Why the rich should now be made to pay

The architect of Tony Blair's 'third way' outlines 16 steps to a fairer Britain

Britain remains a society with too many inequalities, too many barriers to opportunity for those at the bottom. "Not enough redistribution!" say some. If only things were so simple. Redistribution there must be, but much more besides.

Average income in the UK has grown substantially since 1997 - 2.4 per cent a year to the end of 2005. London has had the highest rises. However, if differences in house prices are taken into account, there is far less variation between London and other areas in spending power. There has actually been considerable redistribution towards pensioners (a term I dislike), single parents and children. The proportion of older people living in poverty is smaller than the average for the population as a whole. In 1997 there were 13.8 million people living in poverty, as measured after housing costs, or 10.2 million before housing costs; these figures have fallen to 11.4 million and 9.2 million. A fifth of the population now lives below the poverty line (60 per cent of median income), compared to almost a quarter in 1997.

The government failed to meet its declared target of reducing child poverty by a quarter by the end of the financial year 2005. Although 700,000 children were lifted out of poverty, reducing the overall number to its lowest since the late 1980s, this figure was still 300,000 short of the target set.

Ministers pledged in 1998 that child poverty would be halved by 2011. If present polices are maintained, however, the level will not differ much from now on. Like other forms of poverty in Britain, child poverty is a relative measure. The government's target of "eliminating" child poverty by 2020 has not yet been clearly defined. Three countries in Europe have managed to achieve child poverty rates of just 5 per cent - Denmark, Norway and Finland - which is about as close as anyone could ever get. Yet even achieving a rate of less than 10 per cent would represent considerable success for British society. A significant change in policy is required, now, if the 2020 target is to be met.

Those on the old left seem to think it easy to reduce inequality: you take money from the rich and give it to the poor. Yet the rich, however defined, are a tiny minority. If they are to be taxed more, it should be for reasons other than just a little more redistribution, otherwise it would do virtually nothing to alleviate the structural problems that make the UK so unequal. Here are 16 policy areas that could make a difference.

1 Make reducing child poverty a driving force, as just mentioned.

2 Conventional redistributive mechanisms should stay in place, but they should be adjusted. Congestion charging and parking charges in cities, for instance, can be designed to have a progressive content - many poorer people do not own a car; the proceeds can be channelled into improving public transport; drivers of larger cars can be made to pay more.

3 Active labour-market policy (the New Deal and welfare-to-work) is important in reducing the disruptive effects of job loss. But because of rising levels of technological change and international competition, we need to explore policies that will help workers even before jobs start to be lost. The present policies are like throwing people into a pool to see if they can swim and helping them only once it is clear they can't. Far better to prepare them. The possibilities include using vouchers for in-work training for those in vulnerable industries, as part of an agreement to accept lower wages for a period. Such schemes, usually involving employers, unions and the government, are already being pioneered in some European countries. In Austria, work foundations have been set up to provide a network of resources for workers who become redundant. Where a company is forced to lay off large numbers of workers, those who stay in their jobs make a contribution as a gesture of solidarity. The company makes a larger overall donation. Those who lose their jobs contribute half their redundancy payments. The state also provides support for retraining and job search.

Helping hand

4 We should start to think of employment or wage insurance. Two-thirds of workers who lose their jobs earn lower wages when they find new work. Wage insurance would replace a substantial proportion of lost earnings for up to two years. A pilot version exists in the US. Under the programme, workers have to show that they lost their jobs as a result of trade competition, be over the age of 50, make less than $50,000 in a new job, and be re-employed within six months of being made redundant.

5 On average, older people in Britain have become better-off since 1997, but 17 per cent still live below the poverty line. We should aim to get to 60:60 - 60 per cent or more of those over the age of 60 in work, in full-time or part-time jobs.

