§ Question proposed, That the Clause stand part of the Bill.
§ 3.31 p.m.
§ Mr. Douglas Houghton (Sowerby)
We now come to the principal taxing Clause in the Bill, and it may give the Committee an opportunity of discussing the present level of direct taxation. It is on this Clause that the House of Commons keeps up the fiction that Income Tax is a temporary tax, renewable annually. As a matter of constitutional fact, I suppose there is no need for the House of Commons to repeal any legislation to abolish Income Tax; all it needs to do is to delete the Clause.
Our discussion on the Clause may give the Liberal Party—most of whom seem to have gone to the West Derbyshire byelection—the opportunity of renewing the pledge given by Gladstone nearly a hundred years ago, that, if returned to power, he would abolish Income Tax. If that were to happen there is no doubt that there would be a great deal of public rejoicing. Bonfires would doubtless be made of Pay-As-You-Earn coding notices, Income Tax return forms, awkward inquiries from inspectors of taxes, and all the other hated apparatus of the Income Tax system. But on the day after the night before, not only would all the Income Tax offices be closed but a great many hospitals, schools and police stations.
The last time Income Tax was abolished, in 1816, all assessment books and records were officially destroyed, and quite a lot of assessors were unofficially thrown into the Thames. Peel brought back Income Tax in 1842, and nobody has abolished it since. The Committee has an opportunity of doing it this afternoon, if it is so minded. Peel brought the tax back much against his 35 principles—because they were Tory principles—and much against his inclination, but it had to be done, because it was quite impossible for the finances of the country to be conducted without a system of direct taxation; indeed, the Income Tax reintroduced in 1842 was for the purpose of reducing taxes on a wide range of consumer goods and food and of averting a somewhat stiff rise in regressive taxation. The balance between direct and indirect taxation has been subject to a good deal of economic discussion and political argument ever since.
What prompts me to make a few remarks on the Clause is the remark made by the Chancellor of the Exchequer last Wednesday. I was shocked to hear him, of all people, say:I think that all taxes are odious …"—[OFFICIAL REPORT, 16th May, 1962; Vol. 659. c. 1475.]As the Chancellor has just come into the Chamber I had better repeat what I have just said, namely, that I was very shocked to hear him say, last Wednesday, that he thought that all taxes were odious. The right hon. and learned Gentleman cannot be happy in his work.
I noticed that as he said that he turned to his hon. Friends below the Gangway in the hope of getting some murmurs of approval, but as the debate was about the tax on sweets the Chancellor's rhetoric fell rather flat, because that was one tax, at all events, that in the opinion of hon. Members opposite was not odious. In fact, they welcomed it.
On occasions such as this it should be said that taxation is not as unpopular, still less as odious, as the Chancellor makes out. I know that some people think that their sacred rights are being infringed by a standard rate of Income Tax of 7s. 9d. in the £ to pay for the education of their children and the rebuilding of our cities, and are not in the slightest bit disturbed when they have to pay a tax of 300 per cent. on the marked-up price of some goods they buy in the shops, but the mass of the people realise and understand that with taxes we are buying civilisation. The only issues are how much civilisation we shall buy and how we shall distribute its cost; how much the State should do and how much should be left to the citizen to do for 36 himself—and who should pay what. Those are the politics of the matter, and they divide the two sides of the Committee.
Hon. Members on this side have always leaned heavily towards direct taxation as the most visible and fairest method of taxation. We do not go as far as the hon. Member for the Isle of Ely (Sir H. Legge-Bourke), who recently said that he was in favour of abolishing all indirect taxation and requiring everyone to pay something, however small, by way of direct taxes. We must admit that the total revenue to be raised by means of taxation is too heavy to be supported entirely by direct taxation. Nevertheless, we believe that there are some tendencies in Government thinking and Tory policy which should be watched and checked.
First, we must look with great caution upon the Government's going into Europe as a pretext for widening the scope and increasing the yield of taxes on goods and services. We must also watch the tendency to use flat-rate social service payments and even to exploit graduated contributions, in place of progressive taxation.
Thirdly—and I hesitate to mention this, but it is coming, as sure as day follows night—we must watch the practice of the Conservative Government of reducing the standard rate of Income Tax on the eve of a General Election. They did it in 1955; they did it in 1959, and we shall see what they do before the next General Election. Our electoral strategy was obviously wrong in 1951, because we put up the standard rate and were scarcely rewarded for it.
This Clause defines the part which Income Tax shall play in providing the needful revenue. The standard rate of tax for 1962–63 is to be renewed at 7s. 9d. in the £ and the rates of Surtax for 1962–63 are to be decided later. The current rates of Surtax were fixed in last year's Finance Act when the total yield from Surtax was cut by 40 per cent. That was last year's contribution to the lowering of direct taxation this year on individuals; and, in my judgment, the fact that Profits Tax was raised to make good the loss of revenue is immaterial.
It is desirable to look for a moment at the sort of income which now pays 37 the effective rate of tax of 7s. 9d. in the £. I think that the effective rate of tax on every £ of income is the real test of the burden of the tax—how much out of every £ of income does the taxpayer pay? I am not suggesting for a moment that the marginal rate of tax is not important. It most certainly is. But the burden of tax, the full weight of tax, is tested by the effective rate; and many people who grumble about the tax at 7s. 9d. in the £ pay nothing like that rate of tax on their income as a whole, or even on any part of it.
Even where the top slice of a person's income bears tax at the standard rate, we must remember that the earned income relief of two-ninths of the earned income up to about £4,000 a year is first deducted, and one-ninth earned income relief is deducted from incomes between £4,000 and almost £10,000 a year before any tax is levied. The earned income relief applies not only to Income Tax, but now is carried into Surtax, as there is an additional relief on top. For the year 1962–63 no one pays the effective rate of tax, on wholly earned incomes, including Surtax, of more than 7s. 9d. in the £ unless his income exceeds £9,000 a year. That is for a single man.
A married man with two children under 11 years of age can have £10,000 a year earned income before he pays an effective rate of tax of more than 7s. 9d. in the £. Last year's Finance Act reduced the effective rate of tax on these large earned incomes by between 2s. 4d. and 2s. 8d. in every £ of their income. That was a very substantial relief. Even on an earned income of £30,000 a year there was, in last year's Finance Act, a reduction in the effective rate of tax of 1s. in the £. I stress that I am, of course, talking about the effective rate, the amount paid out on every £ of income.
Now let us look at the marginal rate of tax where it occurs at 7s. 9d. in the £, that is to say, where there is some income taxed at 7s. 9d, in the £ after allowing for earned income relief. No one pays tax at 7s. 9d. on any income at all unless he is paying at least £84 a year in tax. So everyone who pays less than £84 a year in tax is not paying at the standard rate at all, but at a reduced rate on the top slice of 6s. 3d.; on the next band at 4s. 3d. and on the 38 lower band at 1s. 9d. Even then, he pays this rate of tax only on 15s. 6d. out of every £ of his income because of the operation of earned income relief.
This means, roughly, that a single man earning up to £12 a week, and a married man earning up to £15 a week, pays no tax at all at the 7s. 9d. rate. The total tax on these incomes may well be too high. I am not at the moment arguing that point. What I am trying to do, and what I think it necessary to do, is to dispel some of the mythology surrounding the standard rate of tax of 7s. 9d. in the £.
I wish to turn now to another aspect of this Clause and to look at the standard rate of tax in relation to our approach to Europe. The right hon. and learned Gentleman the Chancellor of the Exchequer, in making proposals to alter the structure of the Purchase Tax, referred to the desirability of doing so in view of our approach to Europe. I quoted an Article from the Treaty of Rome which obliged member countries to consider the harmonisation of indirect taxation. I wish to ask the Chancellor, or whoever may be replying to the debate on behalf of the Government, to say a little more if possible on this matter, because one of the reasons for Surtax reductions last year was that we in this country were taxing the earnings of executives, scientists, technicians, salesmen, and others doing valuable work at a much higher rate than were our contemporaries.
I have never been satisfied about the relevance of that comparison, but the Chancellor made a good deal of it in the debate. The picture before the Surtax cuts was of a single man on £5,000 a year paying much the same total tax in the United Kingdom as in France and West Germany, though a good deal less than in Holland. For a family man the incidence of direct taxation on earnings was more severe by comparison with most European countries, especially at the top.
The Chancellor evidently thought last year that this discrepancy should be adjusted and it was on this that he made proposals for drastic cuts in Surtax rates. Does the right hon. and learned Gentleman regard it as equally relevant to make the same comparison and adjustment lower down the scale? If so, he 39 would have to increase Income Tax on the middle range of incomes where it is lower than in any of the countries of the Six, except France.
We on this side of the Committee would find it impossible to support further cuts in taxation on higher incomes, the raising of taxation on middle incomes and the wide extension of taxes on goods and services, all as part of the price of going into Europe. I think that as the Chancellor has referred to tax changes on our approach to Europe he should be invited to carry that survey further.
Company taxation appears to be higher in Common Market countries than in the United Kingdom, though our higher taxation on dividends paid to individuals makes the net yield of dividend income in this country far below that enjoyed in other Common Market countries with the exception of France. Whereas Holland, France and Italy appear to penalise the distribution of profits, West Germany penalises the retention of profits. The outcome of the Chancellor's present consideration of a new composite rate of company taxation to replace the standard rate of Income Tax and Profits Tax will be interesting to watch.
I do not wish to detain the Committee much longer, so I propose to conclude with a few reflections on general attitudes towards income taxation. I think that I am justified in entering a protest against the unrelenting efforts of hon. Gentlemen opposite to make direct taxation disreputable and indirect taxes on consumer goods and eatables respectable. In our view, the truth is the other way round.
A high level of redistributive taxation has undoubtedly brought some evils and that I do not deny. But it has brought social and political stability in this country, which, without such a system of taxation, no one could hope to achieve. France, where direct taxation is the lowest of all the European Economic Community countries, has, in my mind, suffered grievously politically for the very reason that that country has not had an effective or efficient system of progressive taxation.
§ Viscount Hinchingbrooke (Dorset, South)
Is the hon. Gentleman trying to say to the Committee that, in his view, the whole elaborate apparatus of 40 the Welfare State is now supported by progressive taxation on incomes above £2,000 a year, or a figure of that sort?
§ Mr. Houghton
No. I am not saying anything more in this connection than the words I am using, which is that an efficient system of progressive taxation is an indispensable condition of a stable economy and of a stable political system.
