Here comes tax-man

You are a nurse. You've done well in your career and have been given 'consultant' status. You earn £33,940 a year. It's not that much in today's world, what with the huge mortgage, the car in the drive, the money to hire a private tutor to help the children pass the latest school tests.

You pay £8,800 a year in income tax and National Insurance contributions. About 15 per cent goes to the health service, 13 per cent to education and 2.5 per cent to transport. Paying interest on the country's national debt cost you £528 a year. The administration of government costs 10 per cent of your taxes, nearly £900. On Wednesday you will be told to pay more.

You are a police sergeant. You are about to be promoted to police inspector and move outside London. Your new salary will be £35,034 a year. You pay £9,134 a year in tax. On Wednesday you will be told to pay more.

You are a divisional fire officer. You earn £32,874. The last time you looked at your tax bill it said that you were paying £8,566 a year in tax, or nearly £164 a week. On Wednesday Gordon Brown, the Chancellor of the Exchequer, is likely to tell you that your tax bill will increase by more than £400 a year if, as expected, he increases national insurance contributions. Happy?

This is middle-income Britain. The type of people Tony Blair needs if he is to maintain the support of the country. This week their patience will be tested.

The Government is nervous. In three days Brown will make one of the most significant breaks with New Labour orthodoxy for a decade when he announces that, in order to fund a better health service, taxes will have to rise.

It will bring to an end 20 years of political practice - you cannot win public support by pledging to increase the amount people pay in tax. Labour learnt the lesson the hard way - four election defeats in a row. If you cannot be trusted on tax, then you cannot be trusted to run the country.

Since 1997, Tax Freedom Day, the day calculated by economists to be the notional day of the calendar year that you stop paying all taxes and start 'working for yourself' has got later and later. In 1997 it was 27 May, rising to 10 June in 2001 - meaning just over 41 per cent of income on average is spent on taxes. Even in the supposed high 'tax and spend' era of the Seventies the date was 23 May. In the United States it is 27 April and falling.

Whether the Treasury will want to raise an extra £5 billion a year, or £7bn, has been the subject of frenzied speculation. Labour has attempted to soften the public mood before Budget day on Wednesday with nods and winks, official briefings and semi-official leaks. Will the health service really get £18bn of extra funding over the next three years?

To the voter such figures are large - and largely meaningless. Government strategists know that there are only two questions the public want the answers to: by how much will my taxes rise? And when I go to the local hospital, will I have to lie on a trolley for nine hours?

'This is going to be bloody difficult,' said an official from one of the key spending departments. 'There is a concern that we haven't made the case for raising taxes because people think that public services aren't good enough and that throwing more money at them won't make them work.'

Senior figures have started talking about the new 'tax trap', and are worrying that it may derail the longer-term Labour programme. Brown's favoured form of raising more revenue is by increasing National Insurance contributions. At the moment people pay NI on the first £29,900 of their salary, the 'ceiling'. In the past two Budgets, Brown has raised that ceiling by 7 per cent and 7.5 per cent respectively, well above the rate of inflation.

On Wednesday that ceiling is likely to be raised again - or even abolished altogether. Informed sources said that a ceiling of £34,500 is being actively considered by the Treasury, meaning the greatest burden of new taxes will be felt by those earning up to that figure: a consultant nurse, a police inspector living outside London, a divisional fire officer. An increase would mean someone on a salary of £35,000 a year would pay an extra £415 a year in tax.

These are Middle Britain people, New Labour voters, Tony Blair's fabled 'Mondeo man'. They will pay as much extra tax as Philip Watts, the chairman of Shell, who, it was revealed last week, earns that kind of money in a couple of weeks. This is a risky business.

These are just the people who feel most negative about tax increases. The Social Attitudes Survey published at the end of last year revealed that people agreeing with the statement that taxes should rise to pay for health had fallen from 59 per cent in 1996 to 50 per cent in 2000.

'Research on public attitudes [to tax] shows that the public feels deeply disconnected from the tax system,' said Michael Jacobs, general secretary of the left-of-centre Fabian Society. 'People are uncertain about where their taxes go, fearing the Government does not spend the money and cynical about politicians' honesty in talking about it. Surveys suggest that public support for tax rises has actually fallen over the last year.'

Jacobs is in close contact with Downing Street and the Treasury about how to make tax more 'palatable'. He argues that the Government should be brave and sign a new 'tax contract' with the people under which everybody would receive an annual tax report, saying how much they have paid in tax and where that money has gone. The National Audit Office would also be charged with scrutinising taxes and the success that policies were having, taking it out of the hands of the Government. Only then will the tax debate really be won.

