HC Deb 31 May 1937 vol 324 cc697-821

Order for Second Reading read.

4.13 p.m.

The Chancellor of the Exchequer (Sir John Simon)

I beg to move, "That the Bill be now read a Second time."

In rising to move the Second Reading of the Finance Bill, and in the especial and unusual circumstances, I would ask for a double measure of the indulgence and consideration which the House is always accustomed to show to a Member or a Minister who at short notice is undertaking a new and a most responsible task. I suppose it can hardly have ever happened before that a Finance Bill should be printed and circulated only a week ago, that on the back of it it should be declared that it is ordered to be brought in by, amongst others, the Chancellor of the Exchequer, and that in the meantime the incumbent of that office should be changed. But lest any hon. Member who has studied the terms of the Bill and who is now listening to me should be tempted to exclaim that the voice is the voice of Jacob, but the hands which prepared the Bill are the hands of Esau, I should say at once that my right hon. Friend the Prime Minister has been good enough to make me a party to many of the consultations and deliberations which he has been conducting and that, in consequence, I present this Bill to the House, not as a foundling whom I happened to discover on entering the portals of the Treasury two days ago, but rather as an adopted child with whose lineaments I am becoming familiar, and towards whom I entertain those sentiments of championship and even of affection—

Mr. Churchill


Sir J. Simon

—which are the duty and the pleasure of a foster-parent.

The Bill at first sight appears very formidable because it consists of nearly 100 pages, but the House will have noticed that quite half of the pages are nothing more than a reprint of the Trade Agreement with Canada, and the enacting matter in the Bill, therefore, occupies about 50 pages. A large part of it, no doubt, contains matter which requires to be examined closely, but I think I shall best consult the general wishes and convenience of the House if I address myself briefly, and as clearly as I can, to Part III of the Bill which undoubtedly has received most attention and most criticism since the Budget speech was made and the Bill was produced. I, therefore, turn at once to the National Defence Contribution.

Let me first remind the House of the grounds on which that tax was proposed and justified in the Budget statement. The Prime Minister related it to the increased expenditure which the country had to face, an increase not merely this year, but in greater measure for the remaining years of the Defence programme, as it worked to its peak—the Defence programme which we have announced and entered upon, and which has, I claim, the overwhelming support of the country. This year the expenditure on our Defence programme is less than one-fifth of the total of £1,500,000,000 which is contemplated. At first, of course, the rate of actual expenditure is limited by necessary preparations, but if we spend less than one-fifth of that immense sum in the first year we must expect to spend more than one-fifth in the years hereafter, and I would ask the House to observe that though the total amount which we contemplate spending in this present year is less than one-fifth, we are, this year, making use of the borrowing powers which the House has authorised to the extent of a full one-fifth of the £400,000,000 which is provided for by the Defence Loans Act. Consequently, the taxation which must be raised to find the necessary money in the years to follow, must be proportionately more.

New and increased expenditure of that magnitude necessarily involves new taxation, and the House will remember that the Prime Minister discussed in his Budget speech the all-important and most unpleasant question of how that money should be raised. He pointed out that there were very good reasons why we should not increase the ordinary Income Tax beyond 5s. in the £. May I observe, in passing, that those whose memory of this House goes back to the period before the War, will remember that Income Tax in the year before the War stood at 1s. 3d. in the £ and that a figure of that sort was considered of immense significance and importance. The Prime Minister pointed out that Surtax was in- creased in the Autumn of 1931 by 10 per cent. along with so many other burdens, but that Surtax, unlike other burdens, has never been removed. The Prime Minister went on to say—and this is a matter which has received curiously little attention from hon. Gentlemen opposite —that he did not desire in any way to increase indirect taxation. He, therefore, sought for a new source. When one observed in so many quarters the tendency of business profits to rise the Prime Minister pointed out there were strong reasons to feel that a suitable way to raise this additional sum for the next few years would be by getting a modest contribution from the future growth of business profits.

I do not want to raise controversy at this early stage, but I claim that it is within the recollection of the House that, on the whole, that proposal made in those terms, though not universally approved, did receive a very large measure of approval. I recollect that the right hon. Gentleman the Member for East Edinburgh (Mr. Pethick-Lawrence) speaking, of course, cautiously, said that as far as he could see the principle underlying the proposal was probably sound. As a broad principle, and stated as a broad principle, I am entitled to say that it has been very widely accepted, although it has been in some quarters very severely examined. I would like, on my own behalf, to re-state that principle, and I would state it in this way. The principle is that when taxation stands so high that additions to existing taxes would render the burden unduly heavy, then the future growth of business profits may fairly and justly be selected, with the necessary adjustments, to make a temporary contribution to a special and all-important need, and all the more so when that growth of profits has been directly stimulated by the general policy which the country has followed over the last few years, and when the expenditure is necessary for the country's security upon which all business prosperity depends. That, at any rate, is a statement of the principle of this tax which I would ask its critics to examine.

I recognise that there is one essential point in all these matters, namely, that to proclaim a general principle and to carry it out fairly are two very different things. But as we must examine these matters and discuss them together, let us at least begin by seeing how far the principle itself is open co reasonable criticism. I used in that definition which I gave just now a phrase which I repeat —"a temporary contribution." It is one of the merits of a tax conceived on that principle that it is, of necessity, of a temporary nature and I will explain why I say so. It is a tax calculated from a base-line which was drawn in 1937 and which, therefore, could not continue indefinitely as a basis, because such a base-line after many years have passed would be meaningless and would have no permanent justification. The tax is productive only as long as the level of profit is above the datum line. Unlike a general tax on profits which, whether high or low, remains effective in all circumstances a tax on growth of profits properly graduated and adjusted is a useful instrument of taxation only as long as favourable conditions continue. Being a tax on growth of profits, it has the quality that no one is worse off than if his growth of profits had never occurred and it, therefore, has, as a general conception, a great deal to commend it.

Now comes the question of its detailed application. The Prime Minister undertook before the Finance Bill was framed, and while the Budget Resolutions were still under discussion to consider various difficulties and anxieties which had been roused in responsible quarters. It is within the knowledge of the House that a great many deputations and representations have been received accordingly at the Treasury, and this Finance Bill has been framed in the light of those representations in the way, as we believe, best calculated, while preserving the principle of the tax, to meet well-founded anxieties and to establish the necessary adjustments for fair working between widely differing cases. One of the most important things, if you are going to apply this principle, is to apply it in such a way that cases which in themselves widely differ shall not be treated with injustice as between one and another.

What I wish to do, with the permission of the House, is to take from the Finance Bill, briefly, some of the main proposals of Part III which have been inserted there since the Budget speech was made, in the belief that those changes do meet very important criticisms, which we are anxious to meet fairly and squarely. I take, first, a point which has received much attention and which was pressed very strongly upon the Government by a deputation representing the Associated Chambers of Commerce, the Federation of British Industries, the Chamber of Shipping, and the Mining Association of Great Britain. I will describe this change as that of establishing a common date for the beginning of the tax. As originally sketched, the date on which this tax might begin to apply to a given taxpayer depended, the House will remember, on the date to which the accounts of business in that particular case were made up—31st March, 30th June, 30th September, and so on. That method involved variations as between one taxpayer and another in the date of commencement, variations which might even be as much as 12 months or a day shorter.

Let me give a single example. Let me take company X and company Y. Company X has annual accounts made up to 30th June. Under the original scheme company X would have been within the tax from 1st July, 1936, and any growth of trading profits of company X as from that date would have come within the range of the tax. But contrast that with company Y, with annual accounts made up to 31st March. Company Y would not have come within the tax until 1st April, 1937. Now it seems to me, and I think the House will agree, that if we can make a simple change which secures that the tax when it attaches begins on the same date in every case, that is an undoubted improvement. When profits are rising rapidly and irregularly, a variable date of commencement might not operate fairly between one person and another. One company enjoying rising profits might escape over part of the year when another company had already suffered. Therefore, in Clause 15, Subsection (2) (b), a change has been made, and I claim that it is a change of very considerable importance.

But it has a second effect of very considerable value. Under the original scheme a variable date for different companies would mean a shifting set of dates for calculating the profits standard, which meant a different moment at which the tax would begin to operate, but as we have now improved that scheme, the House will see that the effect is that, subject to one necessary exception, which I will not pause to explain—it can be explained in Committee—the tax will attach in every case to the growth of profits ascertained as from 1st January, 1937, any broken period in the accounting year being regulated and adjusted. I notice in one or two less instructed quarters a comment on this as though the only thing to be said was that it was introducing new complications. It is not introducing any complications of importance at all. It does not require any rewriting of accounts, and it does not in the least involve any elaborate calculations which are such as ought to raise serious objections. What will happen will be that the charge of the tax for the first broken period will be arrived at simply by a rateable distribution, and after that concerns which make up their accounts to June or September will find that the charge attaches annually to them as each of their accounting periods comes round. One other thing might be observed as a considerable practical advantage, and that is that the profits standard will now be ascertained by taking the results of certain calendar years, and again one enterprise will not suffer as against another. The time taken for that purpose will not in the least therefore depend on the merely incidental circumstance that one particular enterprise makes up its accounts to one date and another to another. I claim further that that is a change which is an improvement and one which I think the House ought to accept.

I come, secondly, to a very fundamental matter, the profits standard. As originally proposed, the House remembers, the profits standard was to be reached by averaging the profits of three successive years, 1933, 1934, and 1935, or, more strictly speaking, three successive years the last of which ends with an accounting period ending before 6th April, 1936, and then there was a gap. The year 1936 was a dead year, and then the tax was attached when that 12 months gap was over. I need not explain the justification for that provision. There is an argument for it, but undoubtedly it has raised much criticism, and I am more concerned to meet the very widely-felt objection that if an opportunity was given to include the trading results of the year 1936, which was, generally speaking, a good year, that would make the basis clearer and would make the whole scheme more acceptable. Consequently the Bill proposes, in Clause 17, a different calculation of profits standard and one which enables the year 1936 to be brought in. It proposes to give the taxpayer an option to choose, for the purpose of his average for his profits standard, one of two things—either three years out of the four, 1933, 1934, 1935, and 1936, or two years out of the three, 1933, 1934, and 1935. If in your case 1936 was a good year, then use it to improve your average. If, on the other hand, as is true in some cases, 1936 was not a year that would help you, then pick out the best two years of the years 1933, 1934, and 1935, instead of averaging them all.

Mr. Dalton

Successive years?

Sir J. Simon

No. The average may be picked out as between the years mentioned. It would be possible to take, for example, 1933 and 1935, and I want the House to observe that here again the important point applies which I mentioned just now, namely, that when we speak of taking into account the year 1936, it means an opportunity of taking the whole year into account, the whole of the trading profits of that year, whereas if we had not altered the scheme by substituting the calendar year for the accounting period, we should have had some companies taking advantage of the first six months of a prosperous year's trading, but they would not have been able to take advantage of the second six months, because it fell in the later accounting period.

Mr. Churchill

Calendar year, not financial year?

Sir J. Simon

Yes. I will repeat the point, because it is of great importance. As the scheme was originally drawn, not only was the year 1936 excluded, but if you took companies which made up their accounts to somewhere about the middle of the year, they would, of course, pass from one accounting year to another halfway through the calendar year. Now, by substituting the calendar year for the accounting year, we not only give the opportunity of bringing in the year 1936 to improve the standard, but the opportunity of bringing in the whole of the year 1936, from 1st January to 31st December, whatever be the date to which the accounts are made up. That is a very material advantage.

I want, thirdly, to say a word about the percentage standard, the alternative standard, which is arrived at by taking a percentage of the capital ascertained according to the terms of the Bill. The proposal in the Budget, as the House knows, was to take 6 per cent. for bodies corporate and 8 per cent. in other cases, and there arose, very naturally, a very considerable degree of criticism and complaint from those enterprises which felt that, owing to the character of the risk which they ran, to allow them the normal percentage of capital which had been mentioned would be to treat them most unfairly as compared with other enterprises. If the percentage was rigorously applied in every case where the percentage standard was preferred, then no proper allowance would he made in those classes of trade or business where there was an exceptional degree of risk incurred, or an exceptional wastage of capital assets, or any exceptional deferment of yield. I wish to say plainly that I think that that would have been a perfectly reasonable complaint and a perfectly good criticism, but what I wish to call attention to is that in fact it has been met under the Bill in the most complete manner.

The Bill makes it plain that in the classes of business which I have just described an increase of statutory percentage may be adopted. If hon. Members care for references as we go, it is in the Sixth Schedule, Part II. But not only so. We feel that we shall give very much greater confidence in the fair working of the scheme and that in many cases we shall avoid unnecessary controversy if we bring definite substituted percentages in proper cases into operation at once, subject, if necessary, to review. So we provisionally adopt the higher percentages which were worked out and were authorised by the Board of Referees under a Section of the Finance (No. 2) Act, 1915—I think it was Section 42—with regard to the Excess Profits Duty, and as my hon. and gallant Friend the Financial Secretary to the Treasury said at Question time, there is now in the Vote Office a table which has been prepared, which gives a list of the Orders which were made under the Act of 1915 raising the normal percentage to higher figures for certain classes of trade and business. As I have just said, the Bill proposes provisionally to adopt these, so that every such taxpayer may know the nature of the relief which he gets, subject to the provision that it will be necessary in due course to apply for confirmation of this higher figure. In some cases both the Inland Revenue and the taxpayer will agree that this higher figure is reasonable in his case. If the taxpayer in some cases thinks he should get an even higher figure, he will be at liberty to apply for it. If there are cases in which, in the view of the authorities, the figure in present circumstances is too high, the figure can be challenged and changed.

Let me give some half-a-dozen instances to show how very important this is. They will be found in the White Paper. As I have just said, industries that are mainly concerned with the exploitation of wasting assets will certainly be awarded increased percentages. They will include, broadly, speaking, mining industries, whether at home or abroad, and they will cover all the important British industries engaged in the Dominions in mining and in oil. Industries in the nature of plantations—sugar, rubber, and so on—will be entitled to increased percentages by reference to the Board of Referees. I have had taken out six examples to show how very material this adjustment is: Copper mining in Rhodesia, 15 per cent.; gold mining in West Africa, 22½ per cent.; mining in Burma, 12½ per cent.; coal mining in Great Britain, 9 per cent.; rubber growing, 10 per cent.; sugar growing in the West Indies, II per cent. As the House will see, there is no doubt that the complaint, which I regarded as well-founded, that injustice may be done if businesses of a different character were treated in this respect in the same way, is fairly and fully met by the provision which we now make. This list was originally drawn up in 1915 or 1916 and contains some high percentages of which I should doubt the permanence. They were given to.industries long ago because they were in the infant stage. I will give one, which has the virtue of being rather amusing. Aircraft manufacture in 1915 was regarded as being so much in the infant stage that it was awarded a percentage of 15 on its capital. There has been a good deal of change in the indus- trial position of aircraft manufacture since the early part of the War. I am not prejudging the matter, and they may be able to make out their case, but I should think it unlikely that in the circumstances of the present time as compared with other industries 15 per cent. will be thought to be a sound figure. I regard that as an important improvement in the Bill.

I come to the alteration in graduation, and here again let me begin by making a frank statement of my own view. I have no doubt that the proposal to introduce a graduated rate of charge in this tax adds considerably to its complication. If you had a flat rate which could be applied without any regard to whether the growth of profits was small or moderate or phenomenal, and treated the cream at the top as of exactly the same quality as the liquid lower down, no doubt you could avoid a certain amount of complication, but in framing it you would have to strike a fair mean between the simplification which is desirable on practical grounds and the adjustment, or, if you like, the elaboration which, though it strikes some people as excessive, is felt to be very necessary by those who otherwise would specially suffer. I therefore entirely defend the proposal that there should be a graduated rate of charge, but we propose to vary the limits. Instead of making the charge at its lowest rate for such portion of the growth of profit as lies between 6 and 10 per cent. on capital, we propose that it shall be between 6 and 12 per cent. In the next storey, instead of the ceiling being 15 per cent., it will be 16.

There are more reasons than one which make that a valuable change. For one thing, it is desirable not to inflict unnecessarily upon those concerned the calculation of capital. If a concern finds that it prefers to set up a profits standard, as many concerns will, then, so far as settling the standard is concerned, no inquiry about capital is necessary. Additional capital is an easy matter to ascertain. The trouble is that a firm which has selected a profits standard may, none the less, find that the calculation of its capital under the terms of the Bill is necessary in order to determine in which of these three storeys any portion of its growth of profits falls. You cannot altogether avoid that unless you are prepared to scrap all differential charges, which, I should think, would not be desirable, but you can greatly ease the position by what we are proposing to do. If you say that the lowest rate of charge shall attach in all circumstances as long as the profit to be investigated does not exceed 12 per cent. on capital, you will bring, and clearly bring, within the lowest charge a large number of cases which otherwise would have to be examined much more in detail.

My advisers are confident that by that change, apart altogether from the relief to the taxpayer who will get into the lowest storey instead of the middle storey, there will be a considerable simplification in working. If I might suggest an analogy of what one has to consider when moving a tall piece of furniture into the lowest storey of a three-storied dwelling and the ceiling is low, there may be many cases in which you have to measure and calculate and find out whether any portion of the furniture will need to be cut down or altered in order to get it into the room. Raise the ceiling however and there will be an increasing number of cases in which these inquiries will become unnecessary. [Laughter.] There will be a great number of cases in which, by a mere examination of the balance sheet and the making of simple adjustments, it will be obvious that what has to be taxed is all taxed on the lowest scale. The more we can secure that result without unnecessary elaboration the better it will be for everybody.

The House will see that in Clause 22 a provision has been made for what are called deficiencies during the period of the tax; that is to say, in the case of a temporary tax on growth of profits over a datum line you must secure an arrangement by which, when the whole period of the tax is exhausted, only the net growth of profit over the whole period shall have suffered tax. Since one has to proceed by annual jumps that necessarily involves this consideration: it may be that at one period too much has been exacted, or the right amount has been exacted in view of the increase of profits in that year, but it turns out to be too much in view of what happens in later years.

My last attempt at an analogy had a rather doubtful reception, but I will give another which is more seasonable. Imagine that a standard score was to be ascertained for a batsman on the basis of his averages in past years, with the privilege, no doubt, of selecting the years when he did best and imagine that he was to be in some way rewarded or dealt with if, in a season now, he made scores which were above that average. He might begin with a series of centuries, and yet at the end of the season misfortune may have overcome him, and he may previously have been treated on a much higher scale than the average results justified. Just as you would in that case endeavour to adjust the matter, so in the case of this tax, whether the exceptional profit is at the beginning and worse periods follow, or whether, on the other hand, there is a mounting profit which continues beyond the standard figure afterwards, the Bill provides, in a way which everybody acquainted with these things understands, that the adjustment will be made to suit the total result. Since the tax is a differential tax, it is important to decide, if you are paying anything back, whether you are paying back at the highest, the middle or the lowest rates. The Clause is drawn so that in that matter, so far as there has been any tax paid at the highest rate, the taxpayer will get that back first.

The only other one of these difficult and important matters I would like to mention is that of new businesses. A good deal of anxiety has been expressed as to the working of this tax in reference to a business that was only recently started. It is true that if the business has only started recently it does need, or may very likely need, a higher proportion of the profits it is beginning to make to build up reserves and the like than in the case of an old established business. Therefore, we propose a relief which will take the form of increasing the capital standard by 2 per cent. for the first three years of the business—I mean increasing the standard which is the appropriate standard for the class of business. It is additional to the exceptional allowances which are made under another heading.

Captain Strickland

Does that apply to a public company taking over a private company?

Sir J. Simon

That has to do with the transfer of one company to another. The relief in respect of new businesses will be given to new concerns. The mere conversion of an existing business from a firm into a company, a mere change of ownership of that sort, would not be sufficient to qualify for the relief.

Colonel Nathan

Or one company to another?

Sir J. Simon

The same thing applies. With regard to small businesses, there is another provision. The Bill proposes to treat businesses coming within its purview as though they had a minimum capital of £25,000, that is to say, they will be given a percentage of capital standard computed by reference to £25,000, although the capital employed may be very much smaller.

Mr. R. C. Morrison

Would the Chancellor be good enough to say what effect the concessions which he has outlined will have upon the original figure of yield of £2,000,000 this year and £20,000,000 in a full year?

Sir J. Simon

I do not think that, as regards the present year, I can give any fresh estimate, and as the hon. Member will recall, the figure was in any case a very small one. As regards a full year, it is easier to make the calculation, which is that these changes, and others, in the Bill will make the amount to be received in a full year in the region of £15,000,000.

Mr. Churchill

Instead of the present figures?

Sir J. Simon

Yes, instead of the present figure. I have spent some time on this particular part of the Finance Bill, and particularly on the modifications introduced into it, because I know this is the part of the Bill to which public attention is chiefly directed and about which real anxiety has been expressed. To those who have been anxious or critical I would make only two observations. First, I would very seriously invite them to consider carefully and at leisure what I have said as to these adjustments, for just as some criticisms originally made of the scheme may have been well founded and well deserved, so I feel confident that the changes now made, when they are maturely considered at leisure, will be recognised by fair-minded people as removing many of the objections. [HON. MEMBERS: "No."] I do not ask any adverse critics to pronounce judgment now, because I should not be able to class them among those who have maturely considered what I have just said. I must point out that a new form of tax, announced on Budget day with the suddenness with which Budget conditions compel such taxes to be announced, is bound to evoke criticism. I am sure that my right hon. Friend never supposed that it would not evoke criticism, and it is not surprising that many people when they heard it and endeavoured to estimate its effects regarded it as elaborate. But is not Income Tax elaborate? Income Tax fills a whole book, and the reason why Income Tax, with its elaborations, is calmly accepted is because we are used to it. If the Income Tax code were now to be introduced in a Budget speech at this Box its elaborations would be one of the principal reasons why it would be opposed. Having studied this matter, I venture to express the opinion that whatever may be said about the principle of the tax, and naturally opinions may differ, the difficulty of the tax from the point of view of elaborate machinery being required is really being exaggerated. We are not dealing here with Tom, Dick and Harry, but with companies and firms whose transactions, whose fortunes, are accurately recorded in books and in balance-sheets, and I find it very difficult to believe that when this Bill has been examined and discussed in Committee we shall not have got an instrument which will be capable of being worked in a practical spirit without undue elaboration.

Mr. Cove

But they are not willing to pay.

