Tax cuts are more about psychology than arithmetic. And that is why David Cameron got it right this week and Gordon Brown got it so very wrong, writes Paul Lewis

Gordon Brown's VAT cut which began on 1 December will cost more than £12 billion. But did anyone notice this massive cut in taxes? In some shops it meant a few pence off at the till – maybe even £2 if you spent £100. Perhaps a tenner off that big new £499 flatscreen TV.

In other shops where prices were adjusted on the shelves we had no way of knowing what the VAT cut meant or whether we had benefited from it or not.

So it was the tax cut no-one felt. Certainly not enough to be grateful.

That is partly because most of us do not worry about VAT. It is just part of the price we pay. And partly because Gordon Brown picked exactly the wrong time. When shops are offering discounts of 30 per cent who can even see the 2 per cent cut offered by the Government?

If it had been done when prices were rising it would have been psychologically the right move. Instead it was a flurry lost in the hurricane of Christmas and New Year discounting.

All that is in sharp contrast to David Cameron's plan this week to scrap basic rate tax on savings interest. That abolishes the one tax that politicians and the press have taught us to hate above all others — income tax. No Government dares raise it — at least not openly. And when Gordon Brown tried to do that for the 10p rate he was forced into last minute concessions to avoid defeat in Parliament. So Cameron's promise to scrap the tax on one class of income for seven out of eight taxpayers can only be popular.

It also boosts the income from savings at a time when falling interest rates have seen returns plummet. While the interest earned was high taking a bit off for tax was hardly noticed. But with the average rate paid on savings barely half what it was a year ago now is the perfect time to scrap the tax to let us keep more of our own money.

Cameron's plan – including raising the tax threshold for people over 65 by £2000 to £11,490 – will cost only a third of Brown's VAT cut. So the tax saved will be less and it will in fact benefit fewer people. But in terms of bang for your psychological buck it is quite simply in a different class.