I believe that most profoundly, and the noble Lord will bear in mind that all the emerging territories in the world today are copying our system of direct taxation and are borrowing our experts to assist them to do it. They know that they cannot sustain the expenditure which is necessary in a modern State on social as well as economic and industrial purposes on indirect taxation alone. Therefore, I think I am quite entitled to draw the inference from what has happened in France in recent years that, had that country had a system of direct taxation which brought more social contentment, it would not have gone through the political agonies and uncertainties which it has had to undergo.
I say that the Chancellor should not say, even in fun—if it was fun—and not even as a rhetorical comment, that all taxes are odious. Hon. Gentlemen opposite should not talk of our Income Tax and Surtax system as if it was sapping the energy and initiative of the nation's breadwinners. That is a charge which has been made on a number of occasions and for which there is no support whatever on the researches which have been undertaken. The taxes in this Clause are an indispensable part, and the main part, of the fiscal system of a modern democratic State, and, without them, we should have social unrest and popular uprising.
Hon. Gentlemen opposite should bear in mind that the alternative to a satisfactory system of progressive taxation is dispossession and the confiscation of wealth. That has happened in other countries, and it is detestable that hon. Gentlemen opposite lend support to the natural desires of the people for more social expenditure, and that then the Chancellor should say that all taxes to pay for them are odious. What is odious is for hon. Members apposite to say in the same breath that the standard rate 41 of Income Tax is too high and the Purchase Tax on clothing is too low.
§ Mr. E. H. C. Leather (Somerset. North)
I should like to make one or two comments before we allow this Clause to pass, because I think that most of it will be without controversy. It is a privilege to say a few words on Income Tax following the hon. Member for Sowerby (Mr. Houghton), and I do not disagree with a great deal of what he said.
I accept that a system of direct taxation, rising fairly steeply on higher incomes, is an essential part of our economic and social structure. I accept the justice of that, as I think most of us on this side of the Committee do. The argument is about how far and at what level does it cease to be fair and become positively unfair. I accept without argument the hon. Gentleman's thesis that, on balance, the Tory Party believes in lower taxation and the Socialist Party believes in higher taxation. This has been a principle of politics in this matter for many years, and I see no reason to argue it now.
When one talks about taxation, I think that one ought to challenge the use of the word progressive", which always comes from the other side of the Committee. "Progressive" is an adjective which has been cornered by certain interests in this country to mean almost anything they want it to mean, and it sounds good. Hon. Members opposite talk about progressive taxation. Let us all be quite clear that what they mean is higher taxation. [HON. MEMBERS: "No."] Yes.
§ Mr. G. R. Mitchison (Kettering)
This really is nonsense. If the hon. Gentleman is to proceed on that principle, he should get it right. It depends whom we tax.
§ Mr. Leather
I entirely accept that, but, with respect to the hon. and learned Member for Kettering (Mr. Mitchison), it is not nonsense at all. If the hon. and learned Gentleman will allow me to finish this brief part of my remarks, I will tell him that I fully accept that the party opposite mean whom we tax. Progressive taxation is higher taxation on the people who do not vote for them. [HON. MEMBERS: "No."] We are all 42 perfectly clear on that. The basic fact remains that direct taxation is a tax on work and indirect taxation is a tax on spending, and, on balance, it seems to me that if we are all concerned to have a more dynamic, expanding economy, the present taxation on work should be slightly reduced.
The plea that I would like tomake——
§ Mrs. Barbara Castle (Blackburn) rose—
§ Mrs. Castle
The hon. Gentleman has just said that Income Tax is a tax on work and that other forms of taxation are taxes on spending, but is not the National Insurance contribution a tax on work? Is it not merely levied in an unfair ratio according to the size of the income?
§ Mr. Leather
With great respect, I accept what the hon. Lady said. I agree that the National Insurance Contribution is a tax on work, but it is a different one to the one we are discussing here.
I should like to come now to the main point I wish to make, and here I am at one with the hon. Member for Sowerby, who talked about the mythology of the standard rate and the fact that practically nobody pays the standard rate. I have no doubt that all of us in this Committee, whose job it is to study these things, realise that the standard rate is merely one signpost in a whole series of signposts. It is not even the most important one. The lower rates of taxation—the 4s. 3d. and the 1s. 9d. rates at the moment—do not necessarily depend on the standard rate at all. This is only one rate on this scale.
I hope that my right hon. and learned Friend will press on with this work, to which he has dedicated himself, of reforming and simplifying our tax system. I wish that we could get away from having this Clause in its present form each year, merely mentioning one figure, which is, in fact, misleading, and bears no real relevance to the problems of the vast majority of taxpayers, both below and above it. I hope that either the Chancellor or the Financial Secretary to the Treasury, if he is to reply to the 43 debate, will assure us that this is still very much in the forefront of the Treasury's mind. It is also related to absorbing the Income Tax and Surtax structures into one, because the present division between these two things is completely artificial.
There is not, in any kind of reality, a magic line of £2,000 a year which makes one a totally different kind of animal. This artificial division causes misunderstanding in the public mind, as the hon. Member for Sowerby said. It confuses them and builds up a mythology.
I hope that in future years we can have this Clause in a more intelligble form, even if it is necessary to set out all the rates. I realise that they vary, and that one has to take account of the number of children, earned income relief, and so on, but, nevertheless, the standard rate is a fiction. If we can have the rates set out in the Finance Bill and in the economic White Paper every year, showing what people really pay at various levels of income, instead of these mythical animals Surtax and Income Tax, which do not relate to anybody's income, it would simplify our discussions and may even help to make the problems of taxation more intelligible for the general public.
§ 4.0 p.m.
§ Mr. John McKay (Wallsend)
I presume that this discussion has some relation to what we are doing so to even out tax contributions that our people will gradually rise to a higher standard of life; and that, where we have to raise the rates of taxation, we shall do so fairly evenly over all sections of the community. This present period, eighteen years after a great war, is similar to the period around 1938, some years after another great war. In both periods the country has been in a somewhat settled position, but there are some special points about standard taxation in the two periods that ought to be examined.
The standard rate of tax in 1938 was 5s. 6d. in the £, and the average earnings of the ordinary married working man amounted to about £3 10s. a week. On those earnings that married man paid no tax at all—and I shall refer throughout my 44 speech to married men. Therefore, the difference in taxation between the man then paying the standard rate and the ordinary worker was a difference of 5s. 6d. in the £.
Today, the ordinary married worker earns £15 11s. 6d. a week on the average, but what is his taxation position as compared with 1938? It not just a question of the average worker today just paying some tax; in the latter stage of his taxation he is reaching into the 7s. 9d. in the £ rate. A mighty change has certainly taken place since 1938, when the ordinary married worker who paid no tax then now pays as much as 7s. 9d. in the £ on part of his income.
We are in a period of peace, and we are gradually getting back to a position similar to that of 1938, but have we been dealing exactly fairly and reasonably in our taxation of the worker as compared with that of the man in the higher income groups? I think that the whole tendency has been the other way. Over the whole period of which I speak, taxation has changed in a way that has put a greater burden on the masses of the people as compared with the burden that has been placed on those in the bigger income groups.
The standard rate, which was 5s. 6d. in the £ in 1938, is now 7s. 9d. in the £. That means an increase of 2s. 3d. in the £ on the man in the high income groups since 1938, but has the average worker's taxation on earnings been increased by just the same? It has not. On some part of his earnings the average married worker now pays 7s. 9d. in the £ in his tax range but the average taxation on all his actual £s taxed is 5s. 3d. in the £—
§ Mr. John Hall (Wycombe)
Can the hon. Member tell me the level of wages on which this average of 5s. 3d. in the £ is being paid? I am a little puzzled.
§ Mr. McKay
The average wage of the married worker is about £810 a year, or £15 11s. 6d. a week. On part of his earnings he gets into the 7s. 9d. rate, but the average amount of tax he pays on his taxed poundage is 5s. 3d. in the £. That means that where he previously paid nothing on what he earned he now pays on part an average of 5s. 3d. in the £. There is no funny business in this; it is an actual fact.
45 Let us take the worker who earns more than the average. The average in 1938 was about £180, and the man getting above the average got, say, £220. It is admitted that wages have risen by about four and a half times since 1938. The married worker then earning £220 paid no tax either. If we multiply that £220 by 4½, we get a figure for today of £990, which is a comparatively big wage. Out of this his £220 cost of living in 1938 would he £660, plus extra insurance of £34.
As I have shown, whereas the higher paid worker in this category—the one with £220— paid no tax whatever before the war he is now paying 5s. 11d. on his taxed income. It obviously seems most unfair that while this man's rate of tax should have been increased from nothing to 5s. 3d. or 5s. 11d., a man in the higher salary scale should have had his tax increased from 5s. 6d. to 7s. 9d. —an increase of only 2s. 3d. in the £.
It is logical now to consider the man who is earning £5,000 a year. As a result of the Chancellor's recent action, he receives a straightforward gift of £490 whereas, had his rate of tax been raised in proportion to the lower-paid workers, he would actually be paying well over an additional £552. [HON. MEMBERS: "What?"] I must correct that. I am only too willing to be corrected when I make an error. I do not wish to make a fool of myself, so I shall explain what I mean. The man about whom I am speaking gets an advantage out of the taxation applying to the standard rate not having risen so high of £552. But he also gets a gift of £490 through the recent Surtax arrangements.
This shows that the £5,000 a year man is getting a big advantage compared with workers generally. Is it not time that we had more agitation, not merely from my hon. Friends, but from hon. Gentlemen opposite and people generally for a more equitable distribution of this burden? Since the ordinary worker has had this tremendous increase placed on him compared with what he paid in pre-war days, is it not right that the burden should be split equally, especially regarding the wealthier sections of the population?
It is clear that the biggest burden of Income Tax has been placed on the wage earners of the nation. How we 46 shall amend this position is not an easy question to answer, but the whole structure needs to be changed so that when additional finance must be found the burden of finding it is distributed equitably. I have been attempting to add weight to the remarks made by my hon. Friend the Member for Sowerby (Mr. Houghton), who made an excellent speech. As we continue to discuss the Clause, and when we get to other Clauses, the position I have been describing will be further brought home to hon. Members.
§ 4.15 p.m.
§ Sir Alexander Spearman (Scarborough and Whitby)
The hon. Member for Sowerby (Mr. Houghton) expressed strong disapproval of the Chancellor's dislike of taxation. I suppose that the hon. Member might admit a slight bias, because I understand before he came here his earnings largely depended on his very valuable service to the tax gatherers.