Sir J. Simon

Such a tax as this is bound to aim at finding a suitable point between over-simplification and intense elaboration. It is no criticism of the amendments that are being made to say that some of them involve further elaboration. If you are going to meet a just claim, and meet it fairly, at the expense of being elaborate, you must be elaborate, but I submit confidently to the House that these adjustments and exceptions have been introduced to make the burden fairer and I invite the House to consider the tax in that spirit. The other observation which I venture to make on this subject is this: I would respectfully suggest that in this, as in other matters, we really must endeavour to preserve a sense of proportion. It will be a very serious error to allow our view of the financial proposals of the Government to be limited to one part of this Bill. We are forced to raise by means of the Finance Bill one of the largest sums this country has ever raised by taxation in time of peace, and that is bound to involve a heavy burden in many directions. There is no such thing as a good tax.

Mr. MacLaren

Oh, is there not?

Sir J. Simon

My hon. Friend opposite may be astounded, but there is no such thing as a good tax, and happy is the Chancellor who lives in times when he can avoid additional imposts and leave mounting profits, in the language of one of the greatest of his predecessors, to "fructify in the pockets of the people." It is easy, nothing is easier, when a new tax is proposed and detailed machinery is set up, than to suggest that some other form of taxation the consequences of which may not have been so fully examined should take its place. I venture to give one illustration. A number of critics desiring very properly, while explaining their objection to this tax, to suggest another, have proposed that this money should be raised by the simple process of increasing the Income Tax on business profits. Has anybody really considered what that would involve? If that is the method to be adopted, then the company which has made the very largest and most exceptional form of profits—I am sorry. I have not put it quite right. I have already dealt with that suggestion, and I will deal with another suggestion. It has been suggested that there ought to be an overriding limit of say, 10 per cent., so that in no circumstances should anybody pay more than 10 per cent. of the profits he makes. Let the House consider what would be the result. That would have the effect of letting off the company which is making the really excessive profits. It would operate the wrong way. Instead of securing that the greater contribution came from those higher regions of growth of profit which I think naturally call for it it would guarantee everybody who had made an exceptional growth of profits against being touched by the tax and would, I believe, be completely in conflict with its real principles.

I have said all that I want to say on this particular subject, and I ask the House to forgive me while I make one or two general observations in conclusion. The Amendment which has been put on the Order Paper by the Opposition will, no doubt, be moved in due course, and we shall leave it to hon. Members who support it to develop it, but I ask leave to make one observation which it suggests. The Opposition Amendment makes reference to price levels, and alleges that this Finance Bill will promote a further rise in them. The recovery which the country has enjoyed is not in any way to be regarded as the precarious by-product of rearmament. Our prosperity does not depend upon rearmament. [HON. MEMBERS: "Oh."] The recovery of the country was thoroughly well advanced before rearmament began, and the pace of recovery, though it goes on, has not noticeably quickened as the result of rearmament. [HON. MEMBERS: "Oh."] That is certainly true. For all that such extra stimulus as rearmament can give in the distressed areas, for example, and elsewhere is particularly valuable, for this reason: that while we want to do everything we can to improve our foreign trade the improvement which this will give in those areas and elsewhere will tend to fill up the gap which will be left by the relatively smaller improvement of foreign trade.

World depression had, of course, specially disastrous effects on international trade, and though it is easy to give figures which show that international trade has passed the worst point and is showing a fairly rapid recovery it is idle to pretend that the figures are not disappointing if taken in comparison with the striking, the phenomenal improvement in our figures of home trade and production. It must be our constant effort to assist and develop our Export trade. An increase in export trade will be all the more important when the special needs of rearmament have been met. Among the dangers with which we are threatened by alarmists is that of an excessive rise in prices and the development of speculative activities unless we carry through a sudden reversal of the policies which we have hitherto followed with success. The amount of speculation in commodities is often exaggerated, and, so far as it exists, it is very largely due to increasing confidence in future prospects. It is much more due to that than to the prevalence of cheap money, which is really of very little importance to the speculator. Great as has been our recovery it is not yet so thoroughly assured that we are in a position to abandon the line we have been following. Therefore, the essential object of our present policy must be to ensure that we do not suffer any general setback to employment or commodity prices. It is true, as has been indicated many times, that the rise in prices should not be carried to such a point as to produce an inflated scale of profits and produce disequilibrium. That was laid down as a principle by the declaration of the British Commonwealth in the World Monetary Conference. As soon as the improving price level ceases to mean more employment for working people and to increase production it becomes an evil. An increase in price level which did not give any further stimulus to production, any further increase in employment and any increased demand for goods, would serve no useful purpose. We are not at that stage at the moment. We have no ground, at present, for abandoning the well-tried policy which has governed our operations in recent years and as a result of which industry and employment continue to improve.

I should like to say that, like my predecessor, I attach the very greatest importance to international co-operation, both in the monetary and in the economic field, and that no efforts on our part will be lacking to secure and extend such co-operation. The House has been good enough to listen to me for a long time. I would make just this final observation, that we are facing a period of very heavy additional expenditure.

Sir Irving Albery

There is one very important controversy on which the right hon. Gentleman has said nothing, and that is Clause 18, with reference to the valuation of capital. Can he give us some example as to how that will work?

Sir J. Simon

I hope the House will forgive me if I do not actually go into that point now. There will be an opportunity, no doubt, in the course of the Debate, and in the Committee stage. I should like to finish my observation. We are facing a period of very heavy additional expenditure, undertaken for the essential purposes of Defence. I beg the House to notice that we are meeting that expenditure without any slackening or setback in our social services; indeed, they are being extended and the provision necessary for them is greater than ever. We are able to meet so great an outlay only because of the recovery. I am entitled to claim that the nation as a whole is everywhere recognising that the soundness of our policy is proved not only by the recovery, but by our determination to be equal to the tasks that fall upon us, to defend ourselves, to play our full part in maintaining the British Commonwealth and to preserve our inheritance and so preserve the general peace. In this stupendous effort we have the admiration and sympathy of the world.

I present this Finance Bill to the House as the instrument by the help of which we may discharge this task and fulfil our destiny. The Bill embodies the proposals of the Budget, with substantial adjustments, to meet difficulties which have been properly raised, and which we are endeavouring fairly to meet. The Finance Bill is the means by which the country will be enabled to finance its policy of Defence, to meet the burden of our expanding social services and to preserve the credit and promote the wellbeing of Britain.

5.19 p.m.

Mr. Dalton

I beg to move, to leave out from "That" to the end of the Question, and to add instead thereof: this House cannot assent to the Second Reading of a Bill which, in time of peace and rising prices, embodies an unbalanced Budget, thereby promoting further increases in prices and depressing the already low standard of life of pensioners, unemployed, wage-earners and other persons of small means, and which fails to deal adequately with profiteering in armaments or, to raise an equitable share of their cost from those most able to bear the burden. I would begin by offering our congratulations to the right hon. Gentleman upon his arrival at the Treasury. The right hon. Gentleman has made a longer tour than most men of the great Offices of State, and perhaps now nothing much remains except the Woolsack. But with our congratulations goes no promise of an easy passage, nor of a long and undisturbed tenure of the Treasury, so far as our political activities can affect the matter. This afternoon the right hon. Gentleman has devoted nearly all his speech to one topic, the so-called National Defence Contribution. I did not think from his speech that he conveyed an impression of passionate approval of that financial device. I did not think that his heart was in his brief. He informed the House that it was only in the last few weeks that he had had the opportunity of studying those proposals; that rather increased our suspicion that, in its original form, the National Defence Contribution was an example of individual enterprise by the present Prime Minister—I gather that right hon. Gentleman assents—and that his colleagues were only made privy to it after the event. I shall have something to say on the National Defence Contribution before I sit down, but there are certain other aspects of the Bill on which I wish to touch for a few moments first.

The Amendment which I have moved emphasises that the Bill embodies an unbalanced Budget. The right hon. Gentleman was kind enough to refer to certain phrases in our Amendment, but not to that one. I gather that he pleads guilty to introducing a Finance Bill embodying an unbalanced Budget. I gather that there is no dispute about the facts; if there is, and if he does not plead guilty, it will be for the prosecution to proceed with their case. The expenditure this year is £943,000,000, including £278,000,000 for Defence. Revenue is £863,000,000 according to the Estimate, leaving a gap to be filled of £80,000,000, which could have been borrowed under the powers which have been taken to borrow £400,000,000 in five years. That indicates a condition of the national finances which can only be described as an unbalanced Budget. I think that that is not denied.

I remember very clearly the Debates in this House in the summer and autumn of 1931. I have refreshed my memory by turning up some of those Debates, and I was particularly struck by two very powerful speeches made from the Opposition side, as it then was, one by the present Secretary of State for the Colonies, and the other by the right hon. Gentleman himself. I am sure that neither of those two right hon. Gentlemen would change their principles and their definitions of financial terms merely because they have crossed the Floor of the House. I will quote from those speeches, and apply the quotations to the present situation. The present Secretary of State for the Colonies made a most powerful speech on 26th June, 1931, winding up for what was then the Opposition, with reference to the borrowing for the Unemployment Fund. He said, referring to the Government of the day: Until they have been thrown from office, we shall never get the finance of unemployment insurance"— I am coming to the unbalanced Budget itself in a moment— put upon a proper and a balanced basis, whereby outgoings will be covered by the incomings. Until that is done, and you pay your way"— and here we are coming to the more general ground of a balanced Budget— you cannot, as a nation say that you are balancing your Budget or attempting to do so. You are going the way of Central American republics by borrowing to pay out week by week, with no prospect of paying back, with no Sinking Fund and with no honourable tradition in finance."—[OFFICIAL. REPORT, 26th June, 1931; col. 787, Vol. 254.] That was a very powerful peroration. May I apply that to the present situation and say that the National Government have, by the standards of the right hon. Gentleman, lowered this country well below Nicaragua?

Now I turn to the Chancellor of the Exchequer himself. I have re-read with very great profit what I thought was a very clear and cogent exposition of the elements of finance. He was speaking on the Finance Bill on 23rd September, 1931, and he said: In these high matters one must pay great attention to the pronouncements of experts, but, looking at the matter in a much simpler way, I should have thought the proposition was easy to prove that whatever may be the importance of balancing your Budget when your currency is on a gold standard, a balanced Budget is even more necessary when the value of sterling may fluctuate freely, not being tied to gold. To put it in another way, you may say that it is more important to sit a boat when you are in a rapid tideway than when the vessel is attached to terra firma."—[OFFICIAL REPORT, 23rd September, 1931; col. 1665, Vol. 256.] The right hon. Gentleman then proceeded to quote with full approval certain sentences from the Treasury evidence before the Royal Commission which had been investigating the Unemployment In- surance scheme. He quoted in particular the evidence of Sir Richard Hopkins of the Treasury, who said: Continued State borrowing on the present vast scale,"— I will give a little statistical precision to that phrase in a moment— without adequate provision for repayment by the fund, would quickly call in question the stability of the British financial system. And further: These vast Treasury loans are coming to represent, in effect, State borrowing to relieve the current State obligations at the expense of the future, and"— as the right hon. Gentleman quoted with approval— that is the ordinary and well-recognised sign of an unbalanced Budget. The right hon. Gentleman has put more clearly than any of us could have hoped to do the elements of the case which we are presenting to the House. He clearly recognised the signs of an unbalanced Budget at that time.

What distinguishes the situation then from the situation now? It was a question then of an increase in indebtedness of £78,000,000 in two years under the Labour Government, of indebtedness to the Unemployment Fund. That is what was called "vast Treasury loans" by the Treasury officials of that day and "State borrowing on the present vast scale." If those were "vast Treasury loans," £78,000,000 in two years, what epithet will best describe the magnitude of loans of £400,000,000 in five years and of £80,000,000 in the first year?

The first factor, then, which differentiates the present situation from that of 1931 is the immensely greater magnitude in the degree of unbalance in the Budget of the National Government, as compared with the degree of unbalance either in the Unemployment Fund or in the Budget itself in 1931. Further, what differentiates the present situation from the situation in 1931 is that in 1937 we are, relatively speaking, in a trade boom, and that in 1931 we were in a trade depression. If there be one proposition on which I think the great majority of all practical financiers and economic theorists are agreed, it is that the argument against an unbalanced Budget is much stronger when trade is good than when trade is had. It is argued by some quite reputable authorities that, when trade is bad, it may sometimes be legitimate to budget for a deficit; but it is generally agreed that in a period of active trade, and particularly when prices are rising and there in some danger of an inflationary boom, then, more than at any other time, it is the duty of a Finance Minister to keep his Budget balanced and to pay off debt rather than to increase it; and it is against this principle, which, as I have said, has the support of an overwhelming weight of authority, both practical and academic, that the Chancellor of the Exchequer is sinning in this Finance Bill.

The Government, in spite of all its pretensions to financial rectitude and strength, is leading this country along a road which points towards financial and economic ruin before many years have passed. This year's Budget could, and should, have been balanced. My hon. Friends have always contended that the proper instrument for such a purpose is direct taxation. We have always advocated the use of direct taxation, properly graduated according to individual ability to pay, as the proper instrument to bridge any gap whereby expenditure should exceed revenue.

The right hon. Gentleman has referred to the Surtax, and has said that it has not yet been reduced. This is about the only aspect of the Government's financial policy for the last few years that we can conditionally applaud. But why, in these circumstances of difficulty, with this great defence programme to be financed, has not the Surtax been further increased, and why have not the Death Duties been further increased, at any rate in preference to this extraordinary production of which the right hon. Gentleman has been speaking during the greater part of his speech? When you have these two familiar and well-accredited fiscal tools, the Surtax on the one hand and the Death Duties on the other, why not make at any rate some use of them? The yield of this new construction has now dwindled to £15,000,000. Surely it is only amour proper which prevents the Government at this stage from scrapping the whole thing and obtaining at least £15,000,000 from what would be a comparatively slight graduation of the Surtax and Death Duties. My hon. Friends and myself would prefer a vigorous use of these two well-accredited instruments to obtain a substantially larger sum towards the proper balancing of the Budget.

There is much to be said, I frankly admit—many of my hon. Friends have expressed their view already in this sense, and I share it—there is a case which can be made out, particularly at a time when both prices and profits are rising, for some kind of special tax on profits. We are in a period in which the rise in prices—of which the right hon. Gentleman made rather light—both of materials and of foodstuffs, has been considerable, has quickened, and is likely to quicken, so far as present estimates can give us any guidance, still more in the future. I will not weary the House with many figures, but already in the last year, from April, 1936, to April, 1937, wholesale prices of food have advanced by 15½ per cent., and prices of industrial materials and manufactures by nearly 20 per cent. Those are very steep rises in a 12-months period. They are not yet fully reflected in retail prices, and perhaps they will not be fully reflected in retail prices for some time to come, but the fact that retail prices follow wholesale prices, whether up or down, after an interval, suggests that much worse is in store for us in the way of rising prices both for food and for materials than we have yet experienced. That certainly is partly due to the financial methods of the Government. They are borrowing £80,000,000 this year, and have expressed their intention to borrow £400,000,000 over a period of five years, and the effect in fact and in anticipation has undoubtedly been to accelerate and stimulate this rise in price levels. Further, the Government have entirely failed, as has been argued in previous recent Debates, to impose any effective check upon profiteering in armaments. That is one reason why the prices of materials relevant to armaments manufacture have risen and are rising, and why certain large profits have already been realised.

The Government in this Bill are making an attempt to snatch back, or, as the right hon. Gentleman the Member for Epping (Mr. Churchill) once said in a characteristically picturesque phrase, to claw back, some small part of the profits which they have allowed to be realised. The case, as I understand it, for imposing a special tax on profits in a period of trade boom is similar to the case for imposing, in a period of trade depression, a special tax upon fixed interest-bearing securities. In a period of trade boom the holders of ordinary shares and people with similar interests are enabled rapidly to enrich themselves at the expense of the rest of the community. Similarly, when prices are falling and trade is depressed, the holders of fixed interest-bearing securities are enabled to obtain a larger real income while others are suffering deprivation. The two arguments are on a par. But, although there is a strong case for a tax on profits, most emphatically this is not the way. When I say that, I summarise views which have been expressed from all quarters—political, industrial, financial.

I have read no paper in the last few weeks which has praised this scheme, either in its original or in its amended form, with any conviction, and I have read innumerable articles, and many of us have received much correspondence, criticising it most severely in a number of respects. Most emphatically this is not the way. "A modest contribution" is, the right hon. Gentleman thinks, a fair description of what the so-called National Defence Contribution is making towards the revenue. The first reason why in my judgment this is not the way is the miserably small yield that is to be derived from this most elaborate machinery. The cost of defence is expected to be £1,500,000,000 over a period of five years. When the present Prime Minister first brought forward this tax in his Budget, he said it might bring in £2,000000 this year, and something between £20,000,000 and £25,000,000 next year. The amount to be paid in subsequent years—I am summarising the passage, which I have clearly in my memory——would depend upon what happened to trade in those years. The right hon. Gentleman this afternoon has scaled that down very handsomely. I understood him to say that, as the result of all the concessions which are to be made, it is doubtful whether he will get much this year. The sum he will get this year is too small to be worth estimating—anyhow substantially less than the £2,000,000 originally expected; while next year, instead of from £20,000,000 to £25,000,000, he does not think it will be more than £15,000,000, and in subsequent years according to what happens.

I want just to make a comment upon the possibility of an increased yield from this tax in future years beyond the £15,000,000 which is now reckoned. I doubt very much whether the yield is likely to increase except on one condition, and that is that prices and profits rise so phenomenally that the whole cost of the armaments programme rises in proportion. If that is so, it will not be of much value to have a slight increase over this miserable £15,000,000 if there is going to be a comparable increase in the enormous sum of £1,500,000,000 that is going to be spent, or in any particular annual instalment of that great programme. Therefore, if inflationary tendencies are to be held in check, and the rise in prices is not to get beyond control, it is to be hoped, from the Treasury's own point of view, that there will be no great rise either in the yield of this poor little tax or in the cost of the armaments programme, because the two will move together. Let us take it that nothing will be obtained this year and £15,000,000 next year and in each of the three years following. That will be, in five years, £60,000,000 out of £1,500,000,000, or 4 per cent. of the total cost of the programme.

That is indeed a modest contribution; the right hon. Gentleman has not done it too much honour in that description. But is it really worth while going to all this elaboration in order to secure what at first sight looks like a contribution of 4 per cent. towards the defence programme? Moreover, taking it net, it will not even be 4 per cent. I do not know—and I ask the question for information—whether, in making these estimates of the yield of the tax, either the present Prime Minister or the present Chancellor of the Exchequer has made an allowance for the fact that, since these national defence contributions are to count as an expense for the purposes of Income Tax assessment, the revenue is going to lose, as a result of diminished Income Tax yield, with a standard rate of Income Tax of 5s. in the£, one-quarter of whatever it gets from the tax. I gather that that has not been taken into account in estimating the yield; I am open to correction, but I rather gather that the loss of Income Tax is not included.

The Prime Minister (Mr. Chamberlain)

indicated dissent.

Mr. Dalton

That scales down the yield a bit more. A quarter of whatever the estimate is will have to be deducted, so that, of this poor little £15,000,000, £3,750,000 goes down the wind, reducing the yield to £11,250,000 right away. Nor is this all. I have been reading, among other interesting speeches, a statement, which was reported in the "Times" city column last Friday, of Mr. Sandford Poole, the chairman of the Industrial and General Trust. Probably this gentleman has voted "National" up to now; whether he will keep it up remains to be seen. The "Times" says: He declared that by the imposition of the tax Mr. Chamberlain"— that was before the change of Government took place— was likely to lose a great deal in Stamp Duties and Death Duties owing to the proposed tax having taken the heart out of the stock markets and having seriously depressed values. He also thought there was a danger of Income Tax collection this year falling materially short of the sum anticipated in the Budget, as there would be many M.D.C. assessments in dispute, and until these were agreed the liability for Income Tax might be unascertainable. That may be a very serious matter. You may have a very serious slowing up of the whole of your Income Tax collection from the class of people liable to pay this tax; even if their liability does not materialise, you may have a very serious slowing up, which may cause a very serious reduction in the Chancellor's estimates of Income Tax revenue this year. When allowance is made for all these things, what kind of residual yield is there likely to be from this portentous operation? I have heard a number of Budgets in this House, and have listened to and sometimes taken part in many Finance Bill Debates; and it was part of my duty at one time to read up earlier Budgets and financial discussions. I do not remember, in the whole range of those personal experiences and academic studies, any tax of any magnitude which was such an administrative monstrosity as this one which the present Prime Minister has given us. It is an administrative monstrosity, a financial phantasy, a device for the endowment of accountants and of lawyers, who batten on the uncertainties of the law and the ambiguities of our Statutes, and who render no service that can strictly be called productive.

I ask the Chancellor whether he has made any estimate of the cost of collection to the Treasury of this impost. He did not mention that. Has any estimate been made of what fraction of the continually dwindling yield is going to be eaten up in cost of collection and administrative supervision? After all, the net yield of a tax should properly he made after deducting any such charges, and I think we are entitled to know whether the Treasury have given their mind to this problem and can tell us how much it will cost to rake in this relatively small sum.

When we reach the Committee stage details will be properly discussable, and it would be out of scale for me to go in great detail into the particular Clauses and Sub-sections, but there are at least seven points which present themselves for criticism so far as this scheme is concerned. First of all, there is the appalling multiplicity of alternative bases of assessment. The right hon. Gentleman said he had thrown in a few more, and that made it more complicated, but, after all, that was no serious argument against it. There is the profit standard, and there is the capital standard; there are alternative years, and selections of years, for assessing standard profits, many possible permutations and combinations within the three or four-year period, and in reply to a question that I put he threw in the additional concession that, if two years only are selected, they need not be successive. They can be picked and chosen, anyhow.