6 People who live in embedded poverty may have few skills, have problems with drugs, fall into a life of crime and find it hard to sustain lasting relationships. The experience since 1997 shows that policies based on benefits or tax credits have little impact, partly because of low levels of take-up. An important approach is intervention targeted at the very young. Research shows that, at the age of two or three, children can establish behaviour patterns that are very difficult to break. Another factor is housing. About 50,000 people nationally, who might otherwise be on the streets, live in hostels or temporary accommodation, but these people cannot find more permanent homes. There are also large numbers of "hidden homeless", who are sleeping on the floors of friends or family members. The government has invested millions in repairing existing council houses, but more social housing is the only feasible solution for those at the bottom.

7 Research shows that even owning a small amount of capital can make an important difference in life. People who own assets at the age of 23 generally earn more ten years later than those without them, even when income, class and gender are taken out of the equation. The government's Child Trust Fund pays £250 to every child at birth. Children from poorer backgrounds get double that sum. The fund is topped up when the child is seven; again, there is more money for poorer children. The child cannot touch the money - nor can the parents - before he or she reaches 18. Surveys show that poorer parents appreciate this scheme.

8 Poverty is an endemic condition for some, but there is also far more movement in and out of poverty than we used to think. We should recognise that much poverty is biographical. People fall into poverty through specific life events and episodes, such as divorce or the break-up of a relationship, leaving the parental home, illness or, of course, losing a job. It follows that we should not concentrate policy solely on those who are poor at any one time, but upon those just above the poverty line.

9 The relationship between work and non-work has grown more complex. We should think of policy more in terms of the lifespan, rather than the here and now. This means seeing employment differently from the way we did in the past - as a temporary state or an expression of long-term employability. A guiding ideal, for both sexes, might be a 30-hour working week over the entire career of the in dividual, with various interruptions or career breaks and allowance for part-time work.

10 The Women and Work Commission found that the gap between the pay of men and women working full-time in 2005 was 17 per cent in hourly pay rates. Although this has closed somewhat, there are several reasons why women still tend to lose out, all of which could be eased by policy intervention.

11 Two-thirds of those claiming Pension Credit are women. At the moment, 85 per cent of men are entitled on retirement to a full basic state pension, compared to 30 per cent of women; only 24 per cent of women have that entitlement on the basis of their own contributions. The government has introduced a new contributory principle, but it will not do much to help in the immediate future. The pension system, moreover, remains extraordinarily complex.

12 Lifestyle changes are starting to influence inequalities a great deal - not just reflect them - especially in health. The remedies here will have to be behavioural rather than simply economic. It has been found, for example, that improving the diet of children with special needs, and combining this with exercise, significantly improves their attitudes and attainment.

13 Giving an effective choice of school to parents from poorer backgrounds must be backed by further policy strategies. One indicator of underprivilege is entitlement to free school meals. Just 3 per cent of pupils at the best-performing state schools fall into this category - showing the extent of "middle-class capture", but also that the pre-existing system was not fair. The average nationally is 17 per cent. The government has made some innovations to try to reverse this. The new school code suggests introducing a lottery-type admission system, to stop parents gaining admission for their children by buying houses nearby. Some city academies already operate random allocation policies, ensuring that certain children from poor backgrounds get a place. The new code is mandatory and will cover anyone applying to state schools in 2008, but other policies must be explored.

14 Labour has largely left private schools alone. Gordon Brown says he wants to increase spending on state schools to the level of private ones. That is a laudable intention, but it can't be realised overnight. Some effort has been made to oblige private schools to show social responsibility. In the UK, the private system is explicitly geared to providing advantages for the sons and daughters of those already advantaged. And it works: 48 per cent of students at Cambridge attended a private school, and 45 per cent of those at Oxford, although only 7 per cent of the population as a whole is educated at such schools. The government has been reluctant to support the scheme pioneered by the philanthropist Peter Lampl, but it should show more interest. The Belvedere School in Liverpool is private. Lampl has given funds to help it operate blind-needs admission. Anyone who qualifies for entry is guaranteed a place, regardless of financial circumstances. The scheme has been a remarkable success, with children from a wide range of backgrounds represented at the Belvedere.