However, I believe that the monetary weapon and indirect taxation are absolutely essential to the regulating of the economy and it was the omission by the Opposition of the first weapon which brought them into difficulties in 1950 and 1951. But I agree that of all the weapons the most effective single one is Income Tax. I am sure that if Income Tax is put up by 6d. or 1s. nothing does more to check spending. Equally, if it is put down, nothing encourages us more to spend more—when it is necessary to expand the economy. I would not have liked to have seen my right hon. and learned Friend lower Income Tax on this occasion because we are not in a condition when we want to increase spending, but I would like him to try to make substantial reductions—not necessarily next year, but over the course of years—in direct taxation for two reasons.
First, because, like the Bank Rate, it is a more valuable weapon when there is more in hand. When the Bank Rate is pushed up to 7 per cent. it is more difficult to use it effectively. When Income Tax is near the maximum it is obviously very difficult to bring it into effective use. For that reason, I would like to see it at a lower level. In fact, I believe that we should be more prepared to see it move both up and down according to the circumstances.
47 Secondly, I would like to see—not here and now, but over the course of years—a reduction in direct taxation, because, contrary to the views of the hon. Member for Sowerby, a bigger proportion than formerly now comes from direct taxation. I agree with my hon. Friend the Member for Somerset, North (Mr. Leather) that we should tax consumption rather than production. We surely want to make the cake of national wealth as big as possible rather than bother too much about how we are to distribute it. The first is surely the way to raise the standard of living.
Hon. Gentlemen opposite continually urge that there should be a switch to direct taxation, but I wonder whether they have looked at the figures. I would refer the hon. Member to the Treasury Bulletin for April, 1960, in which it is shown that, in 1948, 35 per cent. of the revenue came from Income Tax. Today, it is 43 per cent. Total capital taxes—Income Tax, Surtax, death duties, and so on—provided 52 per cent. in 1948 and today, in 1962, provide 55 per cent. I do not give the Government good marks for that. They have, I think, been moving in the wrong direction and I hope they will redirect their efforts.
The hon. Member for Sowerby made a surprising remark about Surtax, especially surprising coming from someone whose views are always carefully listened to and who is so much respected. He said that the fact that Profits Tax was increased last year by about the same amount as Surtax on earned incomes was reduced was quite irrelevant. I cannot understand that view. After all, those with an investment income paid exactly the same rate of Surtax and had smaller incomes because their dividends must have been somewhat smaller.
§ Mr. Anthony Crosland (Grimsby)
The point of this argument is quite simple, that most people, including the Stock Exchange, take the view that, in the long run, some proportion of Profits Tax is passed on to the consumer.
§ Sir A. Spearman
If Profits Tax is higher then dividends must tend to be lower. Therefore, to some extent at any rate, the investment income man must suffer. If the Chancellor had made a reduction in Surtax over the whole field 48 I agree that he would have been vulnerable to criticism from hon. Gentlemen opposite. The could have said that he had made an unfair concession. Whether or not it would have been unfair is, of course, a matter of opinion but, as I say, he would have been vulnerable to that criticism. But since anyone whose income comes entirely from investments pays no less Surtax he cannot be vulnerable to that criticism. The only criticism to which he might be vulnerable is that he made a wrong judgment, that he thought that a reduction in Surtax on unearned incomes would increase incentive and thereby increase the national wealth generally.
§ Mr. Douglas Jay (Battersea, North)
That is extremely misleading. The Financial Secretary told us a year ago that out of the £83 million reduction in Surtax last year £18 million was in respect of unearned income.
§ Sir A. Spearman
I do not see how it could be reasonable to penalise the man with earned income because he had some investment income, too. It cannot be a crime to have saved some money.
All I am saying is that the Chancellor made no reduction in Surtax for those whose incomes came entirely from investments. If he had been trying to give a sop to Surtax payers, obviously that is what he would have done. He did it, rightly or wrongly—I think rightly—because he believed that it would increase enterprise and endeavour. Surely even the right hon. Member for Battersea, North (Mr. Jay) would agree that if the Chancellor was right in that judgment and if the cake of national wealth was expanded it must have been a good thing.
§ Mr. Jay
It would have been possible, because one can do almost anything with Income Tax and Surtax, to give a reduction in such a way that one only got a reduction in virtue of one's earned income; but the Chancellor decided to give it in such a way that the more unearned income one had the bigger the tax concession one got.
§ Sir A. Spearman
I have always found the Income Tax laws very complicated 49 and I will not go into details as to how this could be done. All I am saying—and this cannot be contradicted—is that the man with an investment income only got no reduction at all, and I cannot see why a man should be penalised on his investment income because he had saved. Whether the Chancellor was right or wrong, it is not a question of fairness. It is a question entirely as to whether his judgment was right or wrong that it will in time increase the national wealth.
I believe I am right in saying that in this country, before the last Budget, if a man was earning £5,000 a year and, by extra effort, enterprise, and perhaps by taking risks, he pushed his income up by £1,000 a year he got only about half of what he would have got in respect of the extra amount if he had been in America or on the Continent. That would seem to me to be a reasonable basis for assuming that a reduction in Surtax on earned incomes would increase the national wealth, and that is what we on this side of the Committee have in mind.
§ Mrs. Castle
The hon. Member for Somerset, North (Mr. Leather) objected to us on this side of the Committee describing Income Tax as progressive. He complained that this word "progressive" had been much abused. He also gave us a rather partisan definition of the word, saying that by progressive taxation we meant higher taxation.
The hon. Gentleman should know perfectly well that that is a very inadequate definition of a word which has come to be accepted widely as meaning taxation which is related to ability to pay. That is the real definition of progressive taxation. It means that if income rises and the ability to pay rises pro rata, a man's share of tax payable rises also, but that, equally, if income is low and the ability to pay tax is low, then tax is reduced.
We on this side of the Committee stand very firmly by the view that even though, as my hon. Friend the Member for Sowerby (Mr. Houghton) pointed out, there must always be scope for some form of indirect taxation, if we are to have an equitable sharing of the national burdens vie should make progressive taxation in this sense the mainstay of our taxation system.
50 It would be quite wrong to say that all forms of direct taxation are progressive taxation. That was the meaning of my intervention in the hon. Gentleman's speech. Income Tax is broadly progressive, but National Insurance contributions, which are another form of direct taxation, are not. It is true that Income Tax can be administered in such a way as to make it less progressive. We could do as successive Conservative Chancellors have done and always relate tax reliefs in such a way that the maximum relief is given at the top and the smallest relief at the bottom. This is a process which has been going on during the past ten years under Conservative Governments.
That is why we say that the whole tenor of Conservative Budgets has been regressive, particularly as at the same time that these Income Tax reliefs have been given in such an unfair way direct taxation of the wrong kind, through the National Insurance contributions, has been steadily rising. We have found over the past ten years that the burden of taxation carried in the form of the National Insurance contribution has more than doubled under Conservative Governments. Yet this is certainly not a form of progressive taxation because, as the hon. Member will be the first to admit, the insurance contribution is a flat-rate payment levied regardless of the size of the wage. So here we have under Conservative Governments direct taxation which is overwhelmingly regressive in nature.
Yet what is the National Insurance contribution if it is not a tax on work? It is outstandingly such because it is paid overwhelmingly by the employed person simply because he works. Therefore, that distinction of the hon. Gentleman's that we ought to be sensibly lightening tax an work and increasing it on spending falls to the ground in view of the National Insurance contribution.
§ Mr. Leather indicated dissent.
§ Mr. Leather
I am not objecting to anything. I might, in fact, on another occasion go a long way with the hon. Lady in agreeing that our National Insurance system is full of lunacies. But, with respect, any argument on how we 51 assess National Insurance is utterly irrelevant to what we are arguing about on the Finance Bill.
§ Mrs. Castle
No, not at all. We have been talking about the distribution of the tax burden. What I am saying is that under successive Conservative Chancellors we have had a steady movement away from the principle of putting the burden where there is the greatest ability to pay. We are moving towards the flat-rate principle—shifting the burden of taxation wherever possible on to the flat-rate principle in respect of both direct and indirect taxation.
This does not apply only in the field of the National Insurance contributions. Throughout the whole of Government taxation we are finding an attempt by Conservative Chancellors to reduce the amount which falls to be met by the Exchequer contributions and the pushing of the burden on to the individual. The graduated pension scheme is another example of this system, where we know that the graduated pension contributor is not getting his money's worth for his contribution, on a commercial basis, but is paying a forced levy to the Exchequer which is directly designed to meet part of the cost of the existing old-age pension scheme and, therefore, reduce the Exchequer contribution which has to be met by Income Tax, among other forms of taxation.
What we fear is that we are only at the beginning of this process, on which Conservative Governments have had to feel their way carefully and fearfully towards their long-term goal so as to disguise from the people of the country just what a shift is taking place in the incidence of taxation and to wrap it up for electoral purposes. Their desire to move in this direction is clear, and excuses are being searched for by Conservative Chancellors to enable them to carry the process further.
There is the shift from progressive taxation even in the tax on work, the National Insurance contribution, and in other forms of what the hon. Member for Somerset, North dismissed contemptuously as taxes on spending. I should not say that he contemptuously dismissed taxes on spending, but rather that he seemed to imply that spending 52 as such is rather an iniquitous activity and it is justifiable to tax it.
§ Mrs. Castle
The hon. Gentleman said that it is less excusable to tax work than to tax spending and that there was something anti-social in spending compared with work, and, therefore, it was pro-social to tax spending rather than to tax work.
What we must never forget in this Committee is that some spending is essential to life. If a person does not keep alive, he cannot work. What we fear is that the growing movement will continue towards the taxing of forms of spending that are vital to maintain not only working morale, but the working capacity of the people.
Another recent example is the tax on sickness which the Government have imposed. Expenditure on prescription charges is a form of spending. If someone buys a bottle of medicine, he is spending, but spending to get himself well enough to go back to work. This Government, in order to reduce progressive taxation, have levied a flat-rate charge on spending on medicines.
We had another example in our discussions on Purchase Tax last week. There are certain essentials which people must buy so that they can go to work. For instance, an industrial worker must buy overalls, but the Government have doubled the tax on industrial overalls. This is all part of the move towards a uniform rate of Purchase Tax which will increase the tax on essentials. Of course, there will also be a reduction in the tax on luxuries, but, overall, the Treasury will have more in its coffers with which to reduce progressive taxation, reducing it most at the top and least at the bottom.
My hon. Friend the Member for Sowerby was quite right to express our alarm at this move. Our entry into the Common Market will give another excuse for encouraging the process. One of the by-products of going into the Common Market on the present terms of the Treaty of Rome is that we shall 53 reduce our subsidies to British agriculture which help to keep down the price of food, saving the Exchequer money which it can then, if it cares, use to reduce progressive taxation. In exchange, the consumers of this country will have to pay heavy import levies on foodstuffs at present coming in duty-free. This will be a tax on food and a tax on spending. But is it spending which ought to be taxed?