Secondly, it appears that in nearly all industries and businesses the capital will not only have to be valued according to the peculiar method laid down in the Bill, but revalued every year. The computation of capital itself is most complicated. It is not the nominal capital nor the Stock Exchange valuation of the capital, but something which it will take even the right hon. Gentleman, with his great power of lucidity and compression, a very long time to explain to the House. Different methods of computation apply to various categories of capital. Fourthly, with regard to profits, though the complication is not so great as with regard to capital, there are considerable complications as I am advised and, in particular, profits for the purpose of liability to this tax are not the same as profits for the purpose of liability to Income Tax. In the fifth place—this is perhaps the argument which has struck most critics —there is gross inequity as between various industries and businesses in the operation of the tax. If I may quote another witness who will not be thought to be biased by Socialist doctrine, I select a statement made by Sir Robert Home. He says in a statement made to the Press on Wednesday last: One example is sufficient to demonstrate that even now the Revenue authorities must be ignorant as to how their taxation is going to work. That aeroplane building, fostered to the last degree by the present rearmament programme, should be allowed to enjoy, free of the new tax, a much higher standard of profits than the cotton industry, which is still going through a struggle for existence, affords an interesting commentary on the lack of thought and attention which have been given to the problems of industry. Such inequities might be multiplied indefinitely. The sixth point is that companies registered abroad escape liability for the tax altogether. That surely is adding a very considerable inducement to those which at present exist for companies now registered in London to remove overseas and register elsewhere, and I should have thought that was not a practice which it was the business of the Government to encourage. Seventhly, Clause 22 fills me with dismay. It deals with refunds. One test of a bad tax—[Interruption.] The right hon. Gentleman says there is no good tax. Yes, but there are some taxes which are worse than others. One test of a really bad tax is that it shall contain within itself the possibility of the Exchequer having to refund very large sums later on. Good taxes do not have that disability. Under Clause 22 there is opened up the possibility of refunds on an immense scale relatively to what the yield may be. If trade takes a turn for the worse, the tax may well yield a minus quantity two or three years from now. It may be that the right hon. Gentleman thinks that he will then have no further concern officially with our affairs, but it may well be that all the pluses will go to him and the minuses to another Government.

What then should be done? If I might offer advice, it would be that the right hon. Gentleman should take it back and try again, and give us a simpler tax with a larger yield. There is a case in these days for a special tax on profits and, assuming that that is admitted, let us have a simpler tax, based in some way on profits, which will give us a larger yield. The right hon. Gentleman belongs to a distinguished and select company in so far as he is a Fellow of All Souls. There is another Fellow of All Souls, Mr. Douglas Jay, one of our ablest financial journalists, who writes from day to day in an important organ of the Press, and whom I and others have been reading lately with much pleasure and advantage. If the right hon. Gentleman will follow the City column of the "Daily Herald" he will find some very good advice on possible modifications of this scheme. I quote from the "Daily Herald" of 26th instant: A straight profit tax of 15 per cent. over and above Income Tax, to bring in £70,000,000 or £80,000,000, and cover the whole Budget deficit, would have been preferable to N.D.C. with its yield of perhaps £15,000,000. I described Mr. Jay as one of our ablest financial journalists. He got that last figure right a week before the Chancellor has given it to us this afternoon. He estimated that, with these concessions, the yield would be down to £15,000,000, and £15,000,000 it is. That is a very good advertisement for the perspicacity and competence of the City Editor of our greatest daily journal. One can be both a Socialist and run intelligently about the City. Mr. Jay concluded: Even the City might very well have preferred it. That is one suggestion. I do not tie myself to it. My hon. Friends and I reserve full freedom in Committee to exercise our judgment upon the Clauses and Amendments, but here is one suggestion, to get back to a simple straightforward corporation profits tax. It is true that that is not a tax on growth as such. It may be that the attempt to tax the growth of profits as such is a task which in existing financial and economic circumstances involves too much complexity to be worth while. It may be that on the whole the balance of advantage will be found to consist in putting your profits tax straightforwardly, as one of the right hon. Gentleman's predecessors, Sir Robert Home, did in an early post-War Budget, upon profits. After all, you are going to catch the people who are making high profits by that device. If you have a straight tax, the people who are making high profits will pay heavily, those who are making low profits will pay little and those making no profits will not pay at all. A strong case could be made out for that being the essence of equity in this matter that would be a tax far more practical, simpler, cheaper to collect and more productive of revenue than all those elaborate arrangements which the Chancellor has so half-heartedly defended today. If the right hon. Gentleman is bent on a little complication, may I offer him one alternative suggestion, though much less complicated than his own, which has come to me in the course of my correspondence from a business man in Durham, the northern manager of Tarslag, Ltd.? He complains that the present tax is complicated and will undoubtedly lead to expense and wasting profitable time by enforced conferences with accountants and/or lawyers. It is likely to operate adveresly against concerns which are just coming through past difficulties and generally retard enterprise. Moreover, it unduly penalises one class of investor. His suggestion is, first of all, that there should be a corporation profits tax, but in addition to that, leaving out all these complications of capital valuation, take a particular datum year, or datum average, very much as the right hon. Gentleman does in the Bill and then have a second straight tax, not graduated—in addition to the straight tax on the profits as a whole—upon the increase in profits in any year over and above those of the datum period. Of course, there are arguments that may be put against that, but whereas the Chancellor seems to start from the point of view that a great deal of complexity may be justified if you can get a little money, I think the better line of approach is that we should seek to obtain the largest possible amount of money and get it as cheaply and easily as possible.

In a Debate of this kind it is a mistake to go unduly into detail. The right hon. Gentleman has our sympathy. He has been sent in to bat on a rotten wicket. Everyone is perpetrating witticisms about N.D.C. In the Stock Exchange they speak of the "Nothing Doing Club." An hon. Friend of mine has suggested that these letters stand for Nemesis of the Departing Chancellor, something which the right hon. Gentleman has inherited from his predecessor. I have tried to make an interpretation of my own, and I wonder whether perhaps these mystic letters may not stand for Nemesis of the Disarmament Conference which the right hon. Gentleman has inherited not from his predecessor, but from his own past life. After all, what is all the trouble about? Why are we having these elaborate discussions about raising a little money here and there, although we are still so far short of balancing our Budget? Why has all this arisen? It has arisen because of this enormous charge of £278,000,000 for defence this year. If it were not for that, and if our Defence expenditure had remained on the level at which it stood a few years ago, this Budget would have been easy and no one would have thought of a special tax on profits, and probably the Income Tax would not have been raised another threepence. Everything would have been easier and simpler. The right hon. Gentleman in 1932–33 was present at a place where there was a hope in many hearts that all this might be avoided, and there is no one more responsible than the right hon. Gentleman for the failure of that conference. To-day the right hon. Gentleman is reaping what, five years ago, he sowed.

6.2 p.m.

Sir Francis Acland

I should like to congratulate my right hon. Friend the Chancellor of the Exchequer on attaining his new office and upon his first speech, which was a considerable physical as well as mental effort, as some of us could see. I think that he is suffering from a touch of bronchitis or something of that kind, and as I sometimes suffer from a cognate complaint I particularly admire the way he carried out his task this afternoon. I wish as briefly as I can but very frankly to say what I have thought and am now thinking about the central matter we are discussing to-day—the National Defence Contribution. It is only by talking frankly about it that one can hope to be useful and throw his suggestions into the common pool. I do not perhaps regard this so much as a party matter as do some hon. and right hon. Members, and I am going to adhere to a few rather general points, because I would like to leave the details to those who understand them better than I do, and particularly to hon. Members like the hon. and learned Member for Montgomeryshire (Mr. C. Davies) whom I think the House wishes to hear. I could say something in reply to points made by the Chancellor of the Exchequer this afternoon in explaining some of the details, but it will be better left to those who can speak with more detailed knowledge. I think that we owe something to the appeal of the Chancellor that we should consider at leisure what he had said, and not make up our minds at once about it.

I confess that when the National Defence Contribution was first announced I was definitely pleased with it. It seemed to conform to a sound canon of taxation, that when you want money you should go where money is. I was attracted by the idea of getting something back from the armament makers, because I am convinced that, in spite of all that we are told, they are still making undue profits. I believe that many, particularly of the sub-contractors, are making quite undue profits in this connection. I have enough of the old Adam of Radicalism in me to realise what the reaction of the new tax would be upon a certain class of people who are constantly boasting about their patriotism, but who keep their patriotism in their pockets. When they are asked to open their pockets a little wider than usual their patriotism is rather inclined to leak out. I welcomed it rather as a means with which to sting them a bit. On reflection, and after following what has been happening, I came to the conclusion that some at any rate of those first reflections were erroneous, and I should like to explain how I see it now.

I hope that I do not appear to the House in any way to be a special authority on the subject. I cannot speak as a business man. I wish I could. My incursions into financial business have been as few as they have been unfortunate. I once put all my savings into what I called one Consol which I bought at 113½ and sold at 98. I think I own a few shares in workmen's dwellings and Liberal clubs and bowling greens, and when I say the Liberal clubs pay quite as well as the others, the House will conclude what the general level of the others is. I have shares in a lead mine in a place which is now being put to more productive use as a national forest. That is as far as I have got, and, at any rate, I speak without bias in these matters. I still believe that the principle of going where the money is, is a completely sound one. In that connection the House will have observed the result of a very interesting meeting called by the Association of British Chambers of Commerce last week. I would draw attention to two points which seemed to arise out of that meeting. When people object to taxation they say "This tax will not do; take it off." But this was rather different. They did not simply say "This tax will not do; withdraw it," but that—and I quote the words— They recognise the necessity that industrial profits must provide £25,000,000"— not £15,000,000— a year to total revenue in view of the heavy outlay for rearmament. This meeting is satisfied that there will be a wide measure of support for simpler methods of raising the necessary revenue, which industry is quite willing to provide.

Colonel Wedgwood

And pass it on to the consumer.

Sir F. Acland

They can pass anything on to the consumer. That attitude seemed to be somewhat rather new. They were really willing to provide the money, and it is worth noting. The second point which struck me was that there were at that meeting not only representatives of those upon whom the burden in its present form was likely to fall rather heavily, like the Chamber of Shipping and the British Iron and Steel Federation, but there were also very widely representative organisations like Chambers of Commerce, the Federation of British Industries, and also organisations like Imperial Chemical Industries, and Lever Brothers, which may be doing better now—I do not know as I am not an expert—than they were during the slump. Hon. Members must have noticed a remarkable letter on the subject in the "Times" this morning signed by just those firms that one would expect to receive and who in many cases have level standards of profits, like the Imperial Tobacco Company, Messrs. Boots, Huntley and Palmer, Rowntree, Horlicks, and Chivers, who probably would be much harder hit by a level tax than by a tax on increasing profits, and we ought to take note of the attitude which firms of that kind have taken up. So, from the point of view of going to where the money is, the Chancellor of the Exchequer is practically invited by organisations such as I have mentioned to enter into a conference with them and see whether they cannot yield it in a way which would not be the case when they say, "We have not the money, go somewhere else." He is dealing with people who say, "We have the money, and we are willing to pay it."

Personally, and speaking without expert knowledge, I was very much struck with the suggestion of the hon. and learned Member for Montgomeryshire on 27th April that a single Corporation Profits Tax would meet the case better, and from figures which he gave, it looked as if 2½ per cent. would yield £25,000,000, and although it does not seem to be the only alternative it should be considered. Anyway, the meeting of the Chambers of Commerce was important and ought not to be overlooked. If when they said they were willing to provide the money they were bluffing—I do not think they were at all—why not call their bluff, and ask them to devise an alternative form, and, if they were not bluffing, why not accept their practical suggestion of working out a different basis and incidentally getting the £25,000,000 which they name, instead of the £15,000,000 which is the revised figure of the Chancellor of the Exchequer?

There are two points which seem to arise further. One has already been referred to and must be in all our minds. It is very elementary, namely, the desirability of avoiding new principles of assessment either of income or of capital, if possible. Even I know that the system of direct taxation—the Chancellor of the Exchequer said it this afternoon—is very far from being simple. As much has been written probably about Income Tax and other forms of direct taxation as has been written, say, about the Soviet Republic, and that which has been written by Income Tax gentlemen has been a great deal more truthful than what has been written about the Soviet Republic. Lawyers must make income from the books they write and the opinions they give, and from their Income Tax practice, but the point I want to make is that that goes on, and, in a matter of that complexity, although it has been worked upon by accountants and lawyers and in the Courts for a considerable period of years—in spite of all that, in every Budget the Chancellor of the Exchequer has to stop up holes which ingenious people have found. That is in a system which, either when you are estimating personal incomes or profits or capital of companies, has stood the test of time and struggle, and has been clarified year after year.

When we consider those inevitable complications in any system of direct taxation, why should we, if it is unnecessary, embark upon a fresh system of definitions and computations as this tax will necessitate? Do we really want to introduce systems of assessment as to income, or still more capital, which will be wholly new, and which, in spite of the great ingenuity of the advisers of the Chancellor of the Exchequer, will after they have left this House be subjected to even more skilled and experienced scrutiny by other people, and give quite as much work very likely to the Courts in the long run as Income Tax has done in its long history? It is obvious that there will be more and more attempts to evade a tax which starts by being very largely unpopular than a tax such as we call upon the chambers of commerce to suggest, which would start in a very different spirit. I do not think that anyone wants this business to become a national endowment for accountants rather than a National Defence Contribution. The further we get away from that sort of atmosphere and these dangers, chances and risks, the better.

Coming now to the principle of the tax, the larger objective as it seems to me is this: Is there any moral justification—I make no apology for using the word "moral" in connection with taxation—for differentiating in taxation between businesses in which the profits are inevitably fluctuating according to booms and slumps, and those in which the profits remain pretty level, quite apart from booms and slumps? Whether it be the making of furniture or the publishing of a newspaper, or anything else, is there any moral justification for leaving completely alone the firm whose profits, however high, have been steady all the time, and for taxing the firm which is expanding? For the sake of argument, the firms which make furniture, ink, typewriters or such concerns as chemists do fairly well at most times, but shipping, shipbuilding and woollens do badly in bad times and better in good times. Is there any moral justification for picking out shipping, shipbuilding and woollens and leaving the others alone? That is the way that ordinary people like myself are bound to look at it, and it seems to me natural to do so, and I have not been convinced by the Chancellor's arguments that it is a sound principle.

Let us take two firms in the same line. It seems to me that the "Daily Mail," as the result of great enterprise, has always done well, and that the "Daily Herald" may now be doing better than it did. As they are papers which I never by any chance read, perhaps I may refer to them. On what clear principle of equity and justice can you properly tax one and not the other? I cannot understand it. Take the question of the taxation of armaments profits, which first of all attracted me. That seems to me, on reflection, to be simply an attempt to turn aside, on the cheap, the antagonism to big armament profits which many people feel. It seems to me to be meant only as a substitute for doing the thing properly on the lines of the recommendation of the Royal Commission which dealt with the private manufacture of arms.

If people think, as many do, that most of this new taxation will come out of armaments, I think it cab be shown that that idea is wrong. One hon. Member above the Gangway gave some figures in a previous Debate, to which no reply was made. I do not remember the figures quite clearly, but they were on this line. You want £25 000,000 a year out of this tax. You are going to spend in a normal year 300,0oo,00c on armaments. Say that £150,000,000 of that goes in materials and 25 per cent. is profit. That gives you £37,500,000. Say that half of that amount represents increased profits over basic years. That represents, roughly, £20,000,000. One-half of that will be either exempted before the Finance Bill becomes an Act or it will be dodged afterwards. Therefore you get £10,000,000. You tax that amount on the average of 25 per cent. of profit, and therefore you get £2,500,000. These figures may be too high in some cases and too low in others, but if they are approximately correct, it means that you get £2,500,000, which is only equal to 10 per cent. of the £25,000,000 which the Government are expecting to get. In our opinion, if there were a real check on contractors, especially on sub-contractors, the Government ought to get far more than £2,500,000 out of the immense sums they spend on armaments.

The last point that attracted me as a means of making these people sit up I now recognise, on reflection, to be wholly wrong, although it was fairly natural to form the opinion originally. If we were through a war now and we knew that there would not be another for some time, I should still be attracted by the idea of putting a tax on those who had been specially responsible for letting us drift into war; but we are not in that sort of time now. On the contrary, we may get war. If we do, it is extraordinarily important that you should not have too many people feeling that they are being taxed unfairly. You must have reserves, and the real reserves do not depend so much on the amount you are raising in taxation but on what people feel about it, and whether they feel that it is fair or unfair. However high the taxation may be, if the people feel that it is fair, then in an emergency like war they will be willing to produce more and more revenue. Therefore, it is in the highest degree important that this tax should be fair, and not unfair, as it is very largely, I am afraid, now.

Let me, in conclusion, say a serious and not unfriendly word to the new Prime Minister. We all must wish him well. Anyone knowing what the work of the Prime Minister is nowadays must wish him well. I am sure he will not take it amiss if I say that he is not yet quite so popular as his predecessor was. If the Prime Minister is popular it is not only an asset to his party but to the whole country. Things go easier. Therefore, I suggest to the Prime Minister not only that he should substitute some other tax on industry and do it without loss of face or reputation, but that in view of the recent resolution of the chambers of commerce and other bodies, and letters such as we saw in the "Times" to-day, he owes it as a duty to his own popularity to try to work out a system of taxing industry which those organisations would consider fairer and less complicated. Comparing very small things with very great ones, I hope that I have confessed my errors without loss of such reputation as I have, if I have any. I believe that any effort that the Prime Minister made in that direction, would greatly redound to his credit.

6.24 p.m.

Mr. Clement Davies

Everyone will join with the right hon. Member for North Cornwall (Sir F. Acland) in expressing our united sympathy with the Chancellor of the Exchequer in his ordeal this afternoon. Only his great courage, which we all recognise and know, enabled him to carry through his great task so successfully. I should like to congratulate him on the way in which he elucidated this very complicated Bill. I should also like to congratulate, as everyone does, the Prime Minister upon appointment to his great office. May I perhaps congratulate him more pertinently in regard to this matter upon his having as an advocate for this new tax, which is the Prime Minister's tax, one of the greatest advocates that the Bar has ever known, one whom we have all learned to admire, one who can make the most complicated matters clear and one who succeeds where so many of us fail. But I do not think that I have ever seen him quite so lukewarm in regard to his client as lie was in regard to this tax to-day. He did not seem to display that passion which I have known him display in another place when fighting even a forlorn hope. If I may change the metaphor, even in tradition the stepfather is supposed to show a certain amount of effusiveness in public in regard to the child, but the stepfather this afternoon was at pains to explain what we already knew, that the child was not his, and that he had not too much affection for it.

The position which I expressed last April when the Prime Minister made his Budget statement I adhere to now, and having seen the proposals reduced into concrete form, my objections are enhanced rather than diminished. First of all, it has been repeated by the new Chancellor of the Exchequer, and it was stated by the Prime Minister in his Budget speech and in his second statement, that this is a temporary tax. It is only brought in for temporary needs, and in a short while when the prosperity which we all expect and hope for has gone, it will be thrown into the limbo of forgotten things. The other thing that is made eminently clear now is that it is a small tax. At first it was suggested that it would bring in £2,000,000 or £3,000,000 and in a full year £2,000,000, but we now know that it will bring in something like £15,000,000, less, as I stated in Committee, than would be brought in by 6d. on the Income Tax, just about as much as would be brought in by 3d. on the Income Tax, and less than would be brought in by a Corporation Tax of 6d. in the L. All this elaborate structure has been built up to collect this transient, trumpery tax which is going to produce £15,000,000 for national Defence. It seems to me that the Prime Minister has erected a most magnificent mansion to house a guinea-pig. The whole structure is in itself vast and enormously complicated and the cost of running it, I honestly believe, will be more than the inherent worth of its little inhabitant.

The attitude of traders and manufacturers should not be misunderstood. Quite rightly the right. hon. Member for North Cornwall and the hon. Member for Bishop Auckland (Mr. Dalton) have called attention to the fact that traders and manufacturers, having supported increased armaments, realise that the extra cost has to be met; that they have to foot the bill. And they are willing to do so. No one objects to the provision of the money which is necessary to meet the cost of increased armaments. The objection is to the incidence, to the manner in which this tax falls on one harshly and on the other scarcely at all; the objection is to the unfairness of the tax. Do not let the Prime Minister misunderstand the statements that have been made by traders and manufacturers. Most of them are his friends. Only yesterday a great Conservative newspaper in its leading article said: They have hitherto had a high opinion of the Prime Minister and they welcome his successor to the Premiership. They are most unwilling to do anything to hamper his start or cloud his prospects, but they are sincerely and deeply convinced that the new impost will be burdensome and unjust in an unbearable degree. This applies not merely to the tax as originally outlined but definitely to the amended proposals embodied in the Finance Bill. And in regard to the small matters which occupied so much of the speech of the Chancellor of the Exchequer, they say: The Chancellor's concessions are not considered to touch their main objections. That is a strong statement; and it is made by a newspaper which has consistently supported the National Government—the "Sunday Times"—which on the same page as the leading article has a most eulogistic encomium on the new Prime Minister. What I feet is that the Prime Minister is really presuming upon his position and upon the loyalty of his supporters both in and outside this House. He is determined, as far as I can see, to drive the Bill through, and no criticism is going to turn him from the path he has mapped out for himself. He will have the assistance, of course, to-morrow night of the Government Whips, and, more important, the assistance of two very valuable allies—loyalty and fear, the loyalty of his supporters who wish him well, and the fear that, if the tax is rejected, in spite of the Prime Minister it will indicate a want of confidence and will be a vote which must lead to a general election, which nobody wants because it might lead to results which, perhaps, are not desirable. Is it wise at this time to put supporters of the Government to the terrible alternative of having to vote for the tax or to vote for a general election? It is straining their loyalty almost to breaking-point.

I want to correct another misapprehension which has been often mentioned—that this tax is designed in some way to limit speculation and to punish those who have dealings on the Stock Exchange. Of course, the tax is bound to affect the ordinary or equity share. It stands to reason that the value of a share depends partly on the security and partly upon the return you get. If you are to deduct this tax before the shareholder get his dividend, the value of the share naturally goes down That is well known in the City and on the Stock Exchange, and when the Prime Minister made his statement as Chancellor of the Exchequer it had an immediate effect. We can only roughly compute what the loss will be to other parts of the revenue, but the Chancellor of the Exchequer will know it definitely at the end of the financial year. The moment you get uncer- tainty you are bound to get panic, and panic leads to further reductions, and down goes the value of stocks and shares without any reason whatever. It is also a well known financial effect that a direct tax on one specific source of income is that the tax tends at once to be amortised by a fall in the capital price of that source of income. Naturally the moment you put a tax on a particular class of income a buyer is going to pay only the value calculated on a dividend less the tax. In a sense it is in the nature of a capital levy as long as you put a tax on one particular source of income.