15 Universities could look at a scheme originally introduced, somewhat surprisingly, in Texas, and now taken up in France. In 1997 the state of Texas introduced a policy whereby all students graduating in the top 10 per cent of their class in high school are guaranteed university entrance. As a result, the proportion of students from poorer backgrounds and minorities has grown steadily. Evidence so far shows that students admitted in this way perform as well academically as those accepted in the usual fashion. It is easier to apply the idea in France than in the UK, because of the centralised nature of French higher education. Yet either the government, or universities themselves, could agree to pilot a similar scheme in a city or region.

16 Finally, what about the rich? What about the way corporate leaders' salaries have been pulling away from those of their employees? What about the City high-flyers making millions in salaries and bonuses? Should Labour, as Peter Mandelson once remarked, be "relaxed about people getting filthy rich"? No!

Assets for a few

Labour can no longer be against entrepreneurs, the driving forces of economic success. But becoming wealthy should carry with it social obligations, such as to give something back to society, to pay tax in full, and to encourage social and environmental responsibility within companies. For several decades after the Second World War, the ratio of top executives' earnings to average income was stable. In the 1980s, it began to accelerate away and has not stopped since.

There is no official richness line in the same way as there is a poverty line. Let's say arbitrarily that "the rich" are the top 0.05 per cent. Labour should consider introducing a wealth tax of the kind found in some other countries. Wealth is more unequally distributed than income, with a high concentration in the hands of a few. The economist Edward Wolff has suggested for the United States a system based on the Swiss model. Assets would be taxed annually, according to a steeply progressive scale. Those with assets under a specific threshold would not pay, with steeper rates cutting in at, say, £1m in assets. This system would generate about 1 per cent of total revenue - more than would be achieved in the UK if income tax were raised to 50 per cent for people earning more than £100,000. It would be easy to administer, Wolff says, because it could be fully integrated with personal income tax.

The proceeds of such a tax, if implemented here, should not go into the Treasury coffers, but be devoted to a specific purpose - for example, helping children from underprivileged backgrounds get into higher education. Those contributing substantial sums to charity could be absolved from the tax.

Reducing tax evasion and getting rid of the loopholes that make widespread tax avoidance possible should be priorities - as far as possible on an international as well as a national level. The Conservatives have talked about abolishing inheritance tax, but the strategy should be to make it more progressive. At present only 6 per cent of inherited wealth is taken in tax. A steeper rate at the top (in addition, again, to keeping control of loopholes) would be fairer and would generate more revenue (the Budget made some changes in this direction).

Philanthropy is clearly one of the main responsibilities of high earners, because they should give back to the society that has helped them realise their opportunities. In the US, top earners in effect pay a voluntary tax on their earnings, and large numbers accept the obligation. Some prominent figures have given away virtually their whole fortune, especially towards the end of their lives. There is not the same culture of philanthropy in this country, and despite the introduction of tax incentives, there is not yet the same level of tax breaks.

In October, top managers at Siemens in Germany were awarded a pay rise of 30 per cent. The company was in the middle of restructuring, and many workers stood to lose their jobs. Most of the workforce had already accepted pay cuts through agreements that reduced their hours of work. Faced with an uproar, the executives announced that they would donate their pay rises to help workers in a subsidiary whose jobs were threatened. In Britain, the management might have been praised for keeping the company on an even keel in the face of overseas competition. Our business culture needs to change.

"We must show that . . . we will be a party that is for working people, not rich and powerful vested interests." Who said this? Not Tony Blair, not Gordon Brown, but David Cameron. Labour should take note.

Anthony Giddens's new book, "Over to You, Mr Brown: how Labour can win again", is published by Polity (£9.99, paperback)