George Osborne should start looking after his own voters

To appreciate the problem, you have to understand why so many middle-income earners have been caught by what was originally supposed to be a rich man’s tax rate. Broadly speaking, earnings growth tends to track economic growth. Incomes have risen in line with national wealth. Yet rather than raise thresholds at the same rate as earnings, governments have tended to index them to inflation, which is generally a rather lower number, or frozen them completely. More and more people have therefore found themselves in the higher rate tax band, a phenomenon known as “fiscal drag”.

To its credit, the Coalition has attempted to address this issue at the bottom end of the pay scale by increasing the personal allowance, taking low earners out of income tax. Yet to help pay for this massive, £10 billion tax “giveaway”, or at least claw some of it back from higher earners, it has supercharged fiscal drag for the 40p and 45p rates. On two occasions since he became Chancellor, George Osborne has actually lowered the starting threshold for the 40p rate.

Nor is there any let-up in prospect. Present plans limit increases in the threshold to just 1 per cent a year – half the expected rate of inflation. The starting rate for the 40p tax band is just £42,011. This is well above median earnings, but to depict such people as “well off”, as often occurs in political discourse, is insultingly exaggerated.

In any case, according to Stuart Adam of the Institute for Fiscal Studies, Coalition policies have resulted in some 1.1 million more workers being drawn into the 40p tax net than would have occurred under Labour plans. A Tory-led government has pulled off the remarkable feat of punishing its own natural economic constituency in order to reward Labour’s.

Along the way, tax policy has created some truly bizarre, Alice in Wonderland-like distortions. Those earning between £100,000 and £120,000 find themselves paying an astonishing 62 per cent marginal rate on the difference.

Ken Clarke, a former chancellor, said he gave up on tax reform after realising that whatever he did, there would be winners and losers; punishment from the losers was immediate, but unfortunately you never got any credit from the winners either. To my mind, this is too defeatist, even if it contains a large element of political truth.

It is also the case that while much of the debate focuses on thresholds and marginal rates, in the end, it is the average of what you pay that matters, and on this measure, middle income earners have not fared as badly relative to the low paid as is sometimes said.

There is no chance in the Budget of abolition of the 40p tax rate, or indeed in any conceivable future Budget. But the Chancellor would be doing both the economy and his electoral prospects a great service if he were to set out some clear long-term objectives for a flatter, more equitable tax system that provides decent incentives for work, enterprise and saving.

There isn’t much point in paying down the deficit if it poleaxes the economy in the process.

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