The government knows that to win the debate it must push the message that good public services do not come cheap and that we are paying for historic levels of underfunding.

There are supporting factors for this argument. Public services need money to improve. Even the Prime Minister admits that when it comes to health the glass is only 'half full'. The transport system is creaking. He has told colleagues that in a year, the NHS must be showing significant and sustained improvement. He has given transport two years. By raising taxes, you raise the stakes. Fail and the only thing that will be significant and sustained will be the backlash.

'In a way, this is the last chance for the social democratic model, if we get it wrong this time, there will be no more chances,' said a No 10 insider. 'We have asked people to pay more, we've got to show them it counts for something.'

Tax as a proportion of national income in Britain is, at 37 per cent, 6 per cent lower than the European Union average. As Blair says in an article in The Observer today: 'Other countries' health systems do not enjoy a superior system of funding, they enjoy a superior level of funding.' Only Spain and Ireland have a lower tax take than Britain. In Sweden and Denmark it is approaching 50 per cent of gross domestic product.

Another official close to Blair said: 'People think that public services are now as much part of their standard of living as whether they have got a house or a car. They know they have to be funded properly.'

But various tax promises have boxed Brown into a corner. Before 1997, Blair promised that income tax would not be increased during the lifetime of the first Labour government. The vital issue then was reassuring the public on tax and the economy, the two most negative factors in the public mind Labour had to overcome. Philip Gould, Blair's focus group adviser, said that a perceived weakness on tax could lose them the election again.

The Prime Minister made the same promise before the 2001 election. It was a more reluctant utterance. During a trip to Washington, Brown had agreed with his advisers Ed Balls and Ed Miliband that the problems of the NHS were not only due to lack of reform. There needed to be a new injection of money. Tax increases were put on the agenda.

But Blair won the argument before the last election that the same promise would need to be made in 2001 to avoid headlines screaming that the Government planned to raise taxes. So any notion of creating a 50 per cent higher rate band for everyone earning more than £100,000, which would immediately raise £4.5bn, had to be ruled out.

'We still cannot be seen as a party that wants to bash the rich,' said the Downing Street official. 'We don't want to curb people's ambition.'

So, it will be middle-income Britain that will be bashed. There has been much talk in the Treasury of 'aligning' the NI ceiling with the salary at which people start paying the upper 40 per cent rate of tax: just under £35,000.

'The people who get hit the most are those just below the £34,515 higher rate threshold. And it's very hard to compensate them through other methods,' says Tom Clark, a researcher at the independent Institute for Fiscal Studies.

This alignment will see the upper earnings NI limit brought into line with the threshold for higher rate tax. This will hit someone on £35,000 for £400 a year - exactly the same amount of money it will cost a high earner on £100,000.

The move will raise just under £1bn - equivalent to the amount that could have been raised by a 1p increase in the higher rate of income tax, but with the burden spread more evenly.

'Emulating an increase in income tax by messing with National Insurance does make the pledge look pointless, perhaps even disingenuous,' says Clark.

This will not be the first time that Middle Britain has been asked to cough up. The so-called stealth taxes of the 1997 to 2001 government - such as the abolition of mortgage tax relief and of the married couple's tax allowance - fell disproportionately on middle-income earners. At the time that the annual tax take has gone up by £92bn, the actual amount of tax paid for by businesses has gone down by 0.3 per cent.

Although income tax has not been increased, nearly all of the increase in tax revenue has come from personal taxes. The source of much of the personal tax revenue buoyancy is the huge numbers of people being sucked into the higher income tax bracket - a phenomenon known as fiscal drag. About 760,000 more people are now paying higher rate tax than in April 1997. Economists believe that by the next financial year there will be more than 3 million higher rate taxpayers. In 1979 there was just 674,000.

Today, a worker only needs to be earning one and a half times average income to qualify as one of the country's highest earners. Junior doctors, nurse consultants, fire officers and some police sergeants are all at or close to the threshold. 'It's an easy way for governments to raise more money,' says Clark.

The new entrants to the top bracket are seen as a 'soft target' for tax increases. Those on much higher salaries often hire accountants to avoid as much tax as possible. 'If you tax people who earn over £50,000 they are more likely to be able to invest more energy in evasion,' Clark said. 'If you're on £35,000 you probably don't have the required clever accountant.'

Mondeo Man used to be the holy grail for Blair. Convince this mythical man with his 2.4 children, Wimpey home and holidays in Florida that Labour was for him, and you would win every election.

Now he will be directly asked to put his hand in his pocket to pay for better services. Already suspicious that 'stealth taxes' have left him worse off, there is only one thing that will calm him - public services that work.