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The psychology of tax cuts is more important than the actual amount. As Lord Lawson, the greatest tax reforming Chancellor of modern times, says in his interview in this morning’s Daily Telegraph, “The direction of travel is important here.” He urges the present Chancellor, George Osborne:

“Cut the basic rate from 20p to 19p; that would be much more effective than putting up the allowance to £10,500. That would give people the encouragement that rates will continue to go down.”

This is a debate to which I cannot claim to bring a profound knowledge of how the tax system works, or does not work. All I know is that my heart leaps at the thought of a cut of a penny in the basic rate of tax. Readers of a sternly rational cast of mind may dismiss this as a ridiculous reaction, indicative of mental frivolity. Nor can I pretend that I would notice my trouser pockets wearing out very much quicker, from the burden placed on them by the small amount of extra change which such a reform would leave in them.

But such a cut would still give me and millions of others the unexpected sense that the Government was on our side. This is not a moment for dramatic cuts: the deficit is too enormous for those. But the chance does still exist to chart the right course: to show that taxes will steadily diminish over time.

Osborne has in this Budget an enormous political opportunity: to demonstrate that the Conservatives are the only party which is (contrary to received opinion as shown by any number of polls) on the side of ordinary people who lead precarious, Micawberish lives. The Liberal Democrats are of course very anxious to prevent Osborne doing any such thing, and one fears they may succeed.

On the other question raised by Lawson, of the level at which the 40p tax rate starts to bite, I am less certain of the merits of doing anything now. He more than anyone has the right to remind us that this rate, introduced by him in 1988, “was intended for the rich” and not for the “middling professionals” who now find themselves caught by it. This problem will have to be addressed. But addressing it will not make very many hearts leap up. It will not convey the same sense as a cut in the basic rate of income tax that the Conservatives want money to fructify in the pockets of the people.

84 comments for: Lawson is right: Osborne should cut the basic rate

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