These are the objections which are being taken to the tax. They are taken by traders and manufacturers, by employers of labour and employers of capital, because they realise that this is a tax on certain profits, upon profits in excess of those which have been earned during the standard years. The unlucky ones are to be penalised; the lucky ones will escape. Obviously, that meets with the approval of the hon. Member for Aberavon (Mr. Cove). The lucky ones who have made big profits in the past, as long as they are going to make those profits in the future, escape. I should have thought this was made perfectly plain by the hon. Member for Bishop Auckland. Those who were unfortunate enough not to make profits during the period but who now are on a gradual rise of recovery and are making more, are to be hit. They will have to pay. In any event, both the manufacturer and the trader when they go to the public for more money will now have more difficulty in persuading anybody to give them money; and that difficulty is going to face them whether they are subject to this tax or whether they are to escape. This money is usually wanted for new factories and new plant and the employment of more labour, and this comes at a time when we have 1,500,000 unemployed.

I had the privilege last Thursday of attending the meeting referred to by the right hon. Member for North Cornwall. It was a very remarkable gathering. It was not a meeting of speculators. There were representatives of various chambers of commerce throughout the country, and also representatives from London, Birmingham, Liverpool, Manchester, Derby, Leicester and Swansea Chambers of Commerce. There was the Federation of British Industries, the Chamber of Shiping and the Mining Association, the Iron and Steel Federation, Lloyds, the Baltic, the Cotton Spinners, the Liverpool Cotton Association, the Metal Industries—a very comprehensive gathering of nearly every kind of trade and manufacture. They passed the following resolution which I should like to read to the House: That this meeting views with dismay the provisions of the Finance Bill relating to the National Defence Contribution. It considers that these provisions unless substantially amended must involve major hardships and inequities, particularly upon those industries which have been peculiarly subject to depression in recent years, and must severely restrict the growth of enterprise and development of new forms of industrial activity. The industries represented recognise the necessity that industrial profits "— I want to emphasise this point— must provide £25,000,000 per annum to the national revenue in view of the heavy outlay for rearmament, but their considered view is that the circumstances of the present time are so contrasted with those of the years affected by the Excess Profits Duty that the principle of that duty can only be applied to-day with great difficulty and widespread injustice. This meeting is satisfied that there would be a wide measure of support for a simpler method of raising the necessary revenue which industry is quite willing to provide, but that in any event drastic amendment of the present proposals is essential to make the contribution operate with that degree of justice which alone can render it acceptable to the tax-paying community, and ensure that it shall be paid with the willingness which is traditional. I hope it will be noticed that there is no objection to the provision of the money. In fact, there is the clearest recognition that it has to be found, and it will be found from industry, but they want to find it in a simpler and more equitable way.

Colonel Wedģwood

Pass it on to the consumer?

Mr. Davies

They say that, having considered the tax carefully, they are filled with dismay at the proposal. I was told that the Prime Minister met these very people between his Budget statement and the printing of the Bill. He saw them for two hours and listened to them with the greatest courtesy. As far as one can gather he listened to their objections only to this extent, that the year has been changed to a calendar year ending on 31st December, and that 1936 has been added to the standard years. That is just putting in commas and semi-colons. In regard to the question of the Board of Referees, as long as this Bill is based on the Excess Profits Duty, there had to be this provision, whether the chambers of commerce or anybody else had asked for it. Therefore, apart from these concessions, they might just as well have been talking to someone who was smitten with permanent deafness. No wonder they expressed their dismay.

Let me come to the objections to this tax. It is inequitable. Taxation, if it is of a comprehensive character, should apply uniform principles to taxpayers regardless of their individuality or incidental differences, but this tax does not apply uniformly. It hits the weak and lets off the strong. I have heard references in this House that in some way or other it is to be compared with the Excess Profits Duty levied during the War. The two do not compare, any more than to use a favourite quotation of the Lord Chief Justice do six apples and six months, merely because they are both six. They do not compare merely because this is called such and such a duty and the other was called an Excess Profits Duty. In the case of the Excess Profits Duty, industry had been working upon an ordinary trade basis for a number of years prior to 4th August, 1914. Then came the War and the period of abnormality, with abnormal prices and abnormal profits. Then the normal period had already occurred, but now, as I hope in a few moments to show the House, we have not yet reached the normal period. The normal is not to be taken as the standard for this tax, but the abnormal is to be the standard. It seems to me that the Government have not realised that there is a world of difference between taxing prosperity and taxing recovery. This is a tax not on prosperity but on recovery.

I wonder whether the Prime Minister and the Chancellor of the Exchequer have looked at the 73rd and 75th Reports of the Board of Inland Revenue. Those reports give the taxable income for 1927, 1928 and 1929, and it is interesting to compare them with the latest returns of the Board of Inland Revenue. One or two of the figures which I shall quote to the House are really estimates, but the other figures are taken from the reports of the Board of Inland Revenue. The gross assessments to Income Tax on (a) manufacturing, productive and mining industries, and (b) distribution, transport and communications, with the exception of the railways, for the years 1928 onwards, are as follows—and inasmuch as the assessment is for profits earned in the previous year, I will give the House the figures for the actual year of earning: In 1927–28, the amount liable to assessment and earned by industry was £663,000,000; in 1928–29, £660,000,000; in 1929–30, £628,000,000; in 1930–31, £560,000,000; in 1931–32, £438,000,000, and in 1932–33, £417,000,000. Hon. Members will see that it was coming down. There was a drop of £246,000,000, or one-third of the annual income, from those trades in the five years 1928–29 to 3932–33. From 1933–34, a rise began. In 1933–34, the figure was £471,000,000; in 1934–35, £543,000,000; and, in 1935–36, £610,000,000. The next figure must be an estimate, and the best I have been able to get is that the figure for 1936–37 will be about £660,000,000. At last we are at about the normal level of 1928–29.

But what is to happen? One is not to be allowed to take the normal level of this year, but must take the average of three years, of which that year may be one; and I have worked out that the average for those three years would be roughly £605,000,000. If that be deducted from the year's earnings£660,000,000—the tax would then fall upon £55,000,000, and would continue to do so throughout the succeeding years. That would happen in spite of the fact that we know that trade cycles of active and depressed trade have occurred in the past—they have come with extraordinary regularity—and as far a!; we know, are likely to come in the future. What has happened with regard to trade and industry in the past? The moment: they have begun to make a recovery, they have begun to put themselves right after the lean years through which they have passed, they have at once used the money to put their outworn plant in order, to buy new machinery, to extend their business, because of the increasing expansion, and to employ more money. It is at such a moment that the Chancellor says, "No, you shall not use that money for recovery, I am going to take it; and what is more, I am not going to allow you to put it by, as you have done in the past, in order to fortify yourself against the lean years which have to come."

I have spoken of matters generally, but the story of the individual inequalities is more poignant. On the last occasion on which I spoke in the House, I gave instances of companies which had been earning more than 80 per cent. and paying a steady dividend of 80 per cent. Probably they will continue to do so. They are strong, wealthy, old companies. They will not be touched by this tax. It is not designed to touch them. But in the case of a weak company which has been earning only 6 per cent. and which dares to go up to 12 per cent.—not much compared with the 80 per cent. the other companies have been making—the Chancellor takes the first one-fifth between the 6 per cent. and the 12 per cent. before the company, which has been weak all the time, has had a chance to recover. There are in the House hon. Members who are familiar with all trades. Let me take the case of the cotton trade. I have in my pocket three telegrams which I have had from cotton firms in Liverpool to-day. I hope hon. Members representing Lancashire will have something to say to the Chancellor about this tax, for I am not in a position to talk about the cotton industry.

Instances could be given from the textile industry, the mining industry, the iron and steel industry, and shipping. Shipping has had to be subsidised. What is to happen? Will the Government continue to pay the subsidy and then take the tax, or will they take the tax first and subsidise afterwards? The rubber industry is a good instance. I understand that the Association of Rubber Manufacturers in this country covers about 613 companies with a capital of £117,000,000. They have plantations in Malay, Ceylon, the Dutch Indies and so on, amounting to about 2,000,000 acres, and they produce about 1,000,000 tons of rubber. Only about 100,000 tons of that rubber comes to this country. The main market is the United States of America, which controls the world price. Rubber is subject to all sorts of Government restrictions in the various places where it is grown The price has fluctuated extraordinarily, reaching at the end of 1925 as much as 4s. 8d. a lb. The average price for the year was 2s. 11d. a lb. In 1930 the price had dropped to 6d.; in 1931, 3d.; in 1932, 2d.; in 1933, 3d.—gradually the price was rising —in 1934, 6d.; in 1935, 6d., and in 1936, 7¾d. During the years when the price was down to 2d. and 3d. a 1b., those companies were not even paying a 1 per cent. dividend, and only a few of them were paying any dividend.

Now they are beginning to pay dividends again, and they are paying from 5 to 6 per cent., which is very small compared with some of the other companies which have made from 50 to 60 per cent. throughout the slump. Although their plantations are in the tropics, and although this country does not import from them more than it did before, they are to be called upon, if perchance the world price of rubber, which is dominated by the United States of America, goes up, to contribute towards this tax. Moreover, they are people who have to wait a long time for their money. It takes about eight years for a tree to mature before they begin to get any return for the capital and labour which they have put into it.

My fundamental objection to this tax is that one cannot escape from calculating the capital employed in the business. The Chancellor suggested that if one adopted the option which is given of comparing one's profits, one need not bother about the other, but he was forced to admit a few moments afterwards that everybody would of necessity look at the capital position. Let there be no mistake about one thing. The Government, even if this tax is only temporary, even if now it is withdrawn and not pushed forward, have put on record that a 6 per cent. profit on ordinary capital is quite enough. That will be remembered long after this tax is finished. The Prime Minister has made that permanent contribution to the law of economics. While this tax is to be put upon the manufacturer and the trader, but there is to be no punishment meted out to the preference shareholder the banker, Or anybody in the protected rentier class. When one comes to the calculations of capital, one has to leave out certain things. Debenture capital, for example, does not enter into the calculations, but preference capital does enter into them. Some things are brought in and some are left out, and to add to one's troubles, one must take the cost as the basis.

There are companies that have been in existence since the first Companies' Act was passed. I heard the Chancellor say that they keep records, but may I remind him that they keep their records for the purpose of business and not for the purpose of historical investigation? Where is one to find these records? Who is going to remember what occurred? Let me take a simple, everyday instance of a machine which cost £100, and which is written down to £10 in five years. Work gets slack and the machine is put away for a while, but when work begins again, the machine is brought back and is entered in the books as being valued at £10. Any ordinary accountant, looking into the capital employed in the business, would say that £10 is the value, but somebody will remember that years ago the machine cost £100. Then the accountant will say, "Where am I to find some evidence of that? From whom was it bought? Where is the receipt?" In the books the machine would stand at £10, but for the purposes of this tax it would be £100. That will occur all over the country. I could go on giving one instance after another, but it would not be of assistance.

I need not deal with the difficulties and inequalities with regard to mergers, amalgamations and reconstruction. If it is necessary we can deal with them in the Committee stage. There are other instances of the extraordinary fortuity, the extraordinary luck, and the extraordinary chance which are brought about by this Bill. There is one obvious in the Bill itself. If you formed your company on 3oth December, 1935, then you take 1936 profits as your standard. If you formed it on 1st January, 1936, you are not allowed to take profits as your standard; you must take capital as your standard. Why should two days make this difference? Company A has passed through a really bad time. It fails and sells all its assets to company B for a small amount. Company C has passed through the same bad time but just manages to get through. For the purposes of this Bill the capital for company B will be a small one, the price which was paid; but for the other company it will be the old original capital. The Bill bristles with such inequalities.

Quite apart from all these inequalities and the fact that it is quite unnecessary to build up this great structure to take only this small temporary tax, there is one other point which seems to me vitally important. In this country there are very few people who make any effort to dodge their due payment of taxes. Far and away the overwhelming majority of people in this country pay their taxes honestly, and they do so because they believe in the justice of these taxes; they think that they are fair and equitable. There is a third party who has acted as the adviser of the taxpayer and he is a person who is trusted by the Government official, namely, the accountant. He puts the cards on the table and everything he can do to assist the Government official and his client he does. In this case the tax will be regarded as a discriminating tax, as one which falls inequitably and unfairly, and within the legal limits which are open to them business men will do their best to cut down their liability to the smallest amount, and they will call upon their accountants to help them. You will be destroying that confidence which has hitherto existed between the accountant and the Government official. You will be encouraging tax evasion, and that is a bad thing morally for the whole country. I said when I first heard of this tax that it was bad and inequitable. I, and many others, have made suggestions to the Prime Minister and the new Chancellor as to ways of raising this money which would be perfectly equitable and simple. These ways are still open, and that money will be raised and more whenever they want it for the purposes of the Government of this country. But this tax is so fundamentally wrong that I think I am justified in quoting words which were used by the Prime Minister not long ago in saying that this tax must have been brought forward without much deep thought, and in a moment of midsummer madness.

7.6 p.m.

Colonel Nathan

I should like to be allowed to add my congratulations to those offered to the Chancellor of the Exchequer on his accession to his high office. It is natural that in this Debate the attention of the House should be concentrated on what is the central feature of the Finance Bill, this new National Defence Contribution, and any approach to this problem must be on the basis, that the money required by the Exchequer must be raised, and upon the hypothesis that there is to be no war. For if we are confronted with a war, different considerations of an emergency character immediately arise, and this provision would have to be fundamentally reconsidered. If I speak to-day in opposition to this proposed new tax it is not because I take objection to the suitable taxation of profits when they reach an unduly high point; it is because it seems to me that this tax is not apt for its purpose. I could not help reflecting as I listened to the Chancellor that of all those sitting on the Treasury bench he must he the only Minister who was also a member of Mr. Asquith's Cabinet when the Excess Profits Duty was introduced. It was introduced as war taxation. We are now confronted with what is, indeed, almost a blood brother of the Excess Profits Duty in time of peace, and I doubt not that the right hon. Gentleman has well within his mind, as the result of his experience both as a Minister and as a member of the Bar, the complications, difficulties, injustices, and inequities which resulted from the Excess Profits Duty, and also the very long period during which, although it was imposed as a temporary tax to meet an emergency, its operation persisted. I have been looking at the last report of the Commissioners of Inland Revenue and even there, 17 or 18 years after the end of the War for which that duty was imposed, there are still questions of receipts and of repayment referred to.

It seems to me that this tax is evidence that the Government's efforts to restrict and control profits on the manufacture of armaments and other commodities coming within the purview of Government contracts, and to keep down prices, have been ineffective for their purpose, for this tax is not a tax on profits as such; it is a tax upon the growth of profits, and these profits can grow only if there has been an increased profit or the same rate of profit on an increasing turnover. It is evidence that the Government's efforts to restrict profits upon armaments have failed. The right hon. Gentleman told us that this tax was to be regarded as a temporary tax dealing with an abnormal situation. It will be within the recollection of hon. Members that there have been other taxes introduced into this House of which it has been said with a view to making them more palatable that they are temporary taxes. The Excess Profits Duty itself was introduced as a temporary tax, and yet on the Statute Book, in the decisions of the Law Courts and in the reports of the Inland Revenue Commissioners it still has its place 15 or 20 years after that temporary tax was introduced. This House was told when the McKenna Duties were introduced that they were to be temporary taxes. They have now become under a different guise a permanent part of our financial structure. The Income Tax itself was introduced as a temporary tax; it has proved, as we know, a permanent part of our financial institutions.

The amount to be produced by this tax is very small. The question we may well ask ourselves is: Is it worth while to introduce a new tax, with all the uncertainties, difficulties, and inequities which go with it, for the purpose of a return which is relatively so small and insignificant? The Chancellor of the Exchequer has told us to-day that the anticipated return is £15,000,000. But he will be losing Income Tax and Surtax on that £15,000,000 for it is to be regarded as a deduction from profits. It would, therefore, seem that even if his gross estimate of £15,000,000 is realised, the return t the Exchequer will not be more than £10,000,000, which is less than the return of 3d. in the £ on the Income Tax. This tax is being imposed at a time when we are said to be at the peak, or approaching the peak of a boom. After the boom the depression will follow. This Bill provides for overpayments over the whole period of the life of the tax to be adjusted. Adjustments will fall to be made in the period of the depression and there can be little doubt that the £10,000,000, be it a little more or a little less, which will be gained by the Exchequer as a result of this tax at this juncture will fall to be repaid within a short limit of time when the depression supervenes. It is indeed a mortgaging of the future. It is unlike any other tax in our financial system, for of no other tax is it true that it becomes repayable after a period if things go badly.

Mr. Churchill

Will the hon. and gallant Gentleman explain how he reaches the figure of £10,000,000 as the yield of the tax?

Colonel Nathan

The figure anticipated by the Chancellor is, after all these deductions, £15,000,000, slightly more or less. The £15,000,000 is a figure which, if it were not diverted to this purpose, would be subject to Income Tax and Surtax. I make the rough calculation that the Chancellor of the Exchequer will be losing between £3,000,000 and £5,000,000 by way of loss of Income Tax and Surtax. That brings me down to a figure of £10,000,000.

Mr. Churchill

Thank you very much.

Colonel Nathan

I ask myself what principle has been adopted by the Government in presenting this new tax to the country? It seems to me that a Chancellor of the Exchequer ought to be very unwilling to disturb a settled situation and introduce a tax based upon new principles, unless he is reduced to an extremity in which that is unavoidable. I can understand there being a moral principle in the introduction of a new tax. There is a moral principle—it is not necessary that every hon. Member should agree with it—in the suggestion that the profit should be taken out of the manufacture of arms. I recognise the practical difficulties, but there is at least a principle, ascertainable and recognisable, involved in the attempt. I can understand a tax based upon some principle of social justice. There was the proposal made first by the right hon. Gentleman the Member for Carnarvon Boroughs (Mr. Lloyd George) and later by Lord Snowden for the taxation of land values. We may agree or disagree with that proposal, but at least it is based upon an ascertainable principle of social justice. Then, there is the principle of immediate financial stress and emergency. It was on that basis that the Excess Profits Duty was introduced during the War, but it does not lie in the mouth of this Government, which is always stressing, and as the "Times" said not long ago "over-advertising" prosperity, to claim that financial stress is the reason for this tax.

There is another reason which, if unspoken, the Prime Minister may have had in mind when he introduced this proposal. It may have bad an economic objective. I could understand the suggestion, "Here we are, at or approaching the peak of a boom. It may be a year, two years or even three years before we descend into the depression." I could understand the Chancellor of the Exchequer saying that the tax was in order to level out that hump of prosperity, to make the transition from peak to depression easier, to make the descent more gradual. I could understand his saying that that was the principle upon which he was proceeding, but that is not the case. The figure which he has given to the House—and I base my argument upon his figures—is inadequate for any such purpose. I fail to find then, any principle of moral or social justice, any financial stress or any economic objective upon which this tax is based. But I see objections to it based upon the principle that it makes for inequality and inequity between various businesses in the same industry and also between different industries.

It is a tax on initiative and invention. It is a tax upon industry. I am not at all sure that instead of becoming familiar under the initials N.D.C., the tax may not become known as T.O.I., meaning "Tax on Industry" because T.O.I. can be pronounced "toy," and this will become the cherished plaything of every accountant and lawyer in the land. It introduces the element of uncertainty which I have heard the late Prime Minister denounce as leading to lack of confidence. How much is the Exchequer to receive over a period? How much is any individual business to pay? It will become increasingly difficult for any firm or company to make up its accounts. Before it can do so, in a great number of cases it will require to make a fresh calculation of capital upon an entirely novel basis and one bearing no necessary relationship to the capital invested in the business.

The Chancellor of the Exchequer questioned whether a calculation of capital would be necessary except in a small number of cases. I believe the right hon. Gentleman is mistaken in that and I am supported in my view by the opinion of the hon. and learned Member for Montgomery (Mr. C. Davies). I believe that the capital will have to be calculated by the novel method laid down in the Bill in the case of every company which is to receive the advantages of the Bill, as far as covering deficiencies is concerned, as well as for the purpose of settling its appropriate assessment to tax. The Chancellor of the Exchequer is not in his place and I make no complaint about that, but I would not raise this question in his absence except for purposes of record. The right hon. Gentleman stated that 1st January, 1937, being the date selected, it would be open to the firm or company which might be involved to apportion its profits rateably for the period before and after that date. I find no provision to that effect in the Bill. The terms and phrases used in the Bill are apt for the calculation of profits before and after the fixed date. I see the Financial Secretary referring to the Bill. I think he will find that the Excess Profits Duty enactment did provide for an allocation of profits both before and after the date, but that was interpreted in practice to be not rateably but by way of calculation and led to great difficulties, complications and litigation, and I suggest that steps should be taken to clarify that point.

The position of new businesses is left obscure by the Bill. It is of course clear that a business starting ab initio will only have a capital standard of profits, but there is no sufficiently clear provision in the Bill for the position of the business which is being transferred from a vendor to a purchaser. I understood the Chancellor of the Exchequer to say, in reply to an interjection by me, that the purchaser would have the advantage of the profits standard of the vendor. I think that will have to be clearer in the Bill, which is, at present, obscure upon that point. Any Government setting out to establish a tax upon the growth of profits must make up its mind as to the optimum return upon capital. There are three formulae used in the Bill. There is a figure of 6 per cent., or 8 per cent., as a capital standard; then there is a figure of 12 per cent. and a figure of 16 per cent. I accept for this purpose the figure of 16 per cent, as being what the Government regard as the optimum standard, and this is the question which I put to the Government: Why should a firm which, over a long period, has been earning, say, 20 per cent. on the capital employed in its business, be free of this new tax and why should a firm which reaches 16 per cent. and then exceeds r6 per cent. have to bear this tax? What argument of principle, what practical argument is there in favour of that capricious discrimination, as it seems to me, between the firm earning 16 per cent, and the firm earning 20 per cent.?

The Chancellor of the Exchequer in his opening remarks said that one of the reasons why this new tax was proposed was because the Prime Minister had no desire to introduce indirect taxation. But this is indirect taxation. How does it operate? You have a company which has, let us say, a profits standard of 16 per cent. One-third of all its profits in excess of 16 per cent. is to be taken by the Exchequer by way of National Defence Contribution. Take the case of an individual trader who is being taxed to that extent. It means that on all profits over 16 per cent. he is being taxed 6s. 8d. in the £. It, therefore, follows that if he should be so fortunate as to be on the highest standard for purpose of Income Tax and Surtax, he bears on a certain proportion of his income, tax at the rate of 12S. 1d. in the £ and upon a large part of the balance of his income, tax at the rate of 18s. 9d. in the ££. That is too heavy if the objectives of industry as at present conducted are to be achieved.

