 10p rate?

The cost of cuts

Above all, Labour will have to balance intense and contradictory pressures for tax cuts, targeted increases in spending and the rebuilding of its fiscal credibility. Harder still, any new tax cuts will be expensive. Given the size of low-to-middle-income Britain, a few billion pounds won't stretch far; a meaningful cut is likely to cost over £10bn. In view of the fiscal outlook, Labour strategists realise that they will have to raise taxes for some in order to cut for others - as do those Lib Dems who accept that, by the next election, public spending will need to recover with growth rather than be cut further.

When it comes to income tax, there is very little room for manoeuvre. The 40p rate already kicks in at a relatively low and falling level, and there is no support for raising the 50p rate. A further increase in VAT is out of the question. This suggests the need for new ways of raising revenue from wealth and high-value housing. Expect to hear squeals in response to a Labour version of a "mansion tax", a continued push on bankers' bonuses, further savings on pension-tax relief for the highest earners and new ideas for raising money from capital gains and inheritance. Generating income from these sources will be a stiff test of Labour's resolve: the party will face bitter opposition.

In the years ahead, however, the crisis of living standards will lead to something rather like a primal scream from low-to-middle-income households, demanding relief as they become even more resentful of growing wealth at the top. The politics of taxing affluence in 2015 won't be the same as they were in 2010, never mind 1997: on this matter, the past doesn't provide a guide to the future. As Obama showed in 2008, it is possible to forge a common set of interests between low- and middle-income earners and a narrative on tax that speaks to the extraordinary times in which we are living.

Gavin Kelly is chief executive of the Resolution Foundation

Gavin Kelly is a former adviser to Downing Street and the Treasury. He tweets @GavinJKelly1.

This article first appeared in the 28 March 2011 issue of the New Statesman, Why Libya? Why now?

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The love affairs of Stan Laurel: "If I had to do it over again things would be different"

A romantic who craved stability, the English comedian Stan Laurel led a Hollywood love life as chaotic as his films’ plots

The comedian Stan Laurel was, even by the standards of his time, a prodigious correspondent. The Stan Laurel Correspondence Archive Project contains more than 1,500 artefacts, and these are only the documents that have so far been traced, as many of his early missives appear to have been lost. He was, quite literally, a man of letters.

His punctiliousness about correspondence can be ascribed, at least in part, to his natural good manners, but letters were also a means of filling his long retirement. He outlived his screen partner Oliver Hardy – “Babe” to his friends – by almost eight years but refused all offers of work during that time. Instead, heartbreakingly, he wrote sketches and routines for the duo that would never be performed. It was, perhaps, a way for Laurel to speak with Babe again, if only in his head, until he followed him into the dark on 23 February 1965.

Though Laurel and Hardy have never been forgotten, they are currently undergoing an energetic revival. Stan and Ollie, a film dramatisation of their later years, starring Steve Coogan as Stan Laurel and John C Reilly as Oliver Hardy, is scheduled for release in 2018. Talking Pictures TV is to start showing the duo’s long features from September. Sixty years since Oliver Hardy’s death on 7 August 1957, the duo will soon be rediscovered by a new generation.

They were such different men and such unlikely partners. Laurel was born Arthur Stanley Jefferson in 1890, in Ulverston, then part of Lancashire, the son of AJ, a theatre manager, and Margaret, an actress. He made his stage debut at the age of 16 and never again considered an alternative profession, eventually leaving for the United States to act on the vaudeville circuit before finally ending up in the nascent Hollywood. Norvell Hardy, meanwhile, came from Harlem, Georgia, the son of a slave overseer who died in the year of his son’s birth, 1892, and whose first name, Oliver, Norvell took as his own.

Hardy, who had worked as a singer and as a projectionist, became a jobbing actor, often being cast as the “heavy”because of his bulk. Laurel, by contrast, was groomed for stardom, but it repeatedly slipped through his fingers. Unlike Chaplin’s Tramp, or the boater-and-glasses-wearing Harold Lloyd, he had no persona. Only when Hal Roach paired him with Hardy did he finally find a mask that fitted, and thus a professional marriage slowly grew into a friendship that would endure until Babe’s death.

