David Cameron has started 2014 with his biggest spending pledge to date: to maintain the triple lock on the state pension for the entirety of the next parliament. This means that pensions will continue to rise in line with inflation, earnings, or 2.5%, whichever is highest. He tells the Sunday Times: âThis is the first plank of the next general election manifesto. Pensions are protected. I think that is really important. In a civilised society ⊠knowing youâre going to have a decent state pension ⊠is, I think, a really powerful thing.â
This is undoubtedly smart politics. Pensioners are the most likely age group to vote (76 per cent did in 2010 compared to 65 per cent of the total population) and the Tories have become the first party to pledge to maintain the triple lock beyond 2015. But Cameronâs promise is competing for attention this morning with his suggestion that the top rate of tax, which was reduced from 50p to 45p last year, could be cut again. He comments: âIt just seemed to me that if your top rate of tax is not raising the money that it should, and itâs holding back the competitiveness of the economy, then even if itâs politically unpopular to change it, you must do it. Iâm trying to sweep away all the things that hold back the chance of Britain being a real success story in the 21st century. And you know, having a top rate of tax of 50p is just going to hold Britain back. And what weâve seen since the change is actually the growth of tax revenues.â
And adds: âIâm always interested in listening to the experts. Tax rates should be set to raise money, not to send messages. Iâm interested in making sure that the rich in this country pay a lot of tax, which they do. Theyâre paying a bigger share ⊠than they were. If people can bring forward arguments about how to maximise the revenue from the top rate of tax, Iâm always interested to read them.â
So, has Art Laffer (of the eponymous âcurveâ) been vindicated? Do lower rates, as the right has long claimed, produce higher revenues? Not quite. The recent spike in tax receipts was most likely due to the income shifted from 2012 to 2013 in order to benefit from the lower rate. As the IFS noted: âReceipts in April will have been boosted by high income individuals shifting income such as bonuses and special dividends from 2012â13 to 2013â14 in anticipation of the fall in the top rate of income tax from 50 per cent to 45 per centâ. This, of course, is a trick the rich can only play once (unless the rate is reduced again), just as, in the opposite direction, they shifted ÂŁ16bn into the previous tax year when the rate was still 40p (the reason the 50p rate raised less than forecast, although ÂŁ1bn is hardly a trivial sum). Cameron should also avoid confusing correlation with cause. If revenues rise this year, it will likely owe more to the return of growth than lower taxes.
But regardless of the policy implications, Cameronâs hint that the rate could be cut again (âIf people can bring forward argumentsâŠIâm always interested to read themâ) is terrible politics. Every poll published on the subject has shown that the public opposed the decision to reduce the 50p rate (one put support for the higher rate at 68%), while 48% favour a 60p rate. By suggesting, nevertheless, that the highest earners could be awarded another tax cut, Cameron has gifted Labour an attack line. Shadow chief secretary to the Treasury Chris Leslie wasted no time in declaring that âWhile ordinary families are facing a cost-of-living crisis it seems David Cameron wants to give people earning over ÂŁ150,000 yet another tax cut. Working people are on average ÂŁ1,600 a year worse off since the Tories came to office. But once again this Prime Minister seems determined to be on the side of the privileged few.â
This should have been a good news day for the Tories, with Cameron promising continued increases in the state pension for all pensioners (not just some). But the PMâs loose talk on tax has allowed Labour to once again portray him as being on the side of the few, not the many.
Update: Cameron tried to recover some ground on The Andrew Marr Show by saying that if he had âmoney in the coffersâ, he would target tax cuts at âthe lowest paidâ, but he still refused to rule out cutting the 45p rate. If he wants to avoid allowing Labour to claim that heâs planning another âmillionaireâs tax cutâ throughout the election campaign, he would be wise to do so.