The tax will have another effect. It also affects the small man at the other end of the scale. It is indirect taxation upon him, because it denies him the advantages of some of those lower rates of tax and some of those allowances to which, on the lower scales of Income Tax, he is entitled. The small man has become increasingly a participant in industry not so much as a direct investor but in his tens of thousands and hundreds of thousands as an investor through the Co-operative Investment Society or through the whole range of unit trusts—a relatively new phenomenon in our financial structure. It is, therefore, in its very essence, an indirect tax which is proposed.

Finally, the great advantage of the Income Tax in contradistinction to a tax such as this is that it cannot be passed on. This tax will be passed on. I have the support of no less an authority than the "Times" newspaper of 21st April, which reinforces the experience of others in dealing with this kind of tax, that almost inevitably, like any other form of taxation, it will tend to be passed on and thus to put up prices. That cannot be done with the Income Tax, and that is really a fundamental objection to this tax, that it will be passed on. Prices are already rising. In the inevitable race between prices and wage rates, prices, as always, are winning, and the Government are increasing the disparity, inevitable in any case, as it would seem, between prices and wage rates. This Budget was not only unbalanced when it was introduced, but it has become increasingly unbalanced since.

It would be interesting to have a calculation from the Government spokesman at the end of this Debate as to what loss the Exchequer has suffered by reason of the depreciation in Stock Exchange securities, the reduction in stamps, and the deficiency in Death Duties by reason of reduced values since the Prime Minister, when Chancellor of the Exchequer, opened his Budget and introduced this tax, which has created so much uncertainty throughout the industrial community. The criticisms of this tax seem to be such that whether or not the Government withdraw it and substitute some other, the effects will be deleterious to our general financial stability and situation. If the money has to be found, as I am willing to concede for the purpose of this discussion that it has, then let the Chancellor of the Exchequer try the well-tried method, the familiar method, the expected and anticipated method, which will give rise to no uncertainties, no misapprehensions, and no difficulties, the method of increasing the Income Tax, either as a tax upon individuals or as a Corporation Profits Tax.

7.33 p.m.

Sir John Wardlaw-Milne

Like many other Members on this side of the House, I believe, I find myself to-day in more difficulty than I have experienced in the 15 years during which I have had the honour to be a Member of this House. Perhaps on no day more than to-day would it be my earnest desire, and that of most of my colleagues, to support the Prime Minister in every possible way and to show him how heartily and how sincerely we meant the pledge which we gave him earlier in the day, and yet I am quite certain that nobody less than the Prime Minister himself would expect that I or any other Member would take a line, in a matter of this sort, which ewe believed to be wrong and to support which we believed would be against the best interests of this country. He is, however, placing us in an extraordinarily difficult position, and I can only say, perfectly honestly—and I am sure he will forgive me for saying it so plainly—that he is placing us in a position in which we ought not to be placed at all. The results which might arise if it were possible—I do not enter into the question whether it would or would not be possible—to give an effective vote against the Government tomorrow night would be so serious that most, and probably all, of us would say that they could not be contemplated and that we must even swallow this objectionable tax rather than put the country into the state of dilemma, suspense, uncertainty, and even disaster which might come upon it if there were an election forced upon it at the present time. I am aware that that result might not necessarily follow an adverse vote, but at the same time it is a possibility which we are bound to have in view.

The position in which I. Lind myself is to me the more extraordinary when I recollect how much the present Prime Minister, as Chancellor of the Exchequer, has done to support and promote industry in this country in the five or six years of his administration at the Treasury, and how much the country owes, to him personally in that connection. He described in his Budget speech the necessity for this tax as one for raising sonic £2,000,000 this year and £20,000,000 or £25,000,000 in a full year. We have since been told that the sum to be raised will be only about £15,000,000, and, as has been pointed out by the hon. and gallant Member who has just sat down, with a great deal of whose able speech I entirely agreed, the sum is really represented by a smaller nett figure even than £15,000,000, when allowance is made for Income Tax and Surtax which would probably be recovered from the same profits. To secure that figure of £15,000,000 or less than 1:15,000,000, my right hon. Friend the Prime Minister—for it is quite clear that it is lie who is responsible for this proposal——is hitting a severe blow at industry in this country and at the very confidence that he has so ably devoted the last few years to building up. It is strange, I think, that the author of that confidence, who has done so much to give us back our place in the industrial progress of the world, should deal us this blow.

I think it is not untrue to say that since this proposal was put forward in the Budget speech a drop of, not £20,000,000, but, in security values, of probably something like £200,000,000 or £300,000,000, has already taken place. No doubt it will be said, that to some extent such figures are speculative values, which may again recover, and that, no doubt, is true, but there are some people, and very often those who could least afford to lose anything, who have had, because of this fall in values, to sell out and incur definite losses which they cannot recover, while there are others holding on perhaps with great difficulty in the hope that the depression brought about by this proposal will pass. The Chancellor of the Exchequer stated to-day that this Finance Bill is raising a sum of £863,000,000. A large portion of that taxation falls upon a class of people who have been turned to steadily for the last four or five years and required to pay year by year a larger and larger share of the expanding demands which the Government have required of them.

I would like to remind the House that when my right hon. Friend the Prime Minister, as Chancellor of the Exchequer, put through his great conversion loan a few years ago, with the consent and support of practically all the people of this country, he took from a certain class of taxpayer over £80,000,000 per annum. He took that sum out of their pockets. That conversion scheme was accepted as a necessity, and I am not suggesting that any definite promise was made to the holders of the securities affected, but I do not think there is anybody in the country who will not agree that, although there might not have been a definite promise of any kind, there was at least a suggestion that the people who suffered that sacrifice might look forward to a reduction of Income Tax in the future. I am not blaming my right hon. Friend for one moment for the fact that conditions have changed. They have changed through circumstances quite beyond his control and to his deep disappointment, but it is a little hard that these very people who have had to find that money, who have not had any remission of taxation, and who in consequence of it have changed to some extent from the holding of debentures and preference shares to ordinary shares, because of the hope that these ordinary shares would find them the extra money to meet the deficiency in their incomes should now have to face a tax which falls upon them alone.

One of the worst features, perhaps the worst feature, of this tax is that it falls only on those who have taken a risk, who have had initiative, and that it does not fall on the debenture holders and those who receive a definite return for loan or preference capital. In that connection I would invite the House to consider the figure which has been issued quite recently, I am told, in the "Actuaries' Investment Index" and which gives the average yield in 1936 from certain ordinary industrial shares as 3.68 per cent., while on debentures of the same companies the return has been 3.95 per cent. It is probable that a large number of these ordinary shareholders are people who, content with even a less return than debenture holders, have invested in ordinary shares, although with less security for their holdings, because they hoped future earnings would compensate them for their loss of income.

Mr. McKie

Is the hon. Member suggesting that those many holders of 5 per cent. war loan who were largely hit by the reduction of 1½ per cent. have gone into the kind of shares which are going to be tickled up over the proposal in the Budget?

Sir J. Wardlaw-Milne

I am not sure that I fully appreciate the expression "tickled up," but if the hon. Member means, as I assume that he does, whether I think they have gone into ordinary shares, I think it is likely that some have done so, as is shown by the figures I have given, and by the fact that the return to ordinary shareholders to-day, according to this—

Mr. McKie

May I say—

Sir J. Wardlaw-Milne

The hon. Member must allow me to try to answer him. I was saying that I think it is proved by the fact that the ordinary shareholder last year, 1936, according to the "Actuaries Investment Index," received a yield of 3.68 per cent., against the debenture holder in the same industrial companies, who received 3.95 per cent. It seems to be clear that a large number of people—whether the same people or not nobody can say—went into ordinary shares because they found their incomes so reduced that it was necessary to take a greater risk in order to try and make up the deficiency.

I think that the point that I wanted to make, especially to my right hon. Friend the Prime Minister, has already been made by almost every speaker to-day, and I do not think he can be in any doubt about it. It is not a question of industrialists in this country objecting to paying £5,000,000 or £20,000,000 for the purposes of assisting towards rearmament. There cannot be any doubt about that now. The figure as compared with the total taxation of the country, is so trifling, to begin with, and secondly, it has been made plain by every association dealing with trade throughout the country that what is objected to is that the tax is unfair, that it falls, as I have said, on one kind of shareholder only, and that, the class of shareholder which, I venture to suggest, we should do our utmost to support and encourage.

Some hon. Members were, no doubt, present last week when Mr. Runciman, then the President of the Board of Trade, ended a speech upon the Board of Trade Vote by an appeal to industrialists to be enterprising, and not to depend on this or any other Government but to go ahead with new enterprises and show that the old spirit exists. With all the admiration that I have for the right hon. Gentleman, it seems difficult to understand how he could have made such speech knowing that this tax, which is a direct hit at enterprise, was likely to be put upon industrialists. I do not know whether it would have been possible to propound a tax which would have been a direct contribution from the making of armaments. I suppose that it was impossible or the Chancellor would no doubt have done it. Nobody would have objected to such a tax, although it naturally occurs to anyone to ask why it should be necessary if the system of placing contracts is being gone into and watched to see that no undue profits are made, as we are told is the case. I have no doubt that the. Minister in charge of defences is doing his utmost in that direction, but if it were possible to put a tax on extra armament profits there would be no objection to it.

This, however, is a tax on the growth of profits in business and surely the simple way in which to do it is to enforce it as an increased Income Tax. In that way two advantages would be gained at once. Firstly, everybody would pay it. I suggest that it is unfair that productive industry alone should pay a tax of this kind while the barrister, or the doctor, or the professional man, or the firm of stockbrokers or merchants which makes larger profits should escape. I cannot see the justice of that. All professions would pay if the tax had been in that form. Secondly, the tax is unfair because it is paid only by shareholders of companies registered in this country. The situation is such that two companies working mines, for example, in the same part of the Empire, one registered here and one registered abroad, are in a totally different position from each other. The shareholders of one company will pay the tax and the shareholders of the other will pay nothing. I cannot see the justice of an arrangement of that kind. No doubt the Chancellor might say that even in the case of Income Tax, the position would be the same. So far as the British resident shareholders of the company registered abroad are concerned, however, they would pay the tax on the increased dividends they might receive. Under the present proposal they will not pay at all.

The Chancellor has undoubtedly gone a certain way to meet some of the criticisms which were made against his proposal at the time of the introduction of the Budget, but it is clear from the responsible quarters from which criticism has come that he has not gone nearly far enough to make this tax acceptable. The tax will fall heavily upon the sort of enterprises that have built up the trade of this country in the past. Many of them, perhaps, were speculative or risky in their early days, making very little profits, but they are now in a position to be able to pay their way and to give their shareholders some return. I should mention, with regard to companies registered abroad, that there is the curious situation that all the South African gold mines registered in that country will pay no tax, but the West African mines, which are mainly registered here, I believe, w ill pay heavily. The copper mines in Rhodesia will pay, but the Canadian mines will escape. If the Chancellor of the Exchequer will reconsider his proposal it would do more to encourage industry and to bring into the Treasury the money it wants than any other course that could be followed. I do not know whether it is possible to estimate the loss which the Treasury has already suffered in loss of Stamp Duty, reduction in Death Duties and the like since the introduction of the Budget.

I want to deal with certain difficult points which ought to be put before the Chancellor so that we may at least have the satisfaction of feeling that he thoroughly appreciates what our objections are. Under this proposal there is the right to carry forward against taxable profits the actual trading losses during the past four years, but apparently the total deficiency below the capital standard in those four years is not allowed. It seems to me that there is a difference here which is hardly justifiable. If this allowance is justifiable in one case, why not in the other? Again, there is no mention in the Bill, so far as I can see, of any right to recover payment under the tax in the event of losses or deficiencies after the National Defence Contribution is withdrawn. That is a change as against the proposals which governed the Excess Profits Duty. Again, may I take the case of a company which acquires another concern. Apparently the acquiring company will not be able to carry forward the profits standard of the old concern. That was permissible, I think, under the Excess Profits Duty. The assets, it is true, can be added to the assets of the new or acquiring company in an allowance for increased capital but this may not compensate for the loss of the profits standard, particularly as the extra 2 per cent. in the case of capital allowed to new businesses does not apply in that case.

May I give another illustration of the results of this proposal? The effect on new company formations will be that a good profit record means the certainty of a heavy future liability unless the indicated profits are equivalent to 6 per cent. of the purchase price, which is an impossible basis for flotations under present circumstances. On the other hand, new companies formed just before 1936 to acquire established businesses will be exceptionally well treated as they can choose 1936 alone for their, profits standard. Where a company acquires the share capital of an old concern, or 90 per cent. of it, but not its actual assets, there will be a merger of the assets of the two companies, but the price paid for the share capital of the earlier concern will not necessarily be regarded as the value of its assets for the purposes of this contribution. It may be insisted that they be included at the book value, which may be much smaller than the price paid for them by the shares which they actually represented. There was a case not long ago in which the actual book value of the assets acquired in a case of this kind was £1,000,000, but the price paid was £3,000,000. That was presumably a fair price to pay, for the goodwill of an old-established and profit earning business was acquired.at the same time. In such a case only one-third of the value of the assets has been added to the combined capital for the assessment of this taxation.

My right hon. Friend the Prime Minister and the Chancellor of the Exchequer must be having these cases put in front of them every day, and they must know far better than I can the tremendous difficulties and labour which this proposal will place upon productive industry. If there are only 35,000 cases which will have to be considered by the Income Tax authorities for the assessment of a capital standard—and this is the estimate made earlier—we cannot put that figure as the total number of those who will be subject to scrutiny and inquisition, because it is clear that if 35,000 are likely to be liable, there will be something like double that number at least whose affairs the Income Tax authorities will rightly have to go into to see whether they are liable or not. Already the great profession of accountancy, although actively opposed to the tax, is preparing for the enormous amount of work which will fall upon it if the proposal goes through. It will make an enormous increase in the charges which all companies have to meet in accountancy investigation, in looking up old records, in endeavouring to prove the asset value of the various items which have to be taken into account—and all for what? To recover f£10,000,000 or £15,000,000.

I make an earnest appeal to my right hon. Friend to reconsider his position in this matter. Again may I say, with all the energy and conviction at my command, that there is no objection in any quarter of the country to providing the money. The objection is to the unfair method and the complicated confusing machinery which this scheme brings into operation. I ask him to reconsider whether it is not possible even now to withdraw this portion of the Bill and to substitute for it, after due consideration and in consultation with those great bodies of industrial and trade opinion in the country which are only too anxious to help, some tax on a simpler plan, based, if possible, on assessments which are made in the natural course of events for Income Tax purposes and thus enable us to support him whole-heartedly as we so earnestly desire to do in this the first measure to be brought before us under his Premiership.

8.0 p.m.

Mr. Maxwell Fyfe

It seems to me that there are three matters which have to be considered when we are making up our minds as to the rightness or otherwise of this proposal. The first is, Do we approve of the object with which it was made? The second is, Do we approve of the principle underlying the method by which it is sought to attain that object? Thirdly, Are the proposals workable, and do we object to them on the ground that they are not workable? On our answers to these three questions ought to depend our final view. With regard to the object, I have re-read carefully the Debates on the Resolutions, and I cannot find any opposition to or any questioning of the primary object, namely, making those who have benefited or will benefit from rearmament contribute specially in a manner different from the ordinary taxpayer, to the payment for rearmament. As far as the object is concerned, there has been, as far as I can see, no retraction of approval, and all must have felt themselves in symathy with the expression of that object put forward by my hon. Friend the Member for Huddersfield (Mr. Mabane) when he recalled to us the different feelings, in other days, of those who were suffering abroad and those who were engaged at home in a profitable way. Therefore, as far as that is concerned, there is no change in the position, and that part of the case goes.

Now I come to the question whether there ought to be a tax on the growth of profits or simply a tax on profits—to the question of principle, l will come to the workability afterwards. The right hon. Baronet the Member for North Cornwall (Sir F. Acland) said he could find no principle at all, but it seems to me that there is an excellent and well founded principle seeing that we are asked to tax the growth of profits in the case of those whose businesses and industries have been stimulated by national action, especially when that stimulation has come in order to further national safety. Hon Members opposite will remember how, during the Debates on the Special Areas, the view was put forward from all quarters of the House that the Special Areas were not asking for charity but were asking for action on the ground that they had been brought to their existing position by national policy. That was the key-note of their demand. Equally, when it works the other way, when national policy has brought about a benefit, and that benefit is expressed in the growth of profits, it seems to me logical, whatever else it may be, that that growth of profits should be the basis of the taxation.

I have listened with great care to every speech made to-day, and I have not heard one criticism of a tax on profits on the ground of principle. I have heard many considerations advanced which demand great consideration, but they were on grounds of practicability and workability. The principle underlying this tax remains not only standing clear but remains substantially unattacked at the present time. If we come to the question of workability, that, again, has to be considered from two points of view. Is the machinery so elaborate that it will oppress the working of companies, or on the other hand, add substantially to the cost of collection, so as to make it worthless from either point of view? I do not pretend to be an expert accountant, but on hundreds of occasions in my life I have had to "get up" the financial history of a company in a very short time, to understand not only what it was then doing but how its activities were reflected in its past history, financial and otherwise. The hon. Member for Bishop Auckland (Mr. Dalton) suggested that the complaint was directed to the elaboration and multiplication of standards, but in this case we are dealing with a standard of things that are past, with a basic period in which every figure is known.

My hon. and learned Friend the Member for Montgomeryshire (Mr. C. Davies) suggested, apparently, that companies would have difficulty in laying their hands on past computations. In my experience of dealing with these matters I have never known any company which could not without any difficulty produce the Computations, and the calculations which went to the making of those computations, in Income Tax, for the last 10 or 15 years. In the same way, with regard to the proposals for the determination of capital, we are not dealing with the future but with data which are there for everyone to see. It is not a question of trying to work your capital for the future. It is a question of arriving at a standard of information which is not only in the hands of the company but is, largely, in the hands of the Inland Revenue.

Major Stourton

On a point of Order. May I direct attention to the fact that there is no Minister in person on the Treasury Bench, and to the futility of carrying on Debate without a Minister?

Mr. Deputy-Speaker (Sir Dennis Herbert)

That is not a point of Order.

Mr. Fyfe

I was dealing with what my hon. and learned Friend had suggested as to capital construction. The right hon. Gentleman, who raised that point himself, admitted that the question of arriving at profits was infinitely easier than these difficulties of standards or capital construction, so one cannot in argument base a real difficulty on that. From the point of view of a company are they real difficulties, or are they matters which, perfectly genuinely, of course, but from a somewhat excessive apprehension of the present difficulties, have been exaggerated? I should like to give one other illustration. My hon. and learned Friend the Member for Montgomeryshire put as an example a machine, and said, "We find a machine to be worth £10, but how on earth are we going to prove that it was bought for £10 years before?" Really that is putting a case too high. We know that there is a standard of depreciation which is applied to the assets of a company. If you say, "I bought it for £100 10 years ago, but I have not the receipt," the price can be checked by working out the depreciation you apply year by year. We must consider so important a proposal with the greatest possible care and the deepest sympathy, but I suggest that my hon. and learned Friend, who I am sorry is not here, has put his criticism a little too high.

On the question of workability as far as the relations between a company or firm and the Inland Revenue are concerned, I suggest that the difficulties have been largely exaggerated. Everyone who has studied this matter carefully must feel that there are iniquities in the incidence of this tax on different businesses. I will take a case which is of supreme importance to Liverpool and the districts around, the shipping industry. We know that shipping and shipbuilding are periodic industries, that there will be in every decade probably seven bad years and three good, or some fluctuations of that sort. The industries are run on the basis that there will be these cycles and they must in good times provide for the bad times. It is known to everyone that the period from the year:1931 to somewhere well advanced in 1936 was a very bad one indeed for shipping, and this Bill as framed does provide a basis for the criticism that it will make those who suffered worst in the slump pay more.

To-day we are dealing with general points, and I do not want to go into details, but I suggest that that point could readily be met. It could be dealt with either by an amendment regarding the years which could be chosen, or, on the other hand, through the standard rates, which can be advanced in special cases from 6 per cent. to a higher figure; or, if the Government were not disposed to make that change, it could be done by simply introducing into paragraph 4 of Part II of the Sixth Schedule the two improvements of saying that one of the grounds on which an appeal could be brought is excessive fluctation of profits in a business and the appellant company or firm could be allowed to base their argument before the Court of Referees on the fact that the three standard years were years of exceptional depression, as in the case of shipping. If that were done, and if the Board of Referees were ready to enlarge the standard of profit by reason of those matters being proved, one of the most difficult parts of the Bill would be greatly improved and in a large measure the complaints would be removed.

I also respectfully submit that we want more clarity and more generosity on the question of depreciation in industries which depend very largely on the replacement of ships or plant of some kind. At the moment, and for Income Tax purposes, they are allowed to bring in their losses for six years and depreciation not only over that period but the unexhausted depreciation that exists. If they are allowed to do that for Income Tax purposes it does seem hard that they should, for the purposes of this Contribution, be allowed a depreciation for three years only out of the four which form the standard. I hope that the Ministers who are here at the moment will ask for this point to be considered. I mention these, which appear to be Committee points, because I think they show that if those improvements were carried out there could be no question of the prospective taxpayer saying that it is impossible to deal with the inequities. These are points which have either not yet been put forward or have not been sufficiently stressed, but they can be considered, and if they are met a great deal of the case founded upon inequity between different industries will go. I want to make it clear that, from the point of view of equity of principle and from the point of view of making the tax an efficient instrument of taxation, it is of the greatest importance that it should receive consideration.

In a letter to the "Times" Mr. Maynard Keynes has suggested that this would be a tax on enterprise and youth. Why the improvements during the last two years should be attributed to those two excellent qualities I have never been able to understand. Perhaps we shall be informed as this Debate proceeds. We should consider the improvements of the past two years and try to find a plan which meets most of the facts. The hon. Gentleman who preceded me mentioned the question of the inequality for ordinary shareholders as compared with debentures and preference shareholders. Let us look at the facts. The ordinary shareholder knows what he is doing when he subscribes towards the shares. [HoN. MEMBERS: "No !"] An hon. Gentleman has made a very necessary qualification into which I will not go now, but he knows that when a company are going to live upon capital, subscribed on special terms in preference shares and by mortgaging the business by special debentures, they have to pay those things first and they have to consider the people who have those shares. To say that because debenture holders get a fixed interest for which they have contracted is very far from a good argument for being driven to support this proposal.