Laurel was the creative engine of the partnership, creating storylines and gags, intimately involving himself in the directing and editing of each film, but Hardy was the better, subtler actor. Laurel was a creature of the stage, trained to act for the back rows; Hardy, by contrast, had watched countless films from his projectionist’s perch and knew that the smallest of gestures – the raising of an eyebrow, a glance flicked in the audience’s direction – would be writ large on the screen. Laurel recognised this and tailored his scripts to his partner’s strengths.

Thus – and unusually for such partnerships – they never argued with each other about either screen time or money, despite the notorious parsimony of their producer Hal Roach, who paid them what he could get away with and would not let them negotiate their contracts together in order to weaken their bargaining position. Indeed, apart from one contretemps about the degree of dishevelment permitted to Babe’s hair, it seems that Laurel and Hardy never argued very much at all.

And then Babe died, leaving his partner bereft. What was a man to do but remember and write? So Laurel, always a prodigious correspondent, spent much of his retirement communicating with friends and fans by post. It helped that he had a curious and abiding affection for stationery. During one of the many interviews he conducted with John McCabe, his first serious biographer, Laurel revealed a wish to own a stationery store. Even he didn’t seem sure exactly why, but he admitted that he was quite content to while away entire afternoons in examining grades of paper.

Since letters were Laurel’s primary source of contact with the world, much of his writing is quite mundane. He deals with repeated inquiries about the state of his health – “I’m now feeling pretty good,” he informs a Scottish fan called Peter Elrick on 8 June 1960. “I suffered a slight stroke in ’55, fortunately I made a good recovery & am able to get around quite well again, of course I shall never be in a condition to work any more.” He notes the passing of actors he has known (to Jimmy Wiseman on 29 January 1959: “That was a terrible thing about [Carl] ‘Alfalfa’ Switzer wasn’t it? All over a few dollars’ debt he had to lose his life. I knew him very well as a kid in Our Gang films…”), answers queries about his films and his late partner (to Richard Handova on 21 March 1964: “Regarding the tattoo on Mr Hardy’s right arm – yes, that was an actual marking made when he was a kid – he always regretted having this done”) and often writes simply for the pleasure of having written, thus using up some stationery and enabling him to shop for more (“Just a few more stamps – hope you’re feeling well – nothing much to tell you, everything is as usual here,” represents the entirety of a letter to Irene Heffernan on 10 March 1964).

In researching my novel about Stan Laurel, I read a lot of his correspondence. I had to stop after a while, because the archive can overwhelm one with detail. For example, I might have found a way to include Oliver Hardy’s tattoo, which I didn’t know about until I read the letter just now. But of all the Laurel letters that I have read, one in particular stands out. It was written to his second wife, Ruth, on 1 July 1937, as their relationship was disintegrating. It is so striking that I quote it here in its entirety:

Dear Ruth,

When Lois divorced me it unbalanced me mentally & I made up my mind that I couldn’t be happy any more. I met & married you in that frame of mind, & the longer it went on, the stronger it became. That’s why I left you with the insane idea Lois would take me back.

After I left you, I found out definitely that she wouldn’t. I then realised the terrible mistake I had made & was too proud to admit it, so then I tried to find a new interest to forget it all, & truthfully Ruth I never have. I have drank just to keep up my spirits & I know I can’t last doing that, & am straining every effort to get back to normal.

You’ve been swell through it all, except the few rash things you did. I don’t blame you for not being in love with me, but my state of mind overrules my true feeling. If I had to do it over again things would be a lot different, but not in this town or this business. My marital happiness means more than all the millions.

Why has this letter stayed with me? I think it’s because of the penultimate sentence: “If I had to do it over again things would be a lot different, but not in this town or this business.” Hollywood brought Laurel a career, acclaim and a personal and professional relationship by which he came to be defined, but all at a price.

