Careful, Mr Cameron. Don't flirt with us on tax

Ministers have taken their eye off the middle and higher-earners

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He’s a terrific tease is that David Cameron. The Prime Minister says he would “love” to raise the 40p tax threshold, because too many people who do not consider themselves rich are being caught by the higher rate.

Let’s be clear: he’s not guarantee-ing that he will. “I would love to be able to stand here and say we are going to sort all this out, we will raise  the thresholds of all these tax rates.  I can’t make that promise today.” But he signalled that the Conservatives will likely promise such a tax cut in their election manifesto.

He was speaking at a question-and-answer session with staff at United Utilities in Warrington (pictured). He would not have been surprised by the questioning, because tax is a recurring issue at  such gatherings. He loves to be seen  addressing the concerns of “hard- working families”, and an abiding theme is that many of them feel they’re paying too much tax.

They have a point. It’s hard to imagine now, but the 40p levy was billed as the “rich man’s tax” when it was introduced by the Tory Chancellor, Nigel Lawson, in 1988. Then, it caught one in 20 people. Now it hits one in six.

The number affected by the 40p band – those earning more than £41,865 a year – is growing all the time. When the Coalition came to power, three million workers paid 40 per cent tax. Since then, another 1.4 million have been added.

What economists term “fiscal drag” or “bracket creep” has seen years of inflation push more and more people over the 40p limit. As their pay has increased to match rises in prices, they’ve edged towards, and through, the higher cut-off. The same is true of the 45p  top band. According to the Office for Budget Responsibility, more than 10 million people will be paying 45 per cent by 2033, twice as many as at present – and a far higher total than the very top band (recently lowered from 50p) was ever intended to target.

Election strategists have determined that the forthcoming general election, now less than 12 months away, will be decided by the middle class. That’s all very well, but for Cameron and his cohorts this creates a dilemma: since 2010 they’ve been largely ignored.

Indeed, so keen has this government been to present its socially-caring side that it’s  focused much of its effort on lower-earners, on taking them out of the tax system completely. The Tories and their Lib-Dem partners have raised the level at which people start to pay tax, to £10,000, and from April next year, that will rise again, to £10,500.

While that’s commendable, the curmudgeon in me wonders what signal that policy sends. Surely, for the good of society, its members should be encouraged to make some contribution, to pay something for public services? Arguably, a much-reduced rate of tax is more socially-responsible than no tax at all.

In concentrating on the poorer end, ministers have taken their eye off the middle and higher-earners. That’s one interpretation – that they’ve been negligent. Another, less charitable, is that the Exchequer has enjoyed the revenues from failing deliberately to keep pace with the times, and more workers paying 40p and 45p.

 

Whatever the reason, Cameron may be forced to act. Further pressure comes from an overall sense that Britain is a high tax nation. In truth, compared with many similar economies around the world, it isn’t. But the impression that has been allowed to fester is that we pay too much tax.

The problem he faces, however, is that cutting taxes for the better-off (ministers are always quick to stress that the average pay for a man is £29,300 and a woman, £23,600) goes against the grain of someone who has based his reign to date on toughness, on taking awkward measures designed to right Britain’s economy.

He could find himself working with his Chancellor, George Osborne, to insert a clear election bribe into the next Budget, while the cuts from Osborne’s austerity drive are still being worked through. The public spending deficit is not due to be paid down until 2017-18, two years after the country has gone to the polls.

That would provide an election gift for Labour which would accuse the Tories of gross irresponsibility and blatant electioneering. On the other hand, the Tories historically stand for reduced taxes. To ignore the anger of its core support, the sort of folk who work in the head offices of major privatised utility suppliers for example, would be extremely dangerous.

If they’re not careful they could stand accused of favouring the rich – by cutting the top rate from 50p to 45p – but doing nothing to help those in the middle.

Osborne could take a penny off, to 39p – something that previous Tory Chancellors loved to do, to rousing cheers from their backbenches and approving headlines from their supporting newspapers – or he could raise the 40p bar, to £50,000 say. Or he could do both.

What is clear is that the Prime Minister cannot keep offering tantalising glimpses and dropping suggestive hints. Even the most alluring of seducers can quickly find themselves a complete turn-off.

READ MORE:
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