I have indicated, I hope with clarity, the improvements which think are necessary to this tax. In he preliminary stages of every proposal improvements are suggested which people think ought to be made. It would be a very poor reflection on the intelligence of the House if proposals which purported to be improvements were not put forward. We may consider the matter from the three criteria of principle, object and workability. The principle and the object are so clearly defensible that they have never been seriously attacked. There has been no answer in principle to the principle which has been put forward to-day. With regard to workability, we must consider the practical thing which is sought to be done. I submit with the greatest deference that those who put forward objections have greatly exaggerated the difficulty, and that the improvements which I suggest will not only be defensible but will work with justice and equity to the taxpayer.

8.18 p.m.

Mr. Ridley

So many speakers have preoccupied themselves with one topic during this Debate that I almost despair of getting any attention from hon. Members in putting forward general considerations arising out of the Amendment. I shall appear to be trespassing upon forbidden territory almost to the point of being out of order. I do not think I can avoid that, even though I try to, because the arguments in connection with the National Defence Contributions seem to have exhausted themselves nearly as much as they have exhausted the House. I hoped, half an hour ago, that by directing attention to general considerations and away from narrow and particular considerations, I might have earned the gratitude of the Treasury Bench. Since the occupants of the Treasury Bench seem, for the most part, to have sought refreshment elsewhere instead of in the House, even that bit of gratitude seems to be withheld from me.

I beg to observe, in the terms of the Amendment, that the Bill is a bad one because it seeks to avoid problems which honest finance would face. In moving the Second Reading of the Bill the Chancellor of the Exchequer avoided every problem to which attention has been drawn by hon. and right hon. Gentlemen. He seeks to balance the Budget by methods which merely postpone the day of reckoning. The Amendment refers to the Budget as unbalanced. It is unbalanced in two senses. The first is that it does not meet existing commitments with existing revenue, because it resorts to borrowing. It is unbalanced in a second sense because it avoids obligations in 1937 which the Labour Government faced in 1930 and 1931. The Labour Government were not forced to face them, but did so because it was more honourable to do so. I refer to the Sinking Fund and the reduction of the American National Debt, which have been abandoned for the time being, nobody knows for how long. The Chancellor of the Exchequer and the Financial Secretary to the Treasury must know that debt obligations are not discharged merely by attempting to ignore them. They are not discharged even by conversion schemes. They are discharged only by a process of payment. The Chancellor of the Exchequer has ignored and avoided in his present financial calculations the two items I have mentioned, in the hope that some future Chancellor of the Exchequer will have to face the difficulty.

I would ask the House what right the Government have to land us, by their foreign policy and their diplomacy, into an arms race that has resulted in the almost astronomical figures which the Bill requires the House to face? Why should the burden be postponed for another generation and perhaps for another Government? This is, in every sense of the word, a war budget. The right hon. Gentleman who is now Prime Minister said on Budget Day that the Budget was dominated by considerations connected with armaments expenditure. I suggest that this is an unusual Budget in two specific directions. First of all, for the first time in the long history of budgetary finance, every halfpenny of new taxation is being raised for armament purposes, and none for the expansion of social services. It must be many years since the Chancellor of the Exchequer, either on Budget Day or afterwards, as this afternoon, could make a speech in relation to the annual review of national finance and not include a reference of any kind to social service expansion. There would be some justification of the unorthodoxy of the method employed and some slender excuse, if the money being raised in this way were to be sent into fruitful social and economic channels.

In the course of his Budget speech the right hon. Gentleman not only said that the Budget was dominated by the expanding armaments programme, but he made no reference to a single social question or to social reform, despite the fact that money was urgently needed for social reforms which have been pressed vigorously upon the Government in the last few years from all sorts of political quarters. The Government have been asked to take old people out of industry so that young people might find employment; to assist purchasing power in the Special Areas by extending unemployment assistance and benefit; to take the means test out of the lives of our people; to provide solid meals for children who are hungry and need them in order that some decent physique may be preserved for them. But not once was any kind of reference made to any one of these reforms, not because their desirability is questioned, but because, although money in abundance can be found for armaments, not a halfpenny can be found to satisfy the urgent needs of our people. In three years we could lift, and we have lifted, Service expenditure by more than £100,000,000, and yet we could not lift by a single halfpenny the expenditure on the social services. If it had been proposed to raise a National Social Services Expansion Contribution, there would have been even greater and more vigorous protests from the benches opposite than there have been in connection with the contribution that is now before us.

The Chancellor of the Exchequer, in his Budget speech, described as dismal Jeremiahs those who would be opposed to the National Defence Contribution. He said that we could bear it, and that those who would otherwise object to it might be brought to face a little less unwillingly the necessity for it because of the fact that, as he said, it was taking us nearer to the goal of safety. But is there a Member in this House who believes that the heaping up of armaments for which this Bill provides is taking us nearer to the goal of national or international safety? That is a delusion which surely cannot exist in the minds of people occupying responsible positions, even in the present Government. It means, in other words, making war less possible by adding to the instruments of war, or adding to security by increasing the weapons of insecurity. May I claim the indulgence of the House for a very brief quotation? Sir William Robertson, speaking on 8th November, 1927, said: We no longer agree without qualification that the best way to prevent war is to prepare for it. Instead of preventing war, we know that preparations precipitate it. Never in history were preparations so complete or so widespread as during the 50 or 60 years previous to 1914, and yet never were wars so frequent as in that period. With all the experience of history behind us, no matter what excuse or necessity there may be for this new heaping up of armaments, it cannot have the justification or even excuse that it takes us nearer, as the Chancellor said, to the goal of safety. I will give another quotation, which seems not only to be appropriate, but even apt. The present Chancellor of the Exchequer, speaking in his own constituency, said: We all want to promote agreement for general disarmament. I have broken my heart in an effort to do what I could to promote peace. I am confident that the decision at which we have arrived to face manfully this additional expenditure for our own defence is going to reduce a situation which is more likely to produce general agreement between this nation and other nations about disarmament. It will be at least some consolation to members of the House to know that that portion of the right hon. Gentleman's anatomy is not missing, hut, in connection with the problems of disarmament, he is much more likely to break some other people's hearts than to break his own. We do not facilitate disarmament by rearming, by making more profusely the instruments by which war can be waged. The whole dominating expenditure for which this Bill provides whether it is raised out of taxation, out of normal revenue, or by loan, has been made inevitable by the foreign policy of the Government—by a Government which scrapped the Proctocol, which destroyed one Disarmament Conference and treated another with political derision. The financial policy of the Government which it displaced in 1931 was purity and probity itself compared with the financial policy which must be defended to-day and tomorrow, on the present Bill, by a Government which in six years has brought us to a condition of fear and shrinking at the prospect of war. My hon. Friends on these benches will go into the Lobby at some time to-morrow afternoon against this Bill, first, because of the way in which the money is to be raised; secondly, because it postpones the day of reckoning which the party on these benches will have to face when their turn comes, sooner or later—sooner, I hope, rather than later—to sit on the Treasury bench; and, thirdly, because it provides for the expansion of no social service, but lends itself to the totally erroneous and unjustifiable belief that security can be attained by increasing the very weapons of insecurity.

8.32 p.m.

Major Stourton

The burden of the speech of the hon. Member for Clay Cross (Mr. Ridley) appeared to be that not sufficient is being done in this Budget for the social services, but I would remind him that year by year more and more has been spent on the social services, until the grand total now exceeds £500,000,000 a year, which is something like 10 times as much as.vas spent before the War. I do not think. Therefore, that the hon. Member has any serious cause for complaint.

I propose to make a very brief reference to a portion of the Finance Bill which so far has not been referred to, namely, the Male Servants Tax. I desire to express my appreciation and thanks to the Chancellor of the Exchequer for having taken steps to abolish that tax. There were certain obvious drawbacks to it. In the first place, it was a tax upon employment, and therefore pernicious and objectionable, small though it was. Secondly, it was utterly unfair in its incidence, since it applied only to male servants in private employment; and, lastly, it must have been exceedingly costly to collect, because it brought in the trifling sum of £130,000 collected from no fewer than 146 county and county borough authorities. Year by year I have moved the insertion of a new Clause in the Finance Bill to abolish this tax, and it became what I might describe as a "hardy annual." It is, therefore, with all the more pleasure that I congratulate my right hon. Friend on having taken advantage of the recent redistribution of block grants to local authorities to get rid of it altogether.

I would that my right hon. Friend had taken the same view of the National Defence Contribution which has provoked criticism and opposition not only from practically every Member from my side of the House but from most leading industrial authorities. I will mention a few of them. The Association of Investment Trusts, the Federation of British Industries, the National Union of Manufacturers, the Chambers of Shipping of the United Kingdom, the British Iron and Steel Federation and the Mining Association of Great Britain have unanimously protested. There is also a letter in the "Times" to-day, signed by many leading industrialists, condemning it. In face of such general opposition it seems to me extraordinarily futile and unwise on the part of the Government to attempt to ram it down the throats of its own supporters for the sake of a paltry £15,000,000 which might be very much more simply raised by other means. Nor I can I understand how my right hon. Friend was so ill advised as to adopt the tax originally, and still more am I puzzled as to why he has persisted in that intention. It seems to me nothing more nor less than a tragedy that the Prime Minister, who spent six years in unremitting and successful toil to restore national confidence and re-establish the national credit, should have, inadvertently though it be, dealt what might be described in boxing metaphor as a body blow to industrial recovery, for such I deem it to be. Confidence has undoubtedly been shaken, and it takes a deal of restoring when once it has been disturbed.

The concessions made in the Bill are inadequate and only make confusion worse confounded. Already there are abundant signs that the tax is defeating its own object. Stock Exchange values have been falling to the tune of hundreds of millions, which means lowering the yield from Death Duties, and the large falling off in Stock Exchange transactions indicates a greatly reduced yield from Stamp Duties, and incidentally members of the Stock Exchange paying a good deal less Income Tax and Surtax in the next few years. It has also been brought to my notice that great corporations producing base metals, and other big firms, are contemplating changing their domicile in order to escape National Defence Contribution, and of course, in doing so, they will escape British Income Tax altogether. Members of the Conservative party object so strongly to this tax principally because it is entirely unjust in its incidence, because it is a tax on recovery as well as on enterprise, and because it is likely to cause heavy expenditure to firms in ascertaining their liability. It will mean an expanding bureaucracy on a large scale in order that the tax may be collected and, by discouraging enterprise, it is bound to create unemployment to some extent. I might well ask the Chancellor of the Exchequer how much it is going to cost to collect the tax. I have heard no figure mentioned, but I should say the result would be entirely disproportionate to the effort. My friends and I feel justified in the step that we have taken by tabling the Amendment on the Order Paper in face of the general discontent and resentment that the tax has caused.

In the first place it will fall on great industries which are coming out of the trough of depression. In many cases these firms have paid no dividend to their shareholders for five or even 10 years. Their recovery is in no way due, in most cases, to stimulus from the rearmament programme. The industries to which I refer in particular are cotton, rubber, shipping, shipbuilding, iron and steel, coal, engineering and the producers of base metals. For such industries, broadly speaking, the years 1933, 1934, and 1935 were lean times, though 1936 was a rather better year. The directors of companies operating in such industries looked forward to the profits of this year to reward their shareholders for their patience and to build up reserves depleted and dissipated during the years of depression. The tax will, to some extent at any rate, deny them the fruits of their enterprise. I think it can well be contended that dividends of 20 to 30 per cent. are no extravagant reward for shareholders who have had no return on their capital during all those years. But the burden is likely to fall most heavily on thriving young businesses which have been successful from the start and which must earn large profits in order to establish themselves and build up reserves necessary for expansion. Such firms as these are the very life-blood of the nation, upon which we reply for the double purpose of absorbing our unemployed and finding markets abroad for our exports in order to pay for those things which we find it necessary to import. To discriminate against such firms as these is, to my mind, nothing less than a policy of Bedlam.

Let me ask the House to consider those who stand to escape scot-free. These are the holders of gilt-edge securities, debenture stocks, preference shares, Rand gold mining shares—who incidentally have made bigger profits than anybody since we went off the Gold Standard—lawyers and accountants. Persons drawing incomes from any of these sources of £20,000, £30,000 or £40,000 a year will contribute not a penny towards the National Defence Contribution. On the other hand, it is equally true to say that large undertakings such as general stores, caterers and tobacco companies which, for years past, and all through the depression, having established themselves, and earned a steady profit all the time, will contribute next to nothing to this tax; and also that companies with steeply geared capital will also escape the incidence of the tax. I think that I have said enough to indicate that this tax is fundamentally unjust, and I am not without hope that the Chancellor of the Exchequer may yet see his way to substitute some other form of tax in its place. Those of us on this side of the House who are in opposition to it are ready enough to find the money for rearmament without limit. It is purely a question of method. If I may respectfully suggest it to the Chancellor of the Exchequer, the best thing that could be done in the circumstances would be to withdraw Part III of the Finance Bill altogether and appoint a Departmental Committee of investigation. If my personal opinion was canvassed as to how I should raise the money, in place of the National Defence Contribution, I would suggest a flat rate tax on all net industrial profits which could be regulated and raise very much larger sums in the years to come if necessary.

8.47 P.m.

Mr. Holmes

Wish the exception of that of the hon. Member for Clay Cross (Mr. Ridley), every speech since we started just after 4 o'clock has been devoted to the National Defence Contribution. I shall probably return to this particular tax a little later, but before doing so I would like to speak on another point. I want to take the House back to the Budget speech of the Prime Minister a month ago. It will be recollected that in the course of that speech he toad us that he estimated the expenditure for 1937–38 at £862,848,000. He had previously told us that the receipts for last year, 1936–37, were £824,716,000, so that there was a deficit of just over £8,000,000 to be provided in the current year. He went on to say that his estimates of receipts for the year 1937]–38, the basis of existing taxation, were that the increase from Customs and Excise would be £12,000,000, the increase from Income Tax £18,000,000 and the increase from Surtax £4,500,000, with t1:-.1e result that those of us who were listening to him and adding up these figures certainly thought that it would not be necessary this year to put on any new taxes at all. Our hopes were dashed to the ground when he told us immediately afterwards that that very variable item. "Miscellaneous receipts," would be less this year than last year by £13,000,000. But after the Prime Minister had announced the expected addition of 3d. m the pound on the Income Tax, the deficit was left at what he himself described as the trifling figure of £1,748,000.

If the Prime Minister had stopped there and had suggested one or two minor taxes which would have given him the £2,000,000 that he required, the comments which would have appeared in the Press during last week-end and the comments which were made concerning him by individuals throughout the nation, after his six years of Chancellorship, would have been entirely different from what they actually have been. This is unfortunate, because it really is the fact that the Prime Minister, during the six years as Chancellor of the Exchequer, contributed very greatly to the recovery of this country during that period, and it is worth while that we should just recall some facts of his six years as Chancellor of the Exchequer. It is difficult for any of his colleagues to do it, and it is the last thing that he himself would do. I want the House to allow me briefly to recall the five previous Budgets of the Prime Minister. I am also going to give, with regard to each one, what I may call the opinion of the average man. I intend to take the comments in the leader of the "Times" newspaper, for although the "Times" leaders may be written by one man and thought out perhaps by only two or three people, they, as a rule, represent what the average man is thinking or what the average man will think when he has definitely considered the particular point.

Mr. Georģe Griffiths

What does the hon. Gentleman call an average man?

Mr. Holmes

In 1932 the Chancellor of the Exchequer in his first Budget, after he had succeeded the late Lord Snowden, had a deficit of £1,700,000, and he put on a new Tea Duty of 4d. per lb. on foreign tea, and 2d. per lb. on Empire tea. The "Times" of the 30th April, 1932, said: If there was little in it (the Budget) to stir the imagination or to kindle the enthusiasm of his audience, the reason lay partly in his studious avoidance of oratorical superfluities, but even more in the Puritanical severity of his proposals. For the Budget is undeniably a hard Budget.… He simply called upon the country to face the facts and to make the best of them. In 1933 things were better. The Chancellor of the Exchequer had a surplus of £15,291,000, and he also raised an extra £2,000,000 from increased duties on motor vehicles and on heavy hydrocarbon oil. As the result he was able to reduce beer by 1d. per pint, and he restored to us the right to pay Income Tax in two instalments, on 1st January and 1st July. The "Times," commenting on that Budget, said: Mr. Chamberlain's Budget … is very much what might be expected from a sound and orthodox Chancellor.… It makes, or rather promises, a beginning, albeit a small one, in the direction of that reduction in taxation that everyone recognises to-day as being the most urgent necessity of our public finance. The "Times" concluded its leader as follows: Mr. Chamberlain has shown us the edifying spectacle of a just man struggling with adversity. But more than that is needed; he must learn also to find a way of overcoming his difficulties. When 1934 came there was a surplus of £29,100,000. The Chancellor of the Exchequer had found a way of overcoming his difficulties. It will be recalled that on that occasion he said that the appropriate literature was no longer "Bleak House," but "Great Expectations." He was able to restore the full rate of unemployment benefit as from 1st June, half of the other cuts were restored and 6d. was taken off the Income Tax. The "Times" said: The use to which Mr. Chamberlain proposes to put his surplus will stimulate still further recovery.… In these brighter days Mr. Chamberlain displays the same self-restraint and follows the same methods of impeccable correctness as in the days that were not so bright. In 1935 there was a surplus of £5,610,000. Cuts were restored in full, Income Tax to the small taxpayer was substantially reduced by increasing the personal and family allowances, the Entertainments Duty was abolished on seats under 6d. and reduced on seats above that price where the entertainment was provided by living performers. The "Times" said of that year: The small man is to have his turn, and he certainly deserves it. By lightening the lot of the householder who has been harassed to make ends meet on a small income, Mr. Chamberlain is contributing effectively to a further restoration of trade. Lastly, in 1936, the Chancellor of the Exchequer again had a surplus, but he had to face an additional sum of £42,000,000 for the Defence Services, Income Tax was raised by 3d. in the L and the Tea Duty from 4d. to 6d. The brief comment of the "Times" was: It is perhaps not undesirable to bring home to the country the real meaning of the Defence programme upon which the Government have embarked, and certainly no course could be more effective in so doing than that which Mr. Chamberlain has taken. During these six years the Prime Minister's financial policy was such that he was always able to budget for an increased revenue, because the prosperity of the country was being restored. It was a gradual building up, this getting our men back to employment and getting businesses going again, and the way in which the Prime Minister arranged the finances was a great contribution to what has been effeted. It is, therefore, to many of us all the more regrettable that with such a great record he found it necessary to introduce this National Defence Contribution. He has been good enough to receive a report, which has been referred to, from the British Chambers of Commerce, the Federation of British Industries and others. He also received a deputation from them. He was good enough to give them a great deal of time, and they appreciated what he did.

We agree that the idea behind the tax is a good one. Originally, the idea was that those who are making money out of armaments should be particularly taxed. It has been said by a great many speakers to-day that trade and industry are perfectly willing to provide £25,000,000 a year out of profits in order to pay for the armaments programme, but the concessions which the Prime Minister and the Chancellor of the Exchequer have made do not go as far as they should. Once or twice during the Debate to-day hon. Members opposite, particularly, I think, the hon. Member for Aberavon (Mr. Cove), suggested that the business people of the country are not desirous of finding this money. The idea that the profits of our industries go into the pockets of a few rich people is an entire illusion. The great majority of the businesses of this country are to-day carried on by large joint stock companies, and if hon. Members go to Somerset House and examine the annual returns of shareholders which every company has to make, and if they will count the number of shareholders of any of these companies and divide it into the total share capital, they will find that the average holding throughout the country in all our big undertakings is between £100 and £200 per shareholder. That is owing to the fact that gradually all classes of people have been getting better off. Many of the working classes have been able to save a bit of money. They wanted an investment for that money, and they have seen no better investment than putting it into industrial undertakings in their own country.

Mr. Gallacher

And they have lost it.

Mr. Holmes

That is a ridiculous remark. That is what they have not done. We could not have a tax like this proposed if the industrial undertakings were going bankrupt. This tax is not going to be upon the profits of a few rich men, but a tax on the dividends which thousands of small people throughout the country are going to gel on their small investments in these industrial undertakings. These dividends received by small people are spent and not hoarded. That increases the trade in shops. The shopkeeper in turn has to send to the factories for more goods. Money goes out once more in wages in the factories, and it is re-spent in the shops again, and so it goes on in a continuous circle. It is true that there are an umber of people in the country who are not yet in a position to afford to make investments, but if we keep our trade and industry on sound lines more and more, as prosperity comes to the country small investors will be able to take an interest in industry. In these circumstances it would be the possible disadvantage to the country if we introduce a taxing system which is likely to interrupt the even flow and the upward flow of the prosperity of industry.

It would be inappropriate for me to make Committee points on the Second Reading of the Bill. There will be a great number of Amendments which we shall put down on various points arising on Part III of the Bill and the Schedules attached to it. I shall make only one further general point in regard to the tax. I am very disappointed that the Chancellor of the Exchequer to-day indicated that he did not think it was possible for him to agree to what is termed an overriding limit, that is, limiting the amount that any company has to pay in any accounting period to a percentage of, say, 10 per cent. of the actual profits made in that period. An analogy has been made between the new tax and the Excess Profits Duty, but the two are entirely different. During the early stages of the War, profits were made because prices went up. Goods bought at cheap prices were sold at much higher prices. There was no foreign competition. Anybody who was able to get goods was able to sell them again at almost any price that was asked. It was right in those circumstances that the Excess Profits Duty should be put on.

But to-day things are entirely different. We have not only foreign competition but intense competition at home. The profits that are made are made by enterprise, energy and initiative, and while the idea of the new tax is right there will be in- equalities in its application as between different classes of business and between different businesses of the same class. A sense of injustice will arise and payment of the tax will not be made with the usual good will which obtains in this country. Industries which have suffered least during the slump or have recovered very quickly will have a satisfactory profit standard and will bear but a small share of the tax, but industries like cotton, coal, iron and steel and shipbuilding, even with the concession of 1936 as a standard year, will not have such a good profit standard as will enable them to pay much less than one-third of their full profits in any year. In addition, there is a tremendous amount of uncertainty in the minds of those who expect to pay this National Defence Contribution as to the sum they will be called upon to pay, and the complex nature of the calculations makes it difficult for anyone to arrive even at an approximate estimate.