The hon. Member for Somerset, North, draws a quite artificial distinction in suggesting that a tax on work is bad and a tax on spending is good. We must select and pick out what will, overall, lead to the maximum social justice and working efficiency in this country.
§ Mr. Leather
The hon. Lady should not distort to that extent what I have said. I made no such statement. If she had listened carefully to what I said, she would have known very well that I said nothing of the kind. I specifically said that I accepted that, of course, there must be a large measure of direct and of indirect taxation, and we were merely talking about marginal values. She is putting words into my mouth for the sheer joy of demolishing an argument which I never advanced. What she says is quite meaningless.
§ Mrs. Castle
I am prepared to stand by the record in HANSARD tomorrow. I listened very carefully to the hon. Gentleman's speech. Indeed, it was his remarks which stimulated me out of my wonted silence to make a speech.
§ Mrs. Castle
The hon. Gentleman was talking about a marginal balance between direct and indirect taxation. It is the marginal balance which we are very worried about in discussing this Clause, because the marginal balance is being tipped consistently and persistently by Conservative Governments away from progressive forms of taxation —this is what the hon. Gentleman showed that he did not begin to understand—towards this new type of taxation which increases the incidence the wrong way, even though it may appear that some tax reductions are being given.
With specious arguments, the hon. Gentleman and his hon. Friends may 54 try to pull the wool over the eyes of the electorate. I have no doubt they will have a jolly good shot at it, particularly in the next pre-election Budget. However, underneath all the propaganda there lies the inescapable fact that the incidence of taxation in this country now is becoming increasingly regressive. It is falling increasingly on the heads of those who, under a progressive system of taxation, ought to be the first to receive relief.
We on this side of the Committee register once again the fact that we are aware of what the Government are up to. We oppose them bitterly in this trend, and we shall firmly oppose any consequences of the Common Market negotiations which commit us to further moves towards an unfair incidence of taxation. We shall always stand by the principle of levying taxes to the utmost degree possible strictly in accordance with ability to pay.
§ Viscount Hinchingbrooke
The hon. Lady the Member for Blackburn (Mrs. Castle) must take a grip on herself. Lately, she has been making madly reactionary speeches, redolent of the days of British Socialism of the 1930s, the 1920s, and even the 1910s. She is on a parallel with that ardent radical Sir William Harcourt, who said, "We are all Socialists now", and produced some progressive taxation in his time designed to curb differences between rich and poor on a very large scale. Of course, it had to be done in those days. Sir William Harcourt was thinking of the Poor Law, the workhouses and all the other contrivances which had been produced by radicals in the past to deal with the needs of the rising masses in that fierce period of technological advance and change. The hon. Lady has never come away from it. She is still in that mood now, having forgotten nothing and having learned nothing.
There are no votes in this sort of situation now. The hon. Member for Sowerby (Mr. Houghton) talked about the social unrest and popular uprising which would ensue in the country if we departed radically from the present system of taxation and went on to a flat-rate basis. The reason why my right hon. Friends on this side, during the past ten years, have been slowly working towards a flat-rate system of taxation is 55 that they realise that the country is quite prepared to see the change made, and that, for all the shouts——
§ Mrs. Castle rose—
§ Viscount Hinchingbrooke
No—and that, for all the shouts which have been coming from the Socialists, steeped in black reaction as they are, the country has forgotten it all and there is nothing to be said for them.
In the Budget debate, I asked for a reduction of Government expenditure of up to £1,000 million, and, therefore, feel justified in asking, although I do not expect to get it, for a very substantial decrease in direct taxation precisely because if we got into a situation in which we could have a reduction in taxation the Socialists, if they were in power, would make it even more progressive on Income Tax than it is now and would reduce indirect taxation to little or nothing.
My right hon. and learned Friend, being of a very different kidney, I hope —I am not quite sure about it—will do the very opposite. I should like to extract from my hon. Friend the Financial Secretary, who is, I think, to reply to this debate, the promise—a conditional promise if he likes—that when taxation can come down a start will be made on Income Tax and Surtax.
The hon. Member for Sowerby—I am sorry that he has left the Chamber—seemed to think that progressive taxation is what upholds the whole of our society or makes it morally correct as far as finances go. I have done a few sums in my head, having heard this debate and not being prepared for it with documents from outside. About £350 million a year comes from progressive taxation and the Welfare State is upheld by a sum ten times that amount —about £3,500 million. In these days, the Welfare State and all we most admire and our general standard of living are upheld by the normal taxes of the people and not by the so-called very important social element of progressive taxation.
The sooner the Socialist Party begins to realise that we have now walked into a different world, the better. We are not in the world of Sir William Harcourt where the only means of distributing 56 money to the poor was to tax the wealthy. The Welfare State itself and everything that we enjoy come from the taxes of the people, and only one-tenth of it, if that, comes from so-called progressive taxation.
§ Viscount Hinchingbrooke
I hope that they are moving towards a flat rate of Income Tax. I think that there should be a flat rate for all taxes. [Laughter.] That is the point that I am trying to make. The days are gone when we needed to have so-called progressive taxation to do social justice. Why do not hon. Members opposite realise that? They think that they can roar with laughter and go to their constituencies and score point after point against us on this issue of progressive taxation. It does not win them a single trick, and I will give one example to show why.
§ Mrs. Castle
Is the noble Lord aware that I presented to the House not many weeks ago a petition signed by 810,000 people, mainly old age pensioners, bitterly objecting to the levy of National Health Service prescription charges and expressing great social anger and great social unrest about this further move towards the sort of system which he wants?
§ Viscount Hinchingbrooke
I am not talking about prescription charges. I am talking on this Clause and dealing with the speech of the hon. Member for Sowerby about progressive taxation. The petition was not presented by the hon. Lady's constituents in regret of the failure of the Government to introduce even more progressive scales for Surtax and Income Tax than there are now. If they had been, her remark would have been relevant. As it is, it is not relevant.
I should like to give the Committee one example of the many which we all surely have as to why this is no longer true. In my constituency, during the last election, I found that people were interested not in meetings, but in cups of 57 tea in their houses. Day after day I went to council houses to be received by people and given cups of tea. Not day after day but on at least two occasions I found the council house completely transformed. The centre wall had been taken out, the lower storey had a beam across, there was a kitchen at one side, a screen with flowers and a living room on the other side—something that one would expect to see at the Council of Industrial Design as a recent example of modern art.
The tea things were brought out on a silver tray—a silver teapot, silver milk jug and a silver sugar bowl—and tea was served. In the corner of the room was a baby grand piano as well as a television set, a wireless and various other things of that kind. When I said, Thank you very much for tea; I must go to the next place now," they said, "We are very sorry that you cannot stop for cocktails."
The sooner the hon. Lady the Member for Blackburn and people living in the soap-box days of Socialism in the 1920s enter the modern council house and experience things of that kind the better.
§ 4.45 p.m.
§ Mr. Crosland
I think that the future marital prospects of the noble Lord the Member for Dorset, South (Viscount Hinchingbrooke), on which all of us on this side congratulate him, have shifted even further to the right than they were some years ago. It is hard to see what is the implication of his story about council houses. I suppose that the other side of the coin is that if one went to "Castle Hinchingbrooke", or whatever the stately home may be, they would not be able to afford tea, let alone have a radio or other minor luxuries like that.
§ Mr. Crosland
I was simply trying to understate the case. We now see that the noble Lord's argument related to the impoverishment of the English upper and wealthier classes. All this talk about Mr. Clore, who, according to the Evening Standard, has made £34 million in the last ten years, is apparently mythical. Nevertheless, the noble Lord, as usual, has made a serious point with 58 which one should try to deal. His point was that the distribution of wealth has become so much more equal than it was in the days of Sir William Harcourt and that old ideas about progressive taxation have become irrelevant. There is, of course, no evidence for this whatsoever.
It is perfectly true that certain people —and I agree that they probably include high-minded members of the aristocracy—who do not avoid death duties and pay all their taxes in a legal and loyal manner have become relatively much poorer than comparable people of fifty years ago. It is not true of the great bulk of the City financiers. It is not true of the bulk of property developers over the last ten years. Everybody knows that not only Mr. Clore but a great number of such people have made fortunes through property speculation equivalent to those which could have been made in the Edwardian or late Victorian era. The fortune which Mr. Clore has made in the last ten years is roughly equivalent to the fortune which Sir Thomas Lipton would have made, and did make, in Edwardian days.
If one takes businessmen in the City generally, it is not the case, as the noble Lord suggests, that equality has gone so far, as in his case, that they have had to sell their houses, sack the butler and the maids and can scarcely afford a cup of tea on a silver tray. This is only true of a very small proportion of the wealthier classes. If one takes them as a whole, it certainly is not true. The reason why it is not true is directly relevant to the Clause. It is that an enormous amount of tax avoidance goes on.
Supposing that the noble Lord's implication were correct, that everybody paid the rates of tax which are laid down in the Finance Bill, his conclusion would be correct—that we lived in an egalitarian society today and that his own standard of living was scarcely different from that of the average council house tenant. Of course, this is not the case, in spite of the noble Lord's joke about a derelict castle.
We all know—and we might as well face it—that the gap between the standard of living of the wealthy 1 per cent. of the population and the council 59 house tenants is still enormous. The prime reason why it is enormous is that we have a system of taxation which has two grave disadvantages. First, it is very heavily biased in favour of property and against income. Secondly, it can be extremely easily avoided.
There is an enormous difference between two individuals both earning £10,000 a year but one with £100,000 of property and the other with no property. The man with £100,000 of property has far more room for manœuvre. He can cease working for six months if he wishes and his range of choice between jobs and between work and leisure is much greater. He can organise his life with a freedom which is not open to the person who has the equivalent income, but has no property.
This extreme difference between having capital and not having it is scarcely reflected in the British taxation system. It is reflected in the tiny differential against unearned income, but even allowing for this very small differential, there is a heavy bias in the taxation system against the man whose income is solely derived from work and in favour of the man whose income is largely derived from property.
The only logical way to put this right would be to have an annual property tax, which I hope the next Labour Government will introduce. Although my hon. Friend the Member for Cardiff, South-East (Mr. Callaghan) has, I regret, some rather reactionary views on taxation, nevertheless I hope that when we have a Labour Government we shall attempt to cancel out this bias in favour of the property owner by having a small annual property tax, which it seems to me is fully justified by considerations of logic.
