Forget mansions and lower the 40p tax band

Published in The Financial Times (March 6, 2012)

Every successful leader of the postwar age in Britain has understood a basic truth of politics: success depends on winning over the strivers and showing them you are on their side. As David Cameron’s strong personal ratings show, he remains successful in reflecting voters’s hopes despite the handicap of his wealthy background. But as he is constantly reminded by his party’s internal polling and by Andrew Cooper, his director of strategy, the next election swings on the cause of fairness.

This is why the government has found itself in something of a pickle as negotiations over the budget burst into the open. The rich and the right are demanding the lifting of the 50p tax rate, which makes perfect economic sense but absolutely no political sense. Indeed, it is hard to think of a policy more undermining to the idea that we are all in it together, which is why Mr Cameron has blocked it so far.

Meanwhile the Liberal Democrats want to pile hefty new taxes on owners of £2m homes, in effect another levy on those living in London and the south-east where the vast majority of such properties are found. The region is the only one to generate more tax than it spends on state services, shoring up a still swollen public sector in the rest of the country, and such a move would infuriate Conservative supporters.

The Lib Dems propose to use the proceeds to lift more of the poorest workers out of the tax system, enhancing one of their party’s few real triumphs in coalition. This is a laudable aim. But while there is so much focus on the top and the bottom, both parties seem to have forgotten the aspirational classes stuck in the middle who are enduring such tough times in the downturn and will power the engine of recovery.

This is why Mr Cameron should ignore both the Tory right and the Lib Dems. Instead, he should focus on the 40p tax band, which now ensnares nearly twice as many people as when Tony Blair took office in 1997. It penalises people earning little more than one and a half times average full-time earnings, yet George Osborne, the chancellor, is dropping thresholds to appease his coalition partners.

Instead of playing around with taxes on the wealthy, why not drop this rate to 38p? To do so would cost £1.9bn a year – but it would put money back in people’s pockets and, even more importantly, encourage those suffering strivers. As we have seen so often in the past, reducing income taxes can be the best way to boost growth, but the benefits need to be spread as widely as possible.

Fairness is, of course, also at the centre of the fandango over child benefit. The government was right to remove it from higher-rate taxpayers – just as it should take their winter fuel allowances and free bus passes – but now ministers are worried about being unfair to the single-earner families peering over a statistical cliff edge that sees them lose out while wealthier couples carry on receiving the payments.

But amid all the froth and fury, the key is to bring in reforms that incentivise growth, encourage enterprise and carry a perception of fairness for everyone, whether they have children or not. Which brings us back to those strivers. For the key is to find ways to tap into people’s aspirations rather than tinker with taxes for the top 1 per cent; after all, as one key government adviser asked me, how many people will ever earn £150,000? “I know I never will,” he said.

It was Mr Osborne who said in his headline-grabbing announcement on child benefit at the party conference two years ago that he understood most higher-rate taxpayers were far from super-rich. He also said: “We’ve got to focus the resources where they are most needed.”

So why not help those people so crucial both to the party’s political prospects and, far more importantly, to the nation’s economic prosperity?

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