Stan Laurel was a complicated man, and complicated men lead complicated lives. In Laurel’s case, many of these complexities related to women. His comic performances and lack of vanity on screen often disguise his handsomeness, and monochrome film cannot communicate the blueness of his eyes. Women fell for him, and fell hard. He amassed more ex-wives than is wise for any gentleman (three in total, one of whom, Ruth, he married twice), to which number may be added a common-law wife and at least one long-standing mistress.

Had Laurel remained in Britain, serving an apprenticeship to his father before assuming control of one of the family’s theatres, women might not have been such a temptation for him. At the very least, he would have been constrained by a combination of finances and anonymity. Instead, he left for the United States and changed his name. In 1917, he met Mae Dahlberg, an older Australian actress who claimed to be a widow, despite the existence elsewhere of a husband who was very much alive and well. Laurel and Mae worked the vaudeville circuit together and shared a bed, but Mae – who lacked the talent to match her ambition – was eventually paid to disappear, as much to facilitate Laurel’s wedding to a younger, prettier actress named Lois Neilson as to ensure the furtherance of his career.

Yet it wasn’t long into this marriage before Laurel commenced an affair with the French actress Alyce Ardell, one that would persist for two decades, spanning three further nuptials. Ardell was Laurel’s pressure valve: as marriage after marriage fell apart, he would turn to her, although he seemed unwilling, or unable, to connect this adultery with the disintegration of his formal relationships.

The end of his first marriage was not the result of Laurel’s unfaithfulness alone. His second child with Lois, whom they named Stanley, died in May 1930 after just nine days of life. For a relationship that was already in trouble, it may have represented the final, fatal blow. Nevertheless, he always regretted leaving Lois. “I don’t think I could ever love again like I loved Lois,” he writes to Ruth on Christmas Eve in 1936. “I tried to get over it, but I can’t. I’m unhappy even after all you’ve done to try to make me happy, so why chase rainbows?”

But chasing rainbows was Stan Laurel’s default mode. He admitted advertising his intention to marry Ruth in the hope that Lois might take him back. Even after he and Ruth wed for the first time, he wrote letters to Lois seeking reconciliation. It set a pattern for the years to come: dissatisfaction in marriage; a retreat to Alyce Ardell’s bed; divorce; another marriage, including a year-long involvement with a notorious Russian gold-digger named Vera Ivanova Shuvalova, known by her stage name of Illiana (in the course of which Laurel, under the influence of alcohol, dug a hole in his garden with the stated intention of burying her in it), and finally contentment with another Russian, a widow named Ida Kitaeva Raphael, that lasted until his death.

These marital tribulations unfolded in full view of the media, with humiliating details laid bare. In 1946, he was forced to reveal in open court that alimony and child support payments left him with just $200 at the end of every month, and he had only $2,000 left in his bank account. In the course of divorce proceedings involving Illiana, his two previous wives were also briefly in attendance, leading the press to dub Lois, Ruth and Illiana “triple-threat husband hazards”. It might have been more accurate to term Stan Laurel a wife hazard, but despite all his failings, Lois and Ruth, at least, remained hugely fond of him.

“When he has something, he doesn’t want it,” Ruth told a Californian court in 1946, during their second set of divorce proceedings, “but when he hasn’t got it, he wants it. But he’s still a swell fellow.”

Laurel’s weakness was women, but he was not promiscuous. I think it is possible that he was always looking for a structure to his existence and believed that contentment in marriage might provide it, but his comedy was predicated on a conviction that all things tended towards chaos, in art as in life.

Thanks to the perfect complement of Oliver Hardy, Laurel was perhaps the greatest screen comedian of his generation – greater even than Chaplin, I would argue, because there is a purity to Laurel’s work that is lacking in Chaplin’s. Chaplin – to whom Laurel once acted as an understudy and with whom he stayed in contact over the years – wanted to be recognised as a great artist and succeeded, but at the cost of becoming less and less funny, of leaving the comedian behind. Stan Laurel sought only to make his audience laugh, and out of that ambition he created his art.

“he: A Novel” by John Connolly is published by Hodder & Stoughton on 24 August

This article first appeared in the 28 March 2011 issue of the New Statesman, Why Libya? Why now?