The second point about the taxation system is that so large a part of the alleged tax burden is easily avoidable. Death duties are a good example. I have no idea what arrangements the noble Lord or anybody else makes about death duties, but we know that one can pay no tax at all by making gifts inter vivos more than five years before death and that the great majority of very wealthy people with large amounts of property are not paying the heavy death duties which it is alleged that they are paying.
60 No doubt a small minority are, perhaps because they retain an attractive old aristocratic attitude towards one's duties, as it were, about paying taxation, or else because they live in so remote a region of the Highlands that they have never heard of the possibility of tax avoidance, or else they loathe their children, or else they are run over by a bus without knowing beforehand that it is to happen to them and before they have made the appropriate arrangements.
But, apart from this minority, we know that the majority of wealthy people are not paying what they ought to pay under our death duties system. They are simply giving the money away—and it is not only death duties which can be either avoided or evaded in this way. It is very easy, by all kinds of methods which are quite familiar, to avoid the nominal burden of taxation, which appears so heavy. If the noble Lord were right in supposing that people pay Income Tax and Surtax at 17s. in the £, or whatever the figure is, we should have the kind of egalitarian society which he thinks we have, but the fact is that they are not paying these rates.
One can list a number of loopholes in the tax system quite simply. I can list ten straight off. There is the seven-year convenant, which is an obvious method, and the setting up of one-man companies, which is another obvious method. There is the whole range of dividend stripping types of procedure, with which the Finance Bill deals year and after year.
As a consequence, the nominal rates of taxation, which appear to be so heavy in this country, are nothing like as heavy as they seem. One piece of evidence which one can take to destroy this belief, which was the underlying theme of the noble Lord's speech—that we are a desperately heavily taxed country—is the comparison between our figures and those on the Continent. There is a well-known Conservative story that we are the most heavily taxed country in the world, suffering under an exceptionally crippling burden of taxation, but if we look at the figures of the total burden of taxation in this country it seems rather low when compared with that in other countries.
The total amount taken in taxation—national, local and National Insurance contributions—is 29 per cent. of the national income. In Germany, that 61 great free-enterprise country so much lauded on the benches opposite, the proportion taken is 34 per cent. In Austria, the proportion is 33 per cent. and in France it is 32 per cent. In fact, we are a very lightly taxed nation when we look at the figures, and the idea that we are suffering under a crippling burden of taxation without parallel anywhere else in the world is simply a Conservative myth built up by endless speeches over the last ten years. By international standards, on the whole we are a lightly taxed nation.
§ Sir A. Spearman
It is only at the lower levels that taxation is higher in Germany than it is here. At the higher levels it is much higher here.
§ Mr. Crosland
No. The hon. Member made his point about Surtax in his speech. The discussion on the Surtax concession showed that there was one income bracket, let us call it the lower executive bracket, at which taxation was higher in this country than in most other countries, and this was the Chancellor's justification for his Surtax measure. But taking the whole of the higher income tax brackets, and not just the £3,000 to £6,000 bracket which was where Britain was more heavily taxed, it is not the case that Britain is uniquely heavily taxed. In any case, the point which I make is that the possibilities within those brackets of avoiding tax are so numerous and so considerable that even the nominal tax burdens have very little meaning.
There is one point which I should like to take up, because I think that the Financial Secretary will refer to it in his reply. He will give figures of the ratio of direct to indirect taxation. If the figures of direct taxation include a figure for Profits Tax, then in my view these are largely meaningless. This point was raised by the hon. Member for Scarborough and Whitby (Sir A. Spearman), and we ought to try to get some agreement about it. It is the view of most economists, which carries little conviction in the House where, on the whole, economists are reasonably disliked, and also the view of the great city commentators and the Stock Exchange that in the long run an increase in Profits Tax is passed on to the consumer in higher prices.
62 When the Chancellor increased Profits Tax last year by whatever percentage it was, there was no fall in share values as a consequence, because it was generally assumed in the City and by commentators that in the long run it would be passed to the consumer under conditions of full employment. Admittedly, this would not happen in the middle of a depression, but under full employment Profits Tax, in the end, is passed on and simply amounts to a turnover or sales tax on the consumer. Therefore, to include Profits Tax in the figures for direct taxation in my view is extremely misleading. Profits Tax ought to be counted as indirect taxation equivalent to a general sales or turnover tax on the consumer.
Finally, I should like to express a general view about direct and indirect taxation. I do not agree with many of my hon. Friends in what they have said today and said last week about taxation; I believe that any Government which wants to improve the public sector and the social services, as I very much want to do, will have to rely on indirect taxation to a considerable degree. Here I agree with the noble Lord: if one relies more heavily on indirect taxation one will make the whole tax system very much more regressive. Nobody on these benches wants to do that.
But, personally, I am convinced, subject to any Labour Party view of the levels which social expenditure should reach, that this will require an increase in indirect taxation over that which we have today. The only way out of the dilemma is to start by making the taxation system more progressive. For example, we could have a gift tax to stop the payment of death duties as gifts inter vivos; a genuine capital gains tax instead of the pseudo tax in the Budget; and a tightening of the tax system at the top end of the scale, which would make it more progressive.
Having done that, I believe that we on these benches ought to take a more flexible attitude towards certain types of indirect taxation than we have taken in the past, because I believe that without some very high-yielding indirect taxation we shall not get the revenue which we need to create the kind of social sector which we ought to have in this country. But a prior condition of doing this is a 63 progressiveness of the taxation system in which at the moment there is so much evasion and avoidance at the top end of the scale.
§ Mr. Raymond Gower (Barry)
The hon. Gentleman the Member for Grimsby (Mr. Crosland) complained about tax evasion and then, at the end of his speech, suggested a form of tax on gifts inter vivos. I can conceive of no tax so capable of evasion as a tax on gifts between two persons during their lifetimes, a tax on gifts between one person and another.
I hope that in his remarks about evasion he was not carrying them so far as to suggest that there is any greater reluctance in this country to paying taxes than in some other countries and that evasion is not found, for example, in France. I can hardly conceive that this country is the worst in that respect. I should have thought that throughout the post-war era our Inland Revenue has been as effective as any tax-raising system in the world, both in checking the incomes of people and in collecting an immense amount of tax from them.
On the other side of the Committee there have been complaints and suggestions that point to a great divergence of view about the relative importance of indirect and direct taxation. Of course, if one listened only to a debate like that we have had today one would imagine the divergence of view between the two sides to be considerable, even tremendous, but really, our view on this side of the Committee is not so dissimilar from that on the other side. I agree with my hon. Friend the Member for Somerset, North (Mr. Leather) that we do not dissent from the view of the Opposition or of the hon. Member for Sowerby (Mr. Houghton) that it is desirable that a considerable proportion of our tax requirements should be levied by a progressive and direct system. That is the view, I think, of the majority on these benches. I can appreciate that my noble Friend the Member for Dorset, South (Viscount Hinchingbrooke) has a somewhat special point of view, but I doubt whether it is the majority view on these benches. We take the view, in the majority, that a large part of our taxation system 64 should be direct and progressive, but the hon. Member for Sowerby, in his very interesting and admirable speech, implied that in so doing most of our expenditure should be met in that way, that it would be easy for this country, for example, to step up progressive direct taxation and reduce indirect taxation without any ill effects upon our economy.
Other speakers on the other side of the Committee complained that so many lower-wage earners today are paying direct taxation as compared with prewar days. I should have thought that there was a direct conflict between those two points of view. The fact is, of course, that our improved standard of living has drawn more wage earners into the tax paying class. I should have thought that extremely desirable. I should like to see more and more people at the lower end of the wage-earning and salary-earning classes of this country having to pay Income Tax and having to pay more, for this would indicate that in most cases they would be earning higher incomes.
The hon. Member for Sowerby in his remarks thought that we should meet more of our commitments through direct taxation, and I was rather pleased when the hon. Member for Grimsby presented the matter in a somewhat different light. He candidly said that our social services —most of them—had in them the seeds of their own growth which required an extension of the tax raising system. He saw the increased requirement for indirect as well as direct taxation.
It is the major advantage of direct taxation that it is certain. It is certain in amount, it is certain in incidence, and it is fairly graded to the ability of a person to pay it. However, it has the very obvious disadvantage that it does in many cases penalise extra effort not merely by executives but by wage earners. Some of the loudest complainants at my interviews are those who scratch their heads and say, "If I do overtime, why should I pay tax on it?" I do not know whether other hon. Members on either side have had that experience, but there are a large number of those people today. The hon. Gentleman the Member for Wallsend (Mr. McKay) gave the figure of £15 or thereabouts as the average earnings received, 65 but there are a lot of earners who earn considerably more, and the more they earn the more tax they are required to pay and they are just as ready to complain and just as reluctant to pay as others who have paid Income Tax for years.
That is the weakness of stepping up the rates. I can assure the hon. Member for Sowerby that there is not that wonderful enthusiasm for tax paying which he described at one stage of his speech. He extolled the virtues of tax paying. But the State is not always provident in its spending, and there is the contrary view of the nineteenth century liberal economists, that as much as possible of the money of the nation should fructify in the pockets of the people. I think that this is just as capable of strong argument as the one the hon. Member put forward, and I would say that the State is often more improvident in its spending than the individual or the company or the organisation, and I should have thought it would be desirable in any modern economy that we should not wish to increase taxation of that kind.
Our taxation of the wage earner and the salary earner by the direct method is very considerable, and as my hon. Friend the Member for Scarborough and Whitby (Sir A. Spearman) pointed out, the proportion which it bears to the total tax revenue has increased, not diminished. I sincerely hope that in future we shall meet our increasing commitments mot by extending the narrow field which the hon. Member described but in possibly enlarging the field in which there is a conscious choice. I think it is a good thing, if I am not a smoker, that I do not pay that kind of tax, and that if I do not indulge in alcoholic beverages I do not need to pay the duties on them. But, of course, if it is just a question of direct taxation, I pay it willy-nilly, and it is a severe disincentive to me and to my fellow countrymen that I have to pay this tax whatever I do if I earn a certain amount. It is surely a great advantage of most forms of indirect taxation that I have this choice, that if I do not spend my savings in an improvident way I can invest them for the further benefit of myself and the community at large.
There are not the broad and violent differences of view which some hon. 66 Members have attempted to describe. I should have thought the difference a difference of emphasis, and a legitimate difference of emphasis, which is not surprising when one realises the extent of the taxes which are collected in various forms in this country today.
§ Mr. Bruce Millan (Glasgow, Craigton)
Of course, I agree with the hon. Member for Barry (Mr. Gower) and, indeed, other hon. Members who have said that we shall continue to have to have a fairly high level of indirect taxation. As a matter of fact, I think that a good deal of this absolute distinction which is drawn between direct and indirect taxation misses the point, because really what we ought to do is to look at each category of tax to see how the spread of taxation is arranged within that category, because all direct taxation, obviously, does not fall on the wealthy people, and all indirect taxation, on the other hand, obviously does not fall on the poorer class of people.