There is nothing which brings worry and dismay so much as uncertainty. Whatever difficulty one has to face in life one likes to know the worst that can happen. If the Chancellor of the Exchequer would grant an overriding limit he would rid the taxpayer of a feeling of uncertainty, to a large extent destroy the feeling of injustice, and in many cases would simplify computation and obtain the amount due much more quickly, since the taxpayer in such circumstances would be able to agree to pay the maximum without any complicated calculations at all. The special committee which reported to the Prime Minister recommended that the maximum payable in any accounting period should be 10 per cent. of the profits actually earned. Possibly the Chancellor of the Exchequer might take a little more and make it 10 per cent. for new businesses but 12½ per cent. for those which were established before January, 1934. If he would put an overriding limit into the Bill he would remove a great deal of the opposition there is to the tax at the present time, and enable those who do not want to oppose the Measure but to make it workable, and who also desire that the present upward trend of industry should not be affected, to do their best to assist him.

9.10 p.m.

Mr. Graham White

I do not propose to make more than a limited claim on the indulgence and attention of the House be- cause I do not want to refer to any Budget except that for the year 1937, and then to only one small portion of it. I remember that Mr. Speaker in the early days of this Parliament, when giving some guidance to the House on the subject of debates, suggested that we should go in more for the cut-and-thrust of debate. In a debate of the character to which we have listened this evening that is quite impossible because there has been no cut and thrust. We have not had a speech from any quarter of the House which has not been a whole-hearted denunciation of the main feature of the Budget, and in those circumstances the cut and thrust of the debate becomes impossible, and the interest of the debate is limited.

The hon. and learned Member for Montgomery (Mr. C. Davies) in his speech assumed that the Prime Minister was going to force the Bill through the House, in opposition to the convictions and wishes of his supporters, by means of the Government Whips. I do not share that assumption, and I see no reason why the hon. and learned Member should have made it. The Prime Minister is succeeding in his high office a man who has a great reputation as one of the foremost upholders of British democracy, and I can imagine nothing more unfortunate than that his successor should take the undemocratic course of putting on the Whips to force something through the House of Commons which every one of his supporters who has spoken has condemned. I see no reason to assume that that is a course which the Prime Minister will take. I hope he will not, because not only would it be an affront to his followers, but it would be an affront to the House of Commons and a blow at the democratic institutions of this country. I have been at some pains since the proposal of the National Defence Contribution was first announced in the Budget speech to ascertain public opinion with regard to it, and I should like to put it on record that outside the House I have not found a single individual who has anything to say in favour of it. In the House of Commons, as the evidence of the Debate discloses, there has been no one who has been willing to stand up and defend it. I am not surprised, because the tax contravenes every sound canon of financial practice One of the reasons why I hope the Prime Minister will not take the course of forcing this unpopular proposal on the House is this. It is difficult to make any observation which has not been made before, but I think it is of great importance that something should be done to restore the prestige of the Treasury. Many people have said to me that almost the worst feature about it is the evidence of the general incompetence of the Treasury in introducing a tax of this kind, apparently without so little regard of what its consequences would be, and with so little inquiry made in advance. They have expressed their surprise that a Department of State which stands so high as the Treasury should allow itself to introduce a Bill of this kind.

Reference has been made to the consequences of uncertainty in regard to the operation of the tax. I do not know what has already been the cost to the Exchequer of the uncertainty produced by this tax, but I have seen it estimated that between £6,000,000 and £8,000,000 will be the decrease in the yield from Death Duties and Stamp Duties as a result of the proposal of the tax. I should be glad if we could be given some information about that, because if that estimate is correct, and that sum has to be deducted from the £415,000,000 which we are now told is to be the product of the tax, it seems to be incomprehensible that the Chancellor of the Exchequer and the Prime Minister should proceed with the tax.

The House has already been reminded of the extraordinary punishment which will be meted out to shipping firms and shipbuilding firms, whose fortunes are so closely connected with the shipping industry. One of my reasons for speaking is that I wish to associate myself with the remarks made by the hon. and learned Member for the West Derby division of Liverpool (Mr. Fyfe) with regard to the position of the shipping industry. I cannot believe that this tax will be persisted in, but if that should be the unfortunate intention and purpose of the Chancellor of the Exchequer and the Prime Minister, I hope they will remember that only a year or two ago they recognised in this House the dire straits to which the shipping industry had been reduced, and that they will make such modi- fications as may be necessary in this tax in order that the shipping industry may be enabled to retain from earnings, if they are sufficiently large for that purpose, a sum sufficient to enable it to carry on and renew its tonnage in face of the severe foreign competition which it is meeting at the present time. It would appear to be the minimum concession required by the shipping industry that it should be allowed to bring into account, before it is assessed for the new tax, the whole of the arrears of accumulated depreciation. For some years past, many of the more prominent shipping lines have been unable to bring into account depreciation of their ships, and, of course, it is true of a shipping company that it does not earn any profit as long as there are any arrears of depreciation upon its ships. I hope that matter will receive very careful attention.

The Chancellor of the Exchequer referred to the position of plantation companies, and said that their objections had been fairly and squarely met. From what I have heard from some of those interested in that precarious business, it is not their opinion that the objections have been met, especially with regard to capital computation. In that industry, which is just emerging from a period of great depression, some of the companies which were well-managed and which had low production costs were able to weather the storm and to render considerable service to the industry as a whole by taking over other companies which were not able to withstand the strain. Those companies will be heavily mulcted for the services which they have rendered this country by maintaining the plantation industry in time of need. The Chancellor of the Exchequer also said that the tax would touch those whose profits had been stimulated by Government policy. I would point out that there are many companies whose activities and profits have been stimulated by the policy of the Government under the shelter of tariffs which will not be touched by this tax in any degree.

It cannot be said that the opposition to this tax is a revolt of big industry. More than one speaker has pointed out that the opposition to the proposals for their thoroughly incompetent and un-businesslike character comes as much from firms and businesses which will not be touched by the tax as from those which will be touched by it. Something has to be done to restore the prestige of the British Treasury, which has always stood very high indeed. It has shocked me to hear the expressions of opinion of responsible business men who have said that they did not think the British Treasury would have been capable of making a proposal of this kind, which is apparently so ill-considered, with its effects so ill-foreseen, and which has already had such unfortunate and disastrous effects on the financial recovery of this country. I cannot believe, as does the hon. and learned Gentleman the Member for Montgomeryshire, that the Government intend to force these proposals through the House. If that were done, it would be an outrage to Parliamentary procedure, because so far not a single speaker has risen in his place to defend the tax. It would be a grave blow at democratic procedure. We have here a great opportunity for co-operative effort at a time of national necessity. The commercial community of this country is willing and indeed anxious to assist in the raising of this money on an equitable basis. That opportunity is still open, and I urge the Government not to turn it on one side.

9.23 p.m.

Mr. MacLaren

I have sat through this Debate, and I have tried to recall, in the many years during which I have been somewhat interested in the comings and goings of Parliaments, an experience such as we have had to-day. One of the strangest experiences I have ever had has been to see, as I have to-day, the entire House of Commons attacking the Chancellor of the Exchequer for introducing a tax. I do not know what is in the mind of the Chancellor of the Exchequer, but on constitutional grounds, if he has gathered the opinion of this House, he should at once withdraw the tax. To go on with it in the teeth of opposition certainly will not make his path as Chancellor of the Exchequer a rosy one. Another thought which comes to my mind is that since I came back to the House after the last Election, I have heard nothing but a continuous chorus that the National Government has brought us back to prosperity. [HON. MEMBERS: "Hear, hear!"] I hear it again. It is of no use hon. Members opposite getting disturbed, after a carousal, a night out, when the big bad wolf comes in and passes round the hat. But where is the chorus about prosperity to-night? It has gone. One touch of the Treasury has evaporated that great enthusiasm about the prosperity which has been brought to this country. Anyone who is a student of human nature and of economic and political action knew very well that all this nonsense about prosperity in our time would evaporate at a touch of reality, and that is what has happened. We are quite willing to talk about prosperity and the great time we are living in as long as we are not asked to pay for it, and it makes it a merry life when no taxes are called for. Now the testing time has come and taxes are being asked for, and out from the archives of the Treasury comes this new tax.

I was interested to notice in the letters which appeared in the leading papers after the speech of the Chancellor of the Exchequer, who is now Prime Minister, that there were a number of pundits trying to claim merit as the authors of this tax. One of them, Sir Josiah Stamp, who claims to be an economist—I do not know to by he does, but his word is accepted—claims to have been the author of it many years ago. The suggestion has all the characteristics of Sir Josiah Stamp. But it is better to have a look at these things from a broad aspect. The Prime Minister said: "a great amount of money has to be raised for National Defence," and he had the prudence and foresight to say that preparatory to this great venture they would take the precaution of raising the annual sum necessary to meet the expenditure. The effect of this scheme is undoubtedly to put a tax upon industry in some shape or form. I have no doubt that the Prime Minister thought that there would be swollen profits on armaments and that it would be an easy thing to impose a tax on those swollen profits; and as time went on he discovered that the ramifications of the profits arising from the armaments programme were much wider than the profits in the field of armaments alone. To be logical he had to widen his impost far beyond the confines of armament production and levy a tax on profits which could be ascribed to the greater activity due to armament production.

To-night he finds himself faced with a barrage of opposition, for it has been undeniably shown that the tax is undoubtedly a tax on industry. There is no escape from that. The difficulty is to continue in our present canons of taxation the present conception of taxation which Treasuries of all countries; to persist in dominates not only the Treasury but the this until a time is reached when industry is bound to rebel at the increasing taxation levied on it. We often hear of the necessity of having protection for British industry so that it may have a chance against foreign competition, and at such times I think of what takes place at Budget time. The industries of this country are carrying more taxation and more local rates than industries in any other part of the world, and these taxes and rates are passed into the cost of production and increase the prices of British manufactured goods, with the result that British manufacturers entering into the field of foreign competition are undercut by those countries which are not carrying the same amount of taxation. These facts are inevitable while Governments persist in raising their taxes by levying them upon industry, and levying them in proportion to the amount industry earns.

In this respect I am almost looked on as a lone person in warning the House of Commons on each occasion I get an opportunity that if you still go on with this idea that the best way to raise taxes is on incomes, on the value of goods produced, the rebellion which we witness to-day will be a mere sham fight compared with the rebellion we are likely to witness in the near future.

But I would rather criticise this proposal from a broad standpoint, because the more details you hear about it the more fatuous the whole thing becomes. The more you hear details the more you wonder where British liberty is going, and whether the time is coming when every industrialist in the State will have to go on his hands and knees to the bureaucrats in Whitehall. The thing is becoming an utter farce. We boast of liberty, but almost everyone who makes an income, because of the exingencies of taxation, becomes almost a nervous wreck when he sees an Income Tax inspector approaching. We hear so much at Coronation times about preserving our liberty and freedom—yes, until the Income Tax man asks, "Have you got the next form?" and "What about next week's income?" and then all your courage seems to evaporate.

Money is required to defend this country. The defence of this country is not too much if it is needed and if it is efficacious in carrying out that very necessary function. I do not wish the House to think that I am exploiting this situation in order to bring in what may be called King Charles's head. Yes, I know you are all waiting for it. I remember on one occasion in this House being told that I have no need to open my mouth in this House: my presence here is sufficient. That must be a difficulty of identifying oneself with a principle. What is wanted is money for national Defence. We have seen that the machinery set up by the Prime Minister is breaking down in his hand. Why? Because it is complicated, because it necessitates inquisitorial examinations—not merely that, and not merely because it damps enterprise. It is a bad thing for the State when you begin to damp personal initiative.

Every point of criticism that has been raised to-day about this tax must be making it evident to the Treasury that the scheme is utterly impossible. Very good then. We are all agreed if one is to judge from to-day's speeches, that the money is necessary. The State must be defended. How is the money to be raised? If it cannot be raised in this way, what is the alternative? I sympathise with the Prime Minister on the fact that while Members have stood up in their places one after another to throw brickbats at his scheme and to offer plenty of negative criticism they have not offered any constructive proposals. It is high time that the right hon. Gentleman asked for some positive suggestions. This is a question of national Defence. It concerns the defence of the country. Will the House forgive me for asking once again, is there anything more logical than that those who own the country should be called upon to pay a contribution for its defence? Is there any reply to that? Is there anyone to assert that there is no connection between the one thing and the other?

I make this suggestion: if the House will bear with me. The Government must immediately either meet the difficulties which have been put before them to-day, or discover an alternative way of raising the money. In 1931 a Finance Act was passed by the late Lord Snowden and certain machinery was set up under that Measure. All the details were embodied in the Finance Act of that year. That Act would have been put fully into operation had it not been for certain little political difficulties which arose. But the point is that the machinery created by that Act is there, in the Treasury, now. It is not a matter of having to go through a long Committee stage and months of political speeches in this House in order to come to an agreement on what should be done. The machinery is there now, and if the Prime Minister was truthfully reported in yesterday's papers he made the threat that if those concerned did not accept this National Defence Contribution they might have to accept the suggestion that the money should be raised in the manner embodied in the Finance Act, 1931. Hon. Members will notice that I am not actually mentioning that proposal. But I make the suggestion in all seriousness that the machinery of the Finance Act, 1931, could be put into operation because it was never abolished by the common will of this House. Furthermore, not one of the critics who have been heard today could raise the same criticisms against the 1931 proposals. Those proposals were simplicity itself. Not one of the taxes proposed in the Finance Act, 1931, would distress existing industries, or embarrass the development of industries in the future.

I make this suggestion to the Prime Minister by way of introducing a little optimism into this Debate. We started off on an optimistic note to-day, but we seem to have fallen into a sort of vale of wailing and the Prime Minister must feel that it is a bad forecast for the future. I make this suggestion for what it is worth and I hope that to-night when he is thinking over what has been said in this Debate he will realise that there is still within his grasp, in a Government Department, machinery by which he could raise more money than he will get by the present proposal, even if it were put into operation at once. The sum of £15,000,000 has been mentioned, but, as has been pointed out, a deduction will have to be made from that in respect of the Income Tax and Super-tax which would otherwise have been collected on these sums. If we also take into account the cost of the machinery for collecting the money and the litigation and protracted appeals that will be inolved, it would not be surprising to find the Treasury getting nothing more out of this scheme than the cost of collection and even getting less.

I take it that the House means business when it says that money must be raised to defend the State. I see no reply to the challenge that if the land of this country is to be defended those who own the land and who enjoy the benefit of the ever-increasing values which arise from the land by the expenditure of the State, should contribute towards its defence. We have heard that under this proposed contribution holders of gilt-edged securities will not be called on to pay. Solicitors, lawyers, accountants and a lot of other people will not be called upon to pay anything. We have heard nothing about the landowners. I suggest that they should be called in, and I should like to see the landowner in England, Scotland or Ireland who, if asked to pay a special contribution towards the defence of the land which he owns, would have the audacity to deny the Chancellor's right to make such an impost upon him. It is high time that someone in this House came to my aid in this field instead of leaving it always to me, but at the risk of seeming to twang eternally upon the one string, I make this suggestion to-night in all sincerity. God forbid that this country should fall into the state of bankruptcy and harassment owing to irregular taxation as other States have done in the past. There is no force more potent for the destruction of a civilised State than wrongful taxation, and it behoves this country to show as much wisdom in the imposition of its taxation, as I hope it will always show in its use of that taxation.

9.43 P.m.

Sir John Mellor

There has been no suggestion in this Debate that the Chancellor of the Exchequer is seeking to raise too much through taxation for the purposes of national Defence, but I must join my voice with those of the critics who object to the method which has been labelled "National Defence Contribution." I have a natural hesitation in criticising a method proposed in the first instance by the Prime Minister, not so much because he is the leader of my party as because of his wonderful record as Chancellor of the Exchequer in the past six years. When one reflects on that record one hesitates to criticise any proposal which the right hon. Gentleman makes and I feel that when he made his proposal he made what is probably the most altruistic proposal ever submitted by a Chancellor of the Exchequer seeing that in this year he only sought to raise, by means of the National Defence Contribution, an amount which he could easily have raised by many other methods involving no controversy whatever. He did it, I think, with great loyalty to the colleague who would ultimately succeed him.

The hon. Member for Burslem (Mr. MacLaren) said many speakers had criticised the National Defence Contribution, but had not put forward any alternative. It has been clearly insisted upon that industry is willing to pay. That has been stated in the course of the Debate to-day and has been frequently stated by responsible representatives of industry outside the House—that they are prepared for alternative means of raising this money. They have put forward at least three suggestions. One was that it should be done by this method subject to an overriding limit. I share the Chancellor's objection to an overriding limit, which would defeat the whole idea of taxing prosperity. One of the other suggestions was to revive the Corporation Profits Tax. I think that is a bad suggestion, because it would only tax the profits of limited companies and would leave firms untouched. But what I think was a very sensible suggestion and one which would meet the occasion was to increase the rate of Schedule D Income Tax on business profits, and I do not feel that the Chancellor of the Exchequer, in moving the Second Reading of the Bill, did justice to that suggestion. He mentioned it, but did not develop his argument against it.

The reasons why industry objects to these proposals are, first of all, because it considers that there will be injustice in the incidence of them, but mainly because of the appalling complications which they will involve. The Chancellor of the Exchequer referred to-day to the complicated method of grading under the Fourth Schedule. He used the analogy that it served his purpose rather like a man adjusting the height of the ceiling in order to fit the furniture. I think that in making that analogy he came very close to the man who burned down the house in order to roast the pig, and all this in order to raise a sum which he estimates in a full year at £15,000,000. The complications which this will involve have caused great anxiety and very real fear, and I should like to read a very short passage from a letter which I have received from a professional gentleman in my constituency, who says: The actual cost to the taxpayer will be vastly more than the tax received by the Revenue. He will have a very considerable sum to pay to accountants and usually lawyers' fees, even where he is not liable to any tax at all, and in addition many companies will have to pay a staff to search old records for the cost of assets for the capital computation. I fail to see why there should be such insistence upon taxing growth of profits. Surely what we want to do is to place the tax where it can best be borne, and that should be by placing it upon prosperity. There is a natural desire to tax any profits made as a result of Government contracts, but I would remind the Chancellor of the Exchequer that few manufacturers are exceedingly keen upon accepting Government contracts, which very much disturb their normal business, and in most cases they accept them because they are anxious to assist our Defence programme. But this proposal would touch companies that are in no way enjoying any prosperity as a result of the Government's rearmament programme. Take, for instance, a public utility company in South America. It is possible, no doubt, that in some way oar prosperity here is reflected in the earnings of such a company, but surely that is too remote to be used as a justification for this tax upon such a company.

I do not think that opinion has been more united throughout the country against any provision, certainly not in my recollection, than it has against Part III of this Bill. The Chancellor of the Exchequer pointed out that the Income Tax provisions were extremely complicated, and that in the course of time they had involved uncertainty and much litigation. But they are already now the subject of much judicial decision, and their complications have been fairly clearly ascertained. It seems a pity, however, that we should start now upon a fresh campaign of litigation between industry and the Exchequer, taking up the time of His Majesty's Judges when they are already overworked. My hon. and gallant Friend the Member for South Salford (Major Stourton) referred to the cost to the Exchequer through a diminution in the amount which will be collected in respect of Estate Duty, and also of Stamp Duty on Stock Exchange transactions. I would add to that the loss in respect of Stamp Duty on new issues, because the consternation aroused by these proposals has frozen up the new issues activity on the Stock Exchange.

The greatest doubt is felt as to how capital is to be estimated under this Bill. Borrowed money has to be deducted in arriving at the capital. It seems unreasonable that a company that has built up a business largely by issuing debentures should be placed in a worse position than a company that has issued mainly preference shares. And there is this point to which I should be glad if whoever replies for the Government would devote his attention. What is to happen in the case where redeemable preference shares have been issued? Although they rank as capital, they correspond much more closely to an issue of debentures. Again, what about the question of goodwill? I suppose that where cash has been paid as the purchase price of goodwill, it will rank as capital for the purposes of Part III, but what about the case where a company, starting with a very small capital, has, out of earnings, spent a great deal of money on advertising, and so gradually built up goodwill, which may represent perhaps 90 per cent. of its virtual assets? I feel that these proposals are crushing enterprise, and I hope very much that the Chancellor of the Exchequer will announce before the end of the Debate that he will at least postpone these proposals for further investigation in the hope that he may succeed, in discussion with the representatives of industry, in finding some way which will be more acceptable to all concerned.

9.54 p.m.

Mr. Herbert Morrison

This Finance Bill, apart from the feature which has been the subject of debate and of criticism throughout this discussion, is a dull and mediocre Finance Bill. There is nothing really interesting about it. There is nothing resourceful about it. It is ordinary and commonplace, excepting in certain of its vices. This Finance Bill undoubtedly goes upon the principle that the well-to-do members of the community, who are the particular people whom the Conservative party exists to protect, must at all costs be protected to the maximum practical extent, and consequently we find that the additional revenue, apart from this National Defence Contribution, which is raised out of current taxation instead of borrowing is being found by way of a 3d. addition to the standard rate of Income Tax, which will, of course, affect the poorer sections of the middle classes to some extent deleteriously, and will have no particular effect upon the really well-to-do. Death Duties and the Surtax remain where they were and there is no effort to raise the additional revenue out of unearned income. There is a flat increase in the standard rate of Income Tax of 3d., and all those taxation devices for the purpose of getting the maximum contribution from the rich, and particularly from the idle rich, are left alone. There is no increase on the very rich people despite the financial situation that has been brought about by armaments. The reason for that absence of an increase upon the very rich, and particularly the absence of any increase upon the idle rich, is, in my judgment and in that of the Opposition, explained by the fact that the Conservative party exists primarily for the purpose of defending the rich classes in the community and of defending no section of the rich more than the idle rich, who are of no use to the country but are parasitic and live on the productive energies of the people working by hand and brain.

This Budget, therefore, apart from its National Defence Contribution and its unbalanced character, is a dull mediocre Budget which sets out on the basis that there is to be no additional taxation upon the very rich or the idle rich. Indirect taxation, which notoriously affects the working people and the lower middle class in the main, remains where it was. That burden is fully maintained except to the extent that the tendency of tariffs and other Conservative devices for assisting certain people according to their opinions engaged in trade tends to increase the field of indirect taxation. Therefore, we can justly say that apart from this Finance Bill being unsound according to the canons of good finance, its pur- pose is to protect the interests of the very well-to-do, and certainly not to protect the interest of the working classes and the lower middle classes.

