Fraser Nelson Fraser Nelson

Why David Cameron’s tax reform won’t break the bank

It’s odd to see David Cameron’s tax pledge being denounced as profligate, even in publications like the Financial Times. The Prime Minister has always been a moderate on tax, and remains one now. He has astutely positioned his promise to rise the 40p threshold as a giveaway, which makes sense politically. But the truth is a little more complex, and I look at it in my Daily Telegraph column today.

Under Labour, every year was a ‘giveaway’ insofar as tax thresholds increased with RPI inflation. David Cameron has, in effect, decided to bring back this policy. If this is a craven tax bribe for Middle England then it is one that Blair and Brown made every year in office. Here is a brief history of the top tax rate threshold:-

[datawrapper chart=”http://static.spectator.co.uk/JNkOw/index.html”]

So Cameron has promised to go back to doing what Labour did: raising this threshold is not a tax giveaway. It is done to stop tax rises. If you don’t increase it in line with earnings, you ensnare more people in a higher tax bracket. It’s a stealth tax. As David Cameron rightly said:

The 40p tax rate was only supposed to be paid by the most well-off people in our country…but in the past couple of decades, far too many have been dragged into it: teachers, police officers.’

What he didn’t say was that he set this trap himself. He was bequeathed the RPI-indexing policy under Labour, but decided to upgrade it by just 1pc for two years then by CPI inflation thereafter. CPI is lower than RPI, it doesn’t include house prices, and other measures. This manoeuvre sounds dull, but saved a whack.

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