The reason why we need a high level of direct and indirect taxation is, of course, a very simple one, which I think the noble Lord the Member for Dorset, South (Viscount Hinchingbrooke), among others, on the other side of the Committee, just does not accept, and that is that Government expenditure, under any Government, is always certainly bound to increase. We are living in the kind of society in which, and the developments in our society are such, that is becoming almost inevitable. That is happening not only in Britain but in every other advanced industrialised country in the world.
It is certainly possible to keep the rates of increase down, though we on this side of the Committee can think of many aspects of Government policy on which we would wish the Government to spend more. That is also equally true, I think, of all hon. Members on the other side of the Committee, because, when they talk, for example, about the Government spending more money on roads, economically speaking that is exactly the same as spending more capital expenditure on education, and it does require ultimately additional taxation in exactly the same way.
The difference really between the two sides is perhaps a difference in degree, and also a difference in that we would 67 choose to spend money on things which people on the other side of the Committee consider to be less important and they in some cases would choose to spend money on things which we on this side would consider less important. But Government expenditure in any case is bound to go up.
Therefore, we are bound to have a high level of taxation. I think that that is really the fundamental thing which on both sides we ought all to accept and then we can get down to the argument of how we should distribute the burden of taxation.
§ Sir A. Spearman
Would not the hon. Member agree that a higher level of Government expenditure, which I accept, does not necessarily entail a higher level of taxation in an economy in which there is an expansion of national wealth, such as we have had?
§ Mr. Millan
Certainly, but if we had had the kind of expansion of the economy we ought to have had over the last four or five years we should have found the problem of how to raise the additional taxation very much simpler than we are finding it at present. Obviously, the amount of taxation the Government have to raise can go up without rates of taxation going up. The fact nevertheless remains that that expenditure is likely to increase and, therefore, the amount of money which the Government take in taxation in one way or another is likely to increase rather than to diminish, and the real argument is how we should spread the burden of taxation.
I agree very much with most of what my hon. Friend the Member for Grimsby (Mr. Crosland) said about the spread of taxation, but perhaps I may take up one point about the question of Profits Tax. It is certainly true that, as far as possible, Profits Tax is passed on to the consumer. Obviously, industry tends to do that. What applies to Profits Tax on companies applies equally to Income Tax. There is no economic reason why we should make the distinction between Profits Tax and Income Tax.
It is not a simple problem. I do not think that an increase in Profits Tax is naturally and automatically passed on 68 to the consumer. Obviously, a good deal depends on the economic situation. If we have an expanding economy where demand s buoyant, where prices can go up and demand remain bouyant, then it is easier for it to be passed on than it would be in circumstances where there was a deflationary or semi-deflationary situation.
The real point I want to make is that as well as the distinction between direct and indirect taxation, it is worth while making the distinction between personal and corporate taxation, not only from the economic point of view but also from the point of view of social justice. There obviously is a tremendous amount of difference between Profits Tax which can be passed on to the consumer and an increase in Income Tax which cannot. It cannot be passed on in the same way that taxation on companies can be passed on.
I was glad that my hon. Friend took up the point made by the hon. Member for Scarborough and Whitby (Sir A. Spearman) about equating the Profits Tax increase, on the one hand, with Surtax decrease, on the other. To add one additional point—absolutely from fact and not from theory—dividends did not go down after the Profits Tax increase, and there is no sign at all that that increase makes the slightest difference to the rate of dividend distribution. From the shareholder's point of view, in every way it is the rate of dividend distribution which counts from the point of view of current income and also from the point of view of capital gain, because it is that distribution more than anything else which causes shares to appreciate on the Stock Exchange.
The hon. Member for Scarborough and Whitby raised another point and made a frank admission which, so far, has not been made by any other hon. Member opposite. He said that in making the Surtax concessions last year the Chancellor had misjudged the situation to the extent that he had imagined that these concessions would amount to a considerable incentive but that that had not happened.
§ Sir A. Spearman
I said nothing of the sort. I said that my right hon. and learned Friend the Chancellor was open to criticism on whether he had made a misjudgment. I tried to show that he 69 had made the right judgment. It was, naturally, on the question of incentives that he could be criticised and not on the fairness of tax distribution.
§ Mr. Millan
The right hon. and learned Gentleman can be criticised on the incentives, and I should like to criticise him now. This was, of course, the basic argument used by the Government last year, that Surtax concessions were absolutely necessary in order to give to those in our middle and upper management the kind of stimulus which their opposite numbers in the Common Market countries and elsewhere were receiving through their taxation systems and that this would indirectly give a stimulus to the whole economy. That has not happened.
I think that it was my right hon. Friend the Member for Battersea, North (Mr. Jay) who pointed out the other day that, if we were to take the Surtax concessions and what happened to the economy as direct cause and effect, the conclusion would be that the Surtax concessions were disincentives rather than incentives. I would not go as far as that, but there was a good deal of talk last year about the Surtax concessions giving some peculiar incentive which could not be given in any other way in our taxation system. The hon. Member for Scarborough and Whitby was also wrong about the effectiveness as far as unearned incomes were concerned. It is true that a totally unearned income got no concession at all, but a man with £1,000 earned income and £2,000 unearned income received a benefit through the Surtax concessions. He was in no different position from the man with £1,000 earned income and nothing else as far as incentive was concerned, yet, in the former case, the concession was given and in the latter case there was no concession at all.
I hope that what has happened over the last year or so has exploded the idea that there are some peculiar incentives which must be given as an absolutely indispensable pre-condition to stimulus to the whole economy. I do not believe that that is so. Obviously, incentives count a good deal, but that kind of good relationship between incentive, on the one hand, and stimulus to 70 the economy, on the other, does not bear serious examination at all.
If the Government were concerned with giving real incentives they would alter the whole taxation system. They ought to make the cover of the taxation system as comprehensive as they possibly can. The ordinary wage-earner who works overtime and complains to the hon. Member for Barry (Mr. Gower) about the additional Income Tax which he has to pay on his overtime earnings is disturbed and annoyed not because of that, but because he knows that so many other people with very considerable incomes are able to avoid paying their fair share of taxation. That is the real thing that annoys him. It is not so much the additional taxation which he is called upon to pay, though, obviously, no one likes paying additional taxation, but the feeling, which is really endemic throughout the community, that there are very considerable numbers of people who do not pay their fair share of taxation.
§ Mr. Leather
Could it not be that this resentment, which I fully accept, is not entirely or purely related to the fact that someone gets a much higher income but to the fact that his mate, who does his overtime work for someone down the road, pays not tax on it?
§ Mr. Millan
That certainly happens, but I know very few people who resent the fact that the odd-job man makes a hit of tax-free income on the side. On the other hand, I find that very large numbers of people resent those with very large incomes, more particularly with large sums of capital at their disposal, who are able to enjoy these very high incomes without paying what the vast majority of people consider to be fair rates of tax. That is why there has been such tremendous disappointment with the Chancellor's proposals on the capital gains tax.
Obviously, the tax is not a fully fledged capital gains tax at all. It is obviously something which is so wide open to avoidance that we are really only introducing another category of taxation which has exactly the same fundamental faults as has our Estate Duty system at the moment. It has, apparently, high and even punitive rates 71 and yet, in practice, the yield is really quite small because the opportunities for avoidance are so great.
§ Mr. Millan
It all depends on what one means by "responsible commentators and journals". If what is meant are the Economist, the Financial Times, and other newspapers, then I simply beg to differ in that description as far as this taxation is concerned. I am not talking about journalists, but about people in the country as a whole. The hon. Gentleman really must not confuse financial journalism and public opinion, because they are really two quite different things.
There is considerable resentment about tax avoidance, because the ordinary man's knowledge not of the technicalities of it but of its extent and the facility with which people can manipulate it is growing all the time. It is a hypocritical situation, apart from any-think else, to have this high rate of taxation on the one hand and these wide-open facilities for avoidance on the other. If I had to choose, I would choose to have a lower rate which is effective rather than a high rate which is ineffective. Quite apart from the hypocrisy of the situation, it means that the more honest taxpayer is paying some amount in lieu of the taxpayer who is not so scrupulous about paying his fair share and is willing to do everything he possibly can to avoid paying that share.
Another comment which I should like to make, directly related to Income Tax, is a criticism of a tendency during the past few years in the matter of personal allowances and reduced rate relief. Quite apart from the general consideration, the actual working out of taxation liability on particular classes of the community is terribly important. The Chancellor has been able to get considerable rises in taxation revenue from Income Tax over the last few years by the simple device of not increasing personal allowances to take account of the increase in the cost 72 of living. If we compare personal allowances today with what they were ten years ago and then compare them in real money terms we find that they are worth a good deal less today.
The same is true of the reduced rate relief. A point which is not often noticed is that the reduced rate relief ought also to be increased as the cost of living goes up and the value of money goes down. If we compare the situation today with 1952, to take only one example, on the first £400 of taxable income, taking account of the reduced rate relief operating in 1952 and in 1962, the amount of taxation reduction is only £3, yet we know that £400 in 1962 is worth considerably less than it was in 1952. By this simple device of not increasing personal allowances to make up for falls in the value of money and doing the same with the reduced rate relief, the Chancellor is winning considerable sums of money from among the lower wage earners.
This is a point which we shall be coming to in later discussions of the Bill. It is extremely important from the point of view of the equitable distribution of income taxation. It is also another reason why we have the kind of resentment which has already been mentioned in the debate. The ordinary man at about the average wage who does a bit of overtime should not have to pay such a high marginal tax at that level of income that he feels considerable resentment about it.
The fact that many such men do feel resentment is symptomatic of the Government's failure to bring these basic allowances, which apply to everyone, up to date in accordance with the value of money today and indeed in accordance with the level of wage rates today. We shall be able to go into these questions in more detail later, but it is a fundamental criticism of the Clause and of the Bill as a whole that the Government have failed to do this and that ordinary people are becoming more and more disgusted with a situation in which they feel that they are paying far more than their due and fair share of the taxation burden.
§ Mr. Mitchison
I have found this a most interesting discussion. We are considering a Clause which maintains the present rate of Income Tax in a Budget 73 which makes some considerable imposition by way of indirect taxation and further maintains both some recent increases in indirect taxation and the opportunity in the Chancellor's hands to add by administrative Order to those increases in the coming year. We are discussing the Clause in the light of a Budget which leans very heavily in this Bill in favour of increases of indirect taxation as against any dealings at all in direct taxation. The one relief Clause, which we shall come to later, is very small by comparison with what is put on by way of indirect taxation.