I must admit that there are two concessions in taxation which have been made by this Measure. One is that the tax upon male servants is being repealed. That will be of no particular interest to the working and middle classes. It will, however, be some consolation to the Tory country gentlemen and the Tory town gentlemen who employ men servants. It may be that those of them who will have to pay the National Defence Contribution may be comforted in paying it by the knowledge that they have no need to pay the tax on male servants. There is another concession in taxation to an interesting class of people who, I am sure, at this time deserve our sympathy and understanding. Clause 33 of the Bill says: Stamp duty shall not be chargeable upon any grant or letters patent of the honour or dignity of a duke, marquis, earl, viscount, baron,, baronet or knight, or upon any grant or warrant of precedence to take rank among nobility. That is the only concession in taxation apart from the concession of the male servant's duty and it is of particular interest to observe that Sub-section (2) of the Clause provides: This section shall be deemed to have had effect as from the tenth day of May, nineteen hundred and thirty-seven. It appears to have been just in time to cover those honours which were granted in connection with recent events. The Government must not expect any vote of thanks from the Labour party for this concession. Our promotions to another place are not sufficient for it to be of any particular interest to us.

Another characteristic of this Finance Bill is, as my hon. Friend the Member for Clay Cross (Mr. Ridley) has said, that it is based upon the assumption of a greatly increased expenditure upon armaments and a restriction—certainly no increase—of the expenditure upon the social services. The terms of the Budget as a whole and the legislative programme of His Majesty's Government for this Session are an indication that the period of increased expenditure upon armaments and' the stultifications which may precede the restriction of expenditure upon the social services have begun. The Prime Minister in framing this Budget undoubtedly acted upon the principle, which indeed he adumbrated some time ago, that, as far as he is concerned, whatever money is needed for armaments will be found, even though the expenditure has been made necessary by a foreign policy which is hopelessly wrong. It is clear that whatever is necessary for armaments based upon a bad foreign policy will be provided by the Treasury, but it is also perfectly clear that whatever is necessary for social services the Treasury, almost as a direct consequence of the first affirmation, will not provide.

This Bill is really built upon the idea that the expansion and development of the social services has to stop, that the working and lower middle classes, who in the main benefit from the social services, shall not receive any benefit from the expanding trade and what is called increasing national prosperity, that the whole of that development in trade shall go to expenditure on armaments and he denied to the working and lower middle classes so far as the development of the social services is concerned. That is another indication that this is a class Budget conceived by class minds who regard the State not as an instrument to be used for the well-being of the masses of the people, but as an instrument to be used for the protection and furtherance of the interests of the well-to-do.

Then we say that this Budget is unbalanced and evades certain charges which the Budget of the year ought to carry. First, £80,000,000 is to be borrowed for armaments. We say that it ought not to be borrowei, but that the cost of those armaments ought to be met out of current revenue. Having made provision for borrowing £80,000,000, the Prime Minister, in introducing his Budget, went on to the further doctrine that it would be absurd in the circumstances to support a sinking fund for redemption. Therefore, not only are we to have an addition of £80,000,000 to the National Debt, but the normal process of increasing the Sinking Fund so as to reduce the National Debt is also to be slowed down. Therefore, the amount of the National Debt is affected in two directions at the same time. Moreover, the Chancellor takes power to exempt himself from what was the normal set aside for redemption of Sinking Fund in relation to a deficit of the previous financial year. That is a third point in connection with meeting revenue charges either by borrowing or by evasion which characterises this Finance Bill. Yet the present Prime Minister, in introducing the Budget, really made a case for charging this increased expenditure to revenue instead of borrowing. He said on 20th April: I consider that it is a fair conclusion to be derived from these considerations that we have still before us a considerable period when we may count on an expansion of revenue. When I take into account that the new sources of income which have been tapped since 1929 brought us in last year an addition of something like £130,000,000, and I add to that the new springs that have been opened up to-day, I cannot feel any apprehension of the possible failure of revenue. Surely that was stating a case for the Budget of the year to meet this armaments expenditure instead of it being borrowed. There is the case for our view, expressed in the Prime Minister's own words. He states that the revenue is expanding. He indicates that this is a period of relative prosperity when revenue will go up and finances should be in a prosperous condition, and yet, despite the fact that this is a period of relative boom—although we must not forget that there are still 1,500,000 unemployed—he deliberately brings to the House a proposal under which substantial current expenditure which ought to be borne on revenue account is to be borrowed, and therefore become an addition to the National Debt. What is his defence? Later on he says: I have endeavoured to avoid on the one hand, the tremendous increase in taxation which would have been required if we had attempted to defray without borrowing the full cost of rearmament, because I was convinced that the shock of such a sudden and such a tremendous increase of our burden would have checked, perhaps even reversed, the process of convalescence."—[OFFICIAL REPORT, 20th April, 1937; col. 1622, Vol. 322.] With every respect I simply cannot agree with that view. It really is not the cane. It is absurd to say that the raising of another £80,000,000 by direct taxation now would be disastrous to British industry. If we increased the amount raised by taxation by that amount it would still be a smaller proportion of the national income than the amount raised by taxation in 1932, and let it be remembered that 1932 is the year which is claimed by the present administration to be the year of transition from depression to a period of recovery. Therefore, I and my hon. Friends cannot accept the view that this £80,000,000 ought to have been borrowed. It is our belief that the Government have declined to meet this expenditure out of current taxation because they wish—I think taking a short view—to protect the immediate financial interests of their well-to-do supporters, and because they fear that if the expenditure on armaments, which is now very big for our country, following upon an utterly incompetent foreign policy, had to be paid for on the spot by the taxation of the well-to-do they would have trouble from their own supporters over their foreign policy. That is my explanation of this financial policy, which really cannot be defended by canons of sound finance.

Let it be remembered that this is not expenditure for reproductive purposes. We do not mind borrowing for capital expenditure of a reproductive character, that is legitimate capital expenditure, but this is not capital expenditure for reproductive purposes. This is current expenditure upon the instruments of destruction. However necessary this armaments expenditure may be, it is, in an economic sense, the direct reverse of properly-understood capital expenditure. Far from this being an expenditure of wealth for the production of more wealth it is the direct reverse. It is expenditure for destroying life and property. It therefore seems to us that, economically speaking, this kind of expenditure out of borrowing is indefensible.

If there be a strong argument for the view that the abnormal expenditure upon armaments, in this period of relative boom, ought to be met out of current taxation, and if it be true from the immediate point of view, how much more true is it from the ultimate point of view, looking years ahead? There is no hon. or right hon. Member who does not assume that the present period of relative boom will be followed by a slump in industry and trade, it may be in two or three years, or according to the optimist in four or five years. We know it, and it is part of our Socialist indictment against capitalist society, that these things happen in an unregulated economic world. I shall not argue that point now. Hon. Members opposite take the view that this is one of the inevitable things that happen because things cannot always be good and in a state of boom. What- ever our philosophy about it, whether we take the Socialist or the capitalist economic view of it, it is the case, admitted by all of us, that, within some limited period, the present relative boom will be followed by a slump.

What shall we have done? We shall have carried into that slump a burden of debt, and a corresponding burden of taxation, from the period of boom when the cost ought to have been met out of current expenditure from the boom conditions. We shall have taken that capital burden, with its corresponding current annual burden, into the period of slump, and the consequence will be that the Cabinet and the Chancellor of the Exchequer of that time, whatever their politics may be, will not only be faced with a depression in trade and the economic difficulties that it brings, with increased expenditure upon unemployment and possibly upon certain of the social services as a consequence of unemployment, but will be burdened with these fixed and unproductive charges which the present Government will have handed on to them from a period of relative boom. I therefore say that the present policy is indefensible in the light of economic and financial conditions of to-day, and is wickedly indefensible from the point of view of the financial and economic conditions of some to-morrow, when the period of slump and economic depression will have begun. At that time, the House of Commons, and certainly the then Chancellor of the Exchequer, may have reason to curse the present administration for the burden now being imposed.

It is not merely within the considerations of the Budget and of finance that this policy is wrong, but because of its effect upon prices and market conditions. The Government are pursuing a policy tending to inflate prices. That in turn has its effect upon the costs of production in British industry, upon the cost of running national and local Government and upon the cost of living of the working people. In the Budget Debate, my right hon. Friend the Member for East Edinburgh (Mr. Pethick-Lawrence) pointed out these facts. He said that the increase in the cost of living, though not wholly due, was not unrelated, to the financial policy of the Government, and was the equivalent of a tax of 1s. 8d. in the £ upon the expenditure of a family on goods that came within the cost-of-living index figure. That allegation is terribly serious. Hon. Members opposite may not believe it, but the tax of 1s. 8d. in the £ upon family consumption of goods is as serious to the working class and the lower middle class family as would be an increase of 1s. 8d. in the £ in the Income Tax to the well-to-do people.

It is time the Government realised that the conditions of life of our people, and their economic security and wellbeing, are affected not only by taxes levied from Whitehall, from the Treasury and the Inland Revenue, but also by the cost-ofliving prices on every-day commodities required by the working class and middle class families.

Colonel Baldwin-Webb

Do they not receive higher wages?

Mr. Morrison

Higher wages may come, but the hon. and gallant Member will agree with me that they are usually a factor which follows some way behind the rise in prices, and if it were not for the existence of trade unions—organisations that are not altogether loved by hon. Members opposite—[Interruption.] Is that dissented from? Perhaps hon. Members do not recollect the Trade Unions Act of 1927. If it were not for the existence of these trade unions, it is doubtful how far wages would advance at all. Therefore, when the hon. and gallant Member talks about wages, he is making a point which I am perfectly willing for him to make, because it is really a point against himself.

Mr. Boothby

Is the right hon. Gentleman referring, in the main part of his speech, to wholesale or to retail prices? That makes a very great difference.

Mr. Morrison

The figures with which my right hon. Friend was dealing were the cost of living figures, which are based upon retail prices as determined by the Ministry of Labour.

Mr. Wragg

Does the tight hon. Gentleman say that the cost of living has gone up by 1s. 8d. in the £?

Mr. Morrison

I am saying that my right hon. Friend stated that that had happened in the last two years. If the £80,000,000 were met by direct taxation, then the rich would have to pay the £80,000,000 by having their consumption reduced, and I am not sure that it would be altogether a bad thing if the consumption of the very rich were reduced; but, as it is, the poor are really paying by a forcible reduction in their purchases produced by a rise in the cost of living.

Colonel Baldwin-Webb

Consumption has gone up.

Mr. Morrison

If the consumption has gone up, clearly it has not gone up as much as it would have done had the cost of living remained where it was, and it is notoriously the case—the Minister of Agriculture will confirm it from one point of view, and the Minister of Health from another—that there are still many working class and some lower middle class families who are not purchasing all that they need for proper physical subsistence, because they have not the money with which to purchase it. The fact, of course, is that someone has to pay the £80,000,000, and the real question is whether it should be paid at once by the well-to-do people of the country, or whether the financial problem shall be handled in such a way that they carry the minimum of extra charge, and that the bulk of the charge shall either be met in increased prices or by the spreading of the burden of the payment of interest to money-lenders over a period of years.

May I impress upon the House the fact that this tendency towards increasing prices, this tendency to force prices up in various directions, not only affects the housewife going to purchase in the market, but is affecting private industry? The extent to which the price of steel has gone up—I do not want to argue whether it is legitimate or illegitimate, though I have my doubts—as a result of reorganisation and of the operations of the highly organised employers and manufacturers in the steel industry, is a serious matter for private industry, it is serious for public authorities, it is serious for the Government itself because it is going to inflate the cost of the rearmament programme, and it is beginning to be serious for the housing operations of local authorities, to which the Government are committed. There is no tendency on the part of the Board of Trade to worry itself about it at all, and there is no tendency on the part of the Chancellor of the Ex- chequer to worry himself about it as far as financial policy is concerned. [Interruption.] It is always interesting to observe how Members who have a liking for making somewhat irrelevant interruptions have the habit of sitting in that particular quarter of the House. This tendency for prices to soar is a matter of serious concern not only to family life but to industry, to public authorities, to local government and to the State itself. It is the duty of the Government to face that issue and to take it into account both in their financial policy and in their policy as far as the Board of Trade is concerned.

In addition to the £80,000,000, ultimately to be £400,000,000, being carried by debt instead of by new taxation, there is, of course, the evasion of the Sinking Fund itself. As far as existing facts enable us to calculate, at the end of the five years period of rearmament the net National Debt will be larger than it has ever been in the history of our country. I wonder how far that is realised by hon. Members opposite. It will be higher than ii was at the highest peak point in the War period and, instead of proceeding to get rid of its debts as quickly as it can, mankind having seen the evil, the wastefulness and the foolishness of war, the amazing fact is going to be that 20 years or so after the end of the greatest war in history we have learned so little, we are rearming to such an extent, that the National Debt looks like being greater than it was at the highest point of the War period. "Vote for the National Government and the greatest National Debt that Great Britain has ever had." I admit that during our period there were certain limited borrowings, much smaller than are contemplated now, borrowing at a period when borrowing was much more legitimate, namely, in a period of depression, borrowing to keep the souls and bodies of the unemployed together. That is a crime. That is economic wickedness according to the Tory party, but borrowing for armaments because of a wrong foreign policy is legitimate and proper. Nothing could more dramatically illustrate the whole contemptible outlook of the Conservative party.

In his Budget speech the Prime Minister did not say a single word about the debt to the United States. Americans are very sore about it. I am not sure that it is doing much good to our relations with that country. In any case, one would have expected that the Chancellor of the Exchequer would have said something about it. However, it is a matter of interest that the late Prime Minister went to America and made a debt settlement which everybody assumed was a revelation of the late Prime Minister as a somewhat simple soul on these jobs. The debt settlement finally was repudiated by the present Prime Minister as Chancellor of the Exchequer, and to bring it up to date the present Prime Minister, in the Budget speech of 1937, having so completely repudiated the debt and forgotten all about it, does not say a single word upon the subject at all. Supposing it had been a Socialist Government which made the debt settlement with America. I know that hon. Members opposite would have said, "What do you expect when you send people like Socialists to settle debts with a great country like America?" There are a dozen men on this side of the House who could have settled that debt with the United States far more advantageously than did the late Prime Minister. What a howl there would have been if it had been a Labour Government that had repudiated the debt to a great republic and democracy across the sea. What a further howl there would have been if a Labour Chancellor of the Exchequer, within a few years or in bringing in his Budget, did not say a single word about it. But all things are possible to a Conservative Government and not to a Labour Government.

Mr. Maitland

The right hon. Gentleman no doubt wishes to be quite fair. He will remember in regard to that taunt, that in the same speech the right hon. Gentleman, the present Prime Minister, did not say one word with regard to the £1,100,000,000 due from Russia to this country.

Mr. Morrison

This is the first time that I have been called upon to assume that the debts of Russia, whatever they may have been, are debts to the British Treasury. We say that the wording of this Amendment is perfectly legitimate and proper. Having devoted the greater part of my speech to the points of criticism which are contained in the Labour Amendment, I want to say a word or two with regard to this extraordinary Debate to-day. It must be a shocking humilia- tion to the new Prime Minister, on the first day that he has sat on the Treasury Bench as Prime Minister of the country. It is not only an attack upon his Government by his own supporters, but a direct attack upon him as the man who is responsible for this particular tax. I wonder what the right hon. Gentleman the Member for Epping (Mr. Churchill) meant to-day at Caxton Hall, in the speech in which he seconded the right hon. Gentleman as the leader of the Conservative party, in which he said, "We have to combat Socialism and we could do it more effectively as a pack of hounds than as a flock of sheep." Certainly the supporters of the right hon. Gentleman the Prime Minister have to-day been more lack a pack of hounds than a flock of sheep. I am not complaining. I like to see it. I would encourage them to continue the good work, but has there ever been a Prime Minister, who, on the first day that he has sat on the Treasury Bench as Prime Minister in relation to the Budget which he himself introduced as Chancellor of the Exchequer, in what is regarded as principal feature of the Budget has had to listen to nothing but sustained condemnation of that principal feature and certainly to a constant lack of any wholehearted defence of that principle?

That is the case. Moreover, the Government themselves are not going to defend the tax. We have inquired who is to wind up this perfect day's Debate. Nobody is going to wind up from the Treasury Bench. They want notice of the question. They want to sleep on it. They have had such a dreadful day of attack after attack from all quarters of the House that the Government on the spur of the moment—indeed not the spur of the moment because they have had hours to think about it—have not a Minister on that bench or off it, who in the opinion of the Prime Minister is competent to defend the Government in face of the attacks. What a beginning for a great Administration. What a commencement for an iron Prime Minister. What an inauguration for a Prime Minister who has been praised as the man who gets things done. He is the man of decision: the man who is always ready. But the Prime Minister is not ready. He says they will be ready. They hope to be ready tomorrow. In the meantime, he does not want to put the Financial Secretary up to answer. I think it is very rough luck on the Financial Secretary.

The Prime Minister does not want to put up the new President of the Board of Trade to defend the National Defence Contribution. Where is the First Lord of the Admiralty or the Secretary of State for War? They have not a Minister who can reply, in the face of to-day's Debate, after so much attack and condemnation from their own supporters. They are such a collection of incompetents that they have not a Minister they can put up to-night to defend the policy of the Government. The principle upon which the Prime Minister is acting in this matter is the principle that the least the Government say, the safer they are likely to be.

What is the real story about this National Defence Contribution? The Government knew that the armaments manufacturers were making pots of profit. They knew that many Tory armaments manufacturers were making pots of profit out of national necessity. They knew that the Labour party would attack that profit making. We did it straight off. What could the Government do about it? They ought to have nationalised the armaments industry, but they would not do it, because that would offend the Tory armaments manufacturers. If they did not nationalise the armaments industry they ought to have controlled prices, but again that would have offended the Tory armaments manufacturers and other manufacturers as well. So that was not done.

However, they said: "We must do something. Even if we do not do anything really, we must appear to be doing something. Therefore, we will introduce a nice little tax. It will not produce much even when it has been introduced; it will produce less by the time the Finance Bill is out, and it will produce less still by the time the House of Commons Committee has done with it. Conessions will be made. We admit that the tax cannot be defended on logical grounds. In the words of some of our supporters, it may be inequitable and it will become unpopular, but the armaments manufacturers will not be hurt, and at the end of the day, having invented a beautifully complicated tax, with pages upon pages of Clauses in the Finance Bill, pages and pages of complicated Schedules, producing the prospect of much work for lawyers and accountants, and after creating a thoroughly complicated business, then, in due time, when the thing has become thoroughly unpopular, perhaps in about a year, and almost unworkable, because it will be so terribly complicated, we shall be able to say, as we said about sanctions in Abyssinia: 'Ladies and gentlemen, we have tried, but you see these Socialist experiments really will not do.'" They said, "We have tried sanctions and they have not succeeded. They have failed, and the League of Nations is no good." They will say, "We have tried this special tax on the wicked armament profiteers; it was a Socialist device, but, there, everything which is Socialist is bad. We will repeal the tax and let the armament manufacturers have all the profits they want unrestricted."

This tax is not serious business. It is a mere political device designed to meet the criticisms of the Labour party against armament profiteering. Indeed, you cannot defend the tax. How much is it going to produce? Does any Member of the Government know what net result it is going to produce? In the first place it was £25,000,000, now it is to he £15,000,000. But you find that Income Tax is to be charged against it, that is £3,750,000, and Surtax is another charge against it. There is also loss in capital value, and consequent losses upon Death Duties and taxes of various kinds. There is also the cost of collection, which is bound to be considerable. I hope the Government will tell us to-morrow what the cost of collection will be. When you have added all these deductions it will not be £10,000,000 but something between £8,000,000 and £10,000,000 net for the Treasury.

Mr. Remer

I bet the right hon. Member that in two months time it will be nearer £20,000,000.

Mr. Morrison

One of my principles is that I do not gamble, and if I did I should not gamble with the hon. Member, who by his interruption is really saying that Ministers do not know what they are talking about. The Chancellor of the Exchequer, with all the brains of the Treasury behind him, says that it will be £15,000,000, but the hon. Member says, "Do not take any notice of the Chancellor of the Exchequer, he does not know what he is talking about."

Mr. Remer

I will give the right hon. Gentleman £2 to £1 on it.

Mr. Morrison

The probable result will be that the net revenue will be between £8,000,000 and £10,000,000 and in the meantime many profiteers will get off. The people whose profits have been high, and will remain high, get off. Some of the public utility companies, the electricity companies, have been making scandalous profits which never should have been permitted. People like Tillings who have been making 30 to 35 per cent. profit, which never ought to have been permitted, and who are still making plenty of money, will have a chance to escape. People like Lyons and Company have always made a high level of profits. Certainly profiteers ought to be taxed, if you do not Socialise them, which we should prefer, but this measure is a farce and a humbugging device. It will not succeed, it is indefensible, and hon. Members opposite are going to destroy it. Whether the Prime Minister likes it or not he is going to be humiliated and humbled before he is much older. We say in the words of the Amendment that this Finance Bill embodies an unbalanced budget. It promotes a further increase in prices, depressing the already low standard of life of pensioners, unemployed, wage earners and others. We believe that it fails to deal adequately with profiteering in armaments or to raise an equitable share of their cost from those most able to bear the burden. It is for those reasons that we shall solidly and with enthusiasm vote for this Amendment and against the Second Reading of the Finance Bill to-morrow.

10.46 p.m.

Mr. Assheton

The right hon. Gentleman the Member for South Hackney (Mr. Morrison) referred to the meeting which took place this morning at the Caxton Hall. Of course, he had not the advantage which I had of being present at that meeting, but if he had been there he would have realised, as I did, that when the Conservative party pledged its loyal support to its Leader, it meant what it said. I do not say for one moment that there were not present at that meeting many critics of some of the proposals in the Finance Bill, and I am among them; but the right hon. Gentleman will make a great mistake if he thinks that the loyalty of the Conservative party is not as much behind the Prime Minister as it has been behind his predecessor for so many years.

I do not wish to exaggerate the anxiety that is felt in various parts of the country about these proposals, but I do not think anyone who has studied the speeches which various leaders of industry have made during the last three weeks can fail to have been impressed by the fact that the position is, in their view, a serious one. What makes it serious for those of us who are Members of the House is that we have to make up our minds whether this tax will in actual fact produce the effects which the Prime Minister designed it to produce. Let there be no mistake that the industries in question are ready, willing and anxious to find the money that is needed for rearmament. There has never been any doubt of that. The doubt that has been in the minds of certain Members of our party who are critics of this Measure is whether the Measure, as set out in the Finance Bill, would impose that burden with justice and