§ Last year I took off the 6d. from the Income Tax which had been imposed in 1931, but I was not able then to deal with Income Tax allowances, or with the extra 10 per cent. that had been placed upon the Surtax. I have now to make some proposals about Income Tax allowances which involve some change of method. The old reliefs were never scientific, nor are they sacrosanct. They were imposed at a time when the cost of living was high, and some of them were afterwards increased at a time when the cost of living was falling. But there are other reasons for an alteration. In 1931, the increased taxation from reduced allowances was to some partial extent 1633 compensated for by an increase in the earned income allowance from one-sixth to one-fifth. To go back now to the exact system which prevailed before the change in 1931 would, therefore, involve the withdrawal of a concession which was very welcome at the time, and which has now, I think, become established in the tax. At any rate, I should be very sorry myself to alter it.
§ There is a further consideration which weighs with me even more heavily. I had to choose last year between a reduction in the standard rate and an alteration in the Income Tax allowances, and I deliberately selected the first, because I thought it was the more likely to give renewed encouragement and stimulus to trade. I am very glad that that has been borne out by what has happened. But I realised quite well at the time that that proposal conferred a greater benefit upon the large taxpayer than upon the small, because, of course, to the small Income Taxpayer the most important thing is the level of his personal allowances and reliefs, which makes to him more difference than an alteration in the level of the standard rate. Therefore I want this year to see the small taxpayer have his turn. I want the relief that I can give—and, as I shall show, it will be substantial—to go as far as possible to incomes near the bottom of the scale. It is pretty clear what is the best method of effecting that. It is to make an alteration in the zone which is subject to the lower rate of Income Tax. At the present time the rule is that the first £175 of taxable income—that is, income less the personal allowances—is charged Income Tax only at half rate, that is, at 2s. 3d. in the £. I propose to substitute for that a new rule, that the first £135 shall be charged only at one-third rate, namely, 1s. 6d. in the £.
§ It is not very easy for hon. Members to grasp at once what that means. It means, of course, that up to £135 of taxable income a taxpayer will pay at ls. 6d. instead of 2s. 3d.; and between £135 and £175 of taxable income he will pay at 4s. 6d. instead of 2s. 3d. But a man who has a taxable income of £175 has to calculate what is the net effect of the reduction and increase. It comes out that under this proposal 2,250,000 taxpayers, that is, about 70 per cent. of the whole body of Income Tax payers, who have taxable incomes not exceeding 1634 £135, will get a reduction of Income Tax amounting to 9d. in the £, that is to say, three times as much as they got last year. Another 200,000 taxpayers, whose taxable income lies between £135 and £175, will also get relief, but that relief will gradually diminish as they go from £135 to £175, until at the higher figure it has practicaly died out. Let me give the Committee an example to show how the plan works. It really gives a very substantial help to the small taxpayer. Take the case of a married man with three children and an earned income of £500. He has a taxable income of £120. At the present time he pays in Income Tax £13 10s.; under this proposal his tax will be reduced to £9. For technical purposes it will be necessary to move a Resolution in connection with this proposal.
§ That is not my only proposal; I have two more, both of which are designed to lighten the burdens which at present fall upon those who carry the responsibilities of family life. The first concerns the personal allowance of a married taxpayer. That now stands at £150; I propose to raise it by £20, to £170. The second concerns the children's allowances. These at present stand at £50 for the first child and £40 for each subsequent child. I must say that I look upon the continued diminution of the birth-rate in this country with considerable apprehension. At the present time it may seem that we have here a larger population than we are able to support in England. At the same time, we know the difficulty which the Dominions find in accommodating a larger population, when they themselves are troubled with unemployment. But I have a feeling that the time may not be far distant when that position will be reversed, when the countries of the British Empire will be crying out for more citizens of the right breed, and when we in this country shall not be able to supply the demand. I think that if to-day we can give even a little help to those who are carrying on the race, the money will not he wasted. I propose to raise the allowance for each child after the first to £50, however many children there are.
§ These two last proposals benefit all families, and, taken in conjunction with the first one, they give a great deal of relief to families with small incomes. I have already mentioned the case of a 1635 married man with three children and an earned income of £500, and have shown how his tax under the first proposal would be reduced from £13 10s. to £9. Under these further proposals he will get a further reduction of £3, bringing his tax down to £6. If his income is all derived from investments, instead of paying as he does now, £29 16s. 3d., he will only be called upon to pay £20 5s. A married man with £400 a year total income and two children, if his income is entirely derived from investments, now pays £18, and under my proposals he will in future pay £9 13s. If his income is all earned, he now pays £9; in future he will pay only £3 15s. A man with £300 total income, married but without any children, if his income is derived from investments, now pays £16 17s. 6d.; in future he will pay only £9 15s. If his income is earned, he now pays £10 2s. 6d.; in future he will pay only £5 5s.
§ I have one other minor amendment to propose. The smallest earned income which is at present liable to tax, in the hands of a single person, is £125. Such a person gets a personal allowance of £100 and an earned income allowance of £25, and his liability, therefore, is extinguished. But, if his income is derived from investments, he then has to pay tax on £25. That has pressed rather hardly on some people with very small incomes, where their income has been reduced by reason of the conversion loans. I am proposing in future to fix an exemption limit of £125 for all types of income, whether consisting wholly or partly of investment income; and I have to couple with that a special provision for incomes just over £125, so as to prevent there being a sudden jump in liability at that point. For incomes between £125 and £140 there will be an over-riding provision that the tax shall not exceed one-fifth of the excess over £125.
§ The Financial Statement will give a number of tables which will illustrate these proposals in detail, and I think I only need now give the Committee what the cost of these reductions will come to in the aggregate. In a full year the cost of these various amendments in Income Tax allowances will amount to £10,000,000; but, owing to the way in which the tax is collected, I shall 1636 only have to find, in the current year, £4,500,000. This £10,000,000 will, I believe, give a welcome relief to a very great number of small taxpayers. I am sorry that it is impossible for me this year to do anything to relieve the extra 10 per cent. put upon the Surtax payers, but I think the proposal I made last year reducing the standard rate, taken in conjunction with those I am now making, on the whole constitute a fair division of relief among the various classes of Income Tax payers.