One asks oneself the reasons for this. There seem to be two, which I hope the Financial Secretary will deal with if he replies to the debate. One is that the Government and the Conservative Party are doing what they have done regularly at recent elections, that is postponing any remission of direct taxation to just before the election. There was a drop in the rates of Income Tax for the 1955 election and another drop for the 1959 election. When I look at the Clause I conclude that, whatever else it means or does not mean, it means that the Government do not intend to have an election in the coming year. So much is fairly clear.
Whether that is the Government's only motive is another question. The only other possible motive is the one which was put very clearly by my hon. Friend the Member for Sowerby (Mr. Houghton) in his remarkably interesting, eloquent and able opening speech. He pointed out what most of us know generally, and gave chapter and verse for it, that among other comparable countries we are a country of direct taxation rather than of indirect taxation, and that generally we have leaned in the past, and still lean, on direct taxation as our principal instrument.
It is quite clear from what my hon. Friend said, and from what one sees in the terms of the Treaty of Rome, that there will be considerable pressure, both in the terms of the Treaty itself and in the negotiations which one supposes will precede our entry, if we do enter, the Common Market, to make us equalise our system to something more like that which is prevalent in the other European countries concerned. Therefore, presumably, there is pressure, as 74 far as it goes, to urge upon us to reduce direct taxation if we can and certainly to increase indirect taxation. I should like to know whether that has had any part in shaping the Finance Bill and the Budget statement which preceded it. It is something which the Chancellor, or whoever replies on behalf of the Treasury, ought to say quite clearly and definitely to the Committee and, through us, to the country.
I turn now to the general question, which I shall take shortly, whether there ought to be a reduction or an increase in the rate of direct tax at the moment. I agree with all of my hon. Friends who have said that we cannot rely entirely on direct taxation. Undoubtedly we must have indirect taxation too. I think there can be no doubt about that in the foreseeable future. I cannot visualise a Labour Chancellor or any other Chancellor repealing all the indirect taxes and trying to find their yield in some fantastic increase in direct taxation.
But that is not really the question we are considering. We are considering something rather different. Here is a Bill which makes considerable increases in indirect taxation and makes no change in the Income Tax rates. Quite apart from anything else, what criticism can properly be made, and should be made, of that line of approach to the financial problem of today? I will say one thing at once. Hon. Members seem to me to speak as if the yield of a tax was determined solely by the figure at which the tax is placed, whereas it depends, particularly in the case of Income Tax, on the expansion or failure to expand of the country.
In recent months we have had a conspicuous failure to expand in general at a time when all the pressure from the Government was towards expansion. It is not merely a question of months; it goes back over years. I know that there are slight signs of an improvement now. But the yield of direct taxation, even more perhaps than that of indirect taxation, depends on our success in promoting the expanding economy for which we on this side of the Committee have been constantly pressing one Conservative Chancellor after another. We hope that we have found a convert in the right hon. and learned Gentleman, but, 75 whatever he says about it, some of his recent actions do not seem to support his complete and sincere conversion.
Coming to the more general question, it seems to me that those of my hon. Friends and other hon. Members who have said how important it was—my hon. Friend the Member for Glasgow, Craigton (Mr. Millan) said this—to get at the effective taxable capacity of people who were paying direct taxes are absolutely right. I do not think one can regard changes in the rate of Income Tax or the refusal of changes in the rate of Income Tax without a passing wish —we shall come to this matter in more detail later—that the base of taxation should be broadened without too much regard to what in modern society proves to be exceedingly artificial distinctions between capital and income. I am not saying that there is not a real distinction in fact, but many of us, and, I think, most people in the country, would regard a man who was making capital gains under modern conditions as getting something very like an income out of it and yet escaping taxation. That is the most obvious way of broadening taxation at the moment.
The system is not altogether satisfactory not only from that point of view. We are not talking at the moment about the effective rate. The effective rate is just about 2s. 6d. in the £. Anyone who is interested in this will find it dealt with in the last Report of the Commissioners of Inland Revenue, Cmnd. 1598. What we are talking about is a standard rate which is, of course, of fundamental importance in one sense in that it is the rate which governs any number of reliefs and taxation itself. It is perhaps an instrument rather than the last word in taxation. The effective rate is what actually matters to the people concerned.
Looking at the way in which direct taxation falls. I still find myself much shocked by two things. Both arise from the same Report of the Commissioners of Inland Revenue. One arises from the table given there. This table occurs year after year. It can be found on page 45 of the last Report. It shows a number of individuals paying tax which varies comparatively little from 1951–52 to 1960–61. But during that time the number entirely relieved from taxation by allowances has been more than 76 halved while the number chargeable to tax has suffered a considerable increase.
It is very easy to say that this is the result of having a prosperous community or the result of inflation, whichever way one likes to look at it, but the fact remains that in present conditions the exemptions from taxation, which constitute a very important side of the progressive element in it, are becoming less and less effective with every year. Therefore, to that extent direct taxation is by no means as progressive as I think it ought to be.
The second thing which shocks me when I look through the Report is the extraordinarily low level at which people are made to pay direct taxes now. One hon. Member said that everybody ought to pay direct taxes. There are very few people who get out of it. If we can take two single people with equal earnings and find that they are actually paying Income Tax though their joint income is only £400 a year, I feel that one is driven to the conclusion that there is a good deal yet to be done to make direct taxation more progressive.
The conclusion to all this, in my opinion, is that rather than seek changes in the rate of Income Tax, we should follow the precept so eloquently put to us by the noble Lord the Member for Dorset, South (Viscount Hinchingbrooke) and not look for votes before a General Election by reducing the standard rate of Income Tax. The process results in much greater benefit to the substantial taxpayer than to the impoverished taxpayers to whom I have just referred. Instead, we should look to broadening the basis of taxation and revising our views about the effective difference between capital and income for this purpose on the one hand and, on the other 'hand, to the reliefs and exemptions from Income Tax which are so conspicuously omitted from this Finance Bill.
Therefore, I come to the conclusion that I 'have certainly no wish to put the standard rate up this year, nor have I any wish now or in the immediate future to bring the standard rate down. What I would far rather do is to broaden the basis on which Income Tax is levied and make all the concessions possible at the bottom of the scale, particularly to people who are earning such very small 77 amounts under modern conditions as those appearing as taxpayers in the table to which I have referred.
I agree that the amounts paid are not large, but one has constantly to remember in taxation matters, commonplace though it may be, that it is the small taxpayers paying small amounts who may well suffer the greatest practical hardship in the payment of taxation. My conclusion, therefore, is that I, for one, would not divide against the Clause.
§ The Financial Secretary to the Treasury (Sir Edward Boyle)
We have had a very interesting debate in the sense that I hope we may at least have persuaded the editor of the Guardian that we do not spend our entire time in Committee on the Finance Bill talking about tea, coffee, sugar and pool betting.
There is one thing that I slightly regretted this afternoon. The last time we had a debate of any length on the subject dealt with in this Clause, we had with us in full voice my hon. Friend the Member for Kidderminster (Mr Nabarro) who has been absent this afternoon. I shall try to answer the speeches which have been made and the very large number of points that have been raised during the debate.
The hon. Member for Sowerby (Mr. Houghton) took my right hon. and learned Friend the Chancellor of the Exchequer rather vigorously to task for his remark that all taxes are odious, and suggested that that presumably meant that the Chancellor had a strong bias against the whole of the public sector of the economy. As the hon. Gentleman knows, the proportion of the national income going to the public sector has been rising in recent years, and although it is the Government's belief that this proportion must be kept in some kind of check in order to leave resources available for other forms of economic activity, I do not think my right hon. and learned Friend has ever denied in any of his speeches that there are certain aspects of public expenditure, if not others, which ought to rise. One thing which would certainly be odious would be if ever we had a Chancellor who took the line that all income rightly belonged to the State except that which the Chancellor allowed us to have. That would be an odious attitude to take.
78 There was one other point in the speech of the hon. Member for Sowerby that I should like to take up. I think that he slightly misunderstood one argument about Surtax. Surely the point is not just what tax someone earning £3,000 a year is paying, but how much extra earnings he can keep. That is just as important. I made the point last year that if a man earned an extra £1,000, he could, as a result of my right hon. and learned Friend's proposals, keep not £539 but £699. That was slightly more generous than in Germany but considerably less generous than in the United States. I consider that, when spreading the weight of taxation, we must always bear in mind not just the tax that people pay on a particular income, but the extra amount of earnings that they will be allowed to keep as a result of extra effort.
My hon. Friend the Member for Somerset, North (Mr. Leather) said that he wished that Income Tax could be set out differently. I can assure my hon. Friend that if he has any ideas about this and would like to discuss them with the Economic Secretary or myself, we should be very interested to hear what he has to say.
My hon. Friend the Member for Scarborough and Whitby (Sir A. Spearman) raised two or three points to which I should like to reply. I agree with him about the effectiveness of Income Tax as a weapon. On the other hand, I think that he will agree that it is not a weapon that can be brought into play very quickly. I recall what the hon. Member for Grimsby (Mr. Crosland) said about that in his speech on the Finance Bill last year. One of the very strong reasons for having an indirect tax regulator is that it can affect the level of demand quickly. But I agree with my hon. Friend that there is much to be said for the level of the standard rate being one at which we can put the standard rate up on occasions as well as down. This is a very strong argument for not having a standard rate at too high a level all the time.
My hon. Friend raised a point about dividends and got into some controversy on the effects of Profits Tax. I must 79 say the same as the hon. Member for Glasgow, Craigton (Mr. Millan), that it is going too far to say as yet that two rises in Profits Tax from 10 per cent. to 15 per cent. over two years will exert no effect at all on share prices and dividends in the longer run. I was interested in the hon. Member for Grimsby's conviction that Profits Tax tends to be passed on. A good deal of rather conflicting evidence has ben printed about this. I am not quite sure that it is respectable to quote Mr. Kaldor on Income Tax in his book "An Expenditure Tax", in which he had contrary evidence of this kind which was quite interesting. But I do not think that we should dogmatise too much on the subject of what is the effect of Profits Tax.
§ Mr. Crosland
Mr. Kaldor in his book takes very strongly the view I was expressing—almost dogmatically so. I was stating his views and I hope that I am not being misrepresented.
§ Sir E. Boyle
I apologise. My recollection was the other way. I accept what the hon. Gentleman says.
My hon. Friend the Member for Scarborough and Whitby referred to Surtax relief and mixed incomes. On this point, I think that my right hon. and learned Friend the Chancellor was quite certainly right. If a man has £4,000 a year earned income and an investment income of £100 a year, could it really be right to exempt that man's earned income completely from tax but to tax the £100 a year investment income at the rate of 25 per cent.? I cannot see how that can possibly be sensible from the point of view of encouraging saving in the economy. It would be possible to argue against my right hon. Friend's proposal as a whole, but to suggest that we should treat mixed incomes in a different way cannot possibly he helpful to saving.
The hon. Member for Blackburn (Mrs. Castle) said some hard things about the Government's policy and that our whole system of direct taxation was overwhelmingly regressive and that we were having a steady movement away from progressive taxation, and this applied particularly to the financing of health service expenditure.
I do not agree with the hon. Lady that our present system of taxation is moving 80 very rapidly in a regressive direction. We had before the war a very steeply progressive rate of Surtax in this country. The top rate of Surtax before the war left a man with 5s. in the £ on all income above £30,000 but we find that today, after my right hon. and learned Friend's proposals, the top rate of Surtax leaves a man with only 2s. 3d. in the £ on all income above £20,000. It can, therefore, be demonstrated that our direct taxation is a great deal more progressive than it was before the war.
The hon. Lady is also quite wrong about the finances of the National Health Service. If we look over the last three or four years, gross expenditure on the Health Service has risen by £160 million approximately from £714 million in 1959–60 to £877 million which is the estimated figure for the current year, the hon. Lady will find that the total health expenditure has gone up by £163 million and that the total contribution to that expenditure from the stamp and from the charges has gone up by only £68 million. In fact the proportion of Health Service expenditure financed from the general proceeds of taxation has been advancing more rapidly than the proportion of finance from the health stamp and other charges.
§ Mrs. Castle
The hon. Gentleman will realise that I was talking about the last ten years of Conservative Government and not about comparisons before the war, because the whole effect of the Labour Government's taxation policy was to make our taxation more progressive. There has been a reversal of that process in the last ten years.
§ Sir E. Boyle
The hon. Lady must think harder about this. To say that seventeen years after the war we should have rates of direct taxation just as high as in the first five or six years after the war seems an extraordinary thing to say. We had in 1951 when Income Tax was put up by the Labour Government a very severe emergency. If we look at the system today, we have a very much more steeply progressive system than before the war, but I am glad to say that seventeen years after the war it is possible to have a standard rate of tax lower than it was a few years after the war. I should have thought that would be welcomed by the hon. Lady.
§ Mrs. Castle
What is not welcome is that the Government have more than doubled the poll tax of the National Insurance contribution.
§ Sir E. Boyle
Although the National Insurance contribution has been raised, as have the prescription charges and other health charges, the proportion of the total expenditure financed from direct taxation has gone up and not down. No one could possibly say that today the direct taxpayer is not making a full contribution to the finances of the social services.
§ Mr. Mitchison
I think that the hon. Gentleman would agree, judging from what he said at the time the poll tax was introduced, that the extra shilling on the National Health charges was a tax and, for this purpose, a direct tax of the most regressive character because it falls equally on everyone irrespective of earnings.
§ Sir E. Boyle
What the hon. and learned Gentleman says is perfectly true. On the other hand, the fact remains that at a time when the gross Health Service expenditure has risen by £163 million the total amount received from the stamp, or the poll tax, if he likes to call it that, which I agree is a form of tax, from prescription charges and other forms of charges, has gone up by only £68 million. If one looks at these figures, there is no doubt that the gross Health Service expenditure has been rising a good deal faster than the share of it which it is financed by the stamp and the charges.
My noble Friend the Member for Dorset, South (Viscount Hinchingbrooke) asked, in effect, whether the Government still put a high priority on reducing direct taxation. Certainly they do. But I say to him—and here I am sympathetic to much of what was said by the hon. Member for Craigton—that, when considering priorities for tax reductions, one has to think of priorities within a particular kind of taxation. I should not like to say anything beyond this about the priority which the Government will adopt, when economic circumstances permit it, in reducing the standard rate or in increasing direct tax allowances. Obviously, I cannot anticipate any future Budget statement on this point. But my right hon. and 82 learned Friend places high priority on reductions in the general field of direct taxation as circumstances permit.
The hon. Member for Grimsby, in an interesting speech, talked about the wide gap in the standard of living. I do not quarrel in general about this, but would he not agree that, whereas in the old days it was common to think of the standard of living in the image of a pyramid, today, in our modern society, as is the case with a number of societies in the western world, we are moving into something more like a diamond? The gap is taking on a rather different shape from what it had in years gone by.
The hon. Member had a lot to say about taxes in favour of property and against income. I hope that I am not scoring unfair points when I say that one could use part of his case as an argument in favour of the Surtax concession made by my right hon. and learned Friend last year. Certainly, that concession in itself will have done something to lessen the bias against income.
I wish to make two points about the ratio of direct to indirect taxation. First, I wish to explain the difference in the figures which I used in the Budget debate and some which the hon. Member for Cardiff, South-East (Mr. Callaghan) has quoted. I quoted the figures for the proportions of total Government revenue collected from direct taxation as 50.8 per cent. in 1951 and 53 per cent. today. These figures are from the totals which include, as direct taxes, only the Income Tax, Surtax and the Profits Tax, and, as indirect taxes on expenditure, all Customs and Excise duties, motor vehicle duties and stamp duties. The figures I quoted excluded altogether death duties, which are taxes on capital.
The hon. Member quoted from Table 2 (b) of the Board's 104th Annual Report, which shows the proportions of total Government revenue collected by the Inland Revenue Department, and, of course, the Inland Revenue total includes both death duties and stamp duties. That explains the discrepancy between us.
But in view of what the hon. Member for Grimsby said about Profits Tax, and as we are specifically debating Income Tax, perhaps I may quote Income Tax and Surtax as proportions of total tax revenue. For 1951–52, a year in which 83 Income Tax was put up, the proportion of tax revenue taken by Income Tax and Surtax was 43.3 per cent. In 1960–61 it was 45.7 per cent. and in 1961–62 it was up to 46.2 per cent. In this financial year, it will be 45.2 per cent.
It is lower in this financial year because of the regulator which was imposed last year, and, as the hon. and learned Member for Kettering (Mr. Mitchison) said, because of the consolidation of much of that revenue in the Budget. The fact remains, however, that as a proportion of tax revenue, Income Tax and Surtax between them take a bigger proportion today—not a smaller one—than in 1951–52. Equally, they take a slightly smaller proportion than last year.
I was interested in what the hon, Member for Craigton said about indirect taxation and how, in his view, any Government pledged to high social expenditure would have to rely upon it to a high degree. That is true. It is also true because one must, in any Government pledged to high social expenditure, have sufficient fiscal powers to regulate the economy pretty quickly as well. In dealing with personal allowances, I have already stated that the Government realise the importance, as economic circumstances permit, of considering the whole range of direct taxation.
§ Mr. Millan
I want to revert to the point that the percentage of taxation taken by Income Tax and Surtax has gone up. Will he explain that? Is not the reason the one I have mentioned —that the personal allowances have not gone up in balance with the falls in the value of the £? Is not that the reason why he is able to quote these figures to us?
§ Sir E. Boyle
That may be true, and it was natural that the prospective increase in yield on direct taxation was particularly high last year. It was very nearly £400 million. That reflects, to some extent, the fact mentioned by the hon. Gentleman, but it also reflects the fact, as my right hon. and learned Friend has often reminded us, that personal incomes on the Whole rose 9½ per cent. in one financial year and there was a general rise in salaries in the 1960–61 period. I merely make this point to show 84 that it is false and unfair to suggest that under the Conservative Government Income Tax and Surtax have not been playing their full part in financing public expenditure.
The hon. and learned Member for Kettering asked me to anticipate not only my right hon. and learned Friend's Budget Statement but the date of the General Election. I must ask to have notice of that. But I want to reply right away to one point on which there should be no misunderstanding. Do not let anyone think that if we succeed in our negotiations with the European Economic Community, other people are going to dictate to us our standard rate of Income Tax. I am sorry that the hon. and learned Gentleman should have given any encouragement to that school of thought, because there is no truth in that suggestion.
What my right hon. and learned Friend indicated in his Budget speech was that, in considering the general structure of indirect taxation, we needed to consider the crowning aim of making the British economy competitive. That is quite different from suggesting that other people are going to dictate our rates of Income Tax.
§ Mrs. Castle
Is not the hon. Gentleman aware of the position in the Community? At this moment, a committee is studying the harmonisation of taxation, starting with indirect taxation, later moving to direct taxation. Are not the member Governments of the Community seeking to have equivalent taxation burdens throughout each country, with taxes of a similar type, so as to equalise competition?
§ Sir E. Boyle
I have no doubt that, whether we join the Community or not, the member nations will have every incentive to discover one another's taxation practices, which is a good thing, and that what are plainly discriminatory aspects will have to be considered carefully. But that is another matter quite different from suggesting that we are going to be dictated to about our rates of direct taxation.
A number of hon. Members, including my hon. Friend the Member for Scarborough and Whitby, suggested that if we have growth in the economy these problems of taxation might be very 85 greatly mitigated. But if the growth and the increased production were simply a matter of employing more people for longer hours, putting a greater strain on our resources, it might well be that we should have to have not laxer Budgets but more severe ones. But if the growth were to mean getting more value out of a given volume of labour and materials, then, under those conditions, the burden of taxation could be reduced.
That is another way of saying that it is in the interests of the whole community and not just of one section that we should get as much value as we can out of a given level of economic resources. The hon. and learned Member for Kettering talked about poorer people, and a number of hon. Members have referred to those least well off and their tax problems. But let us not forget the other side of the coin—that this taxation finances a vast volume of social expenditure of special benefit to the poorest in our society. I have already talked about health expenditure. Exactly the same is true about expenditure on education. In 1951–52, we were spending a total of little more than £400 million a year on education. In 1960–61, the figure was £945 million and it has risen steadily since then.
This expenditure is of special importance to a number of lower-paid taxpayers. [HON. MEMBERS: "Why?"] Certainly. Agricultural workers, who are among the lower-paid workers in the community, find the development of county secondary education something of very special importance to them. In considering this high level of taxation, let us never forget that those who are lower-paid workers, quite apart from the taxes they pay, gain a disproportionate benefit from the expenditure which this taxation is designed to support.
I think that I have answered at any rate the greater number of the points which have been raised in the debate, and I hope that the Committee may now be ready to pass this Clause and proceed to the next.
§ Question put and agreed to.
§ Clause ordered to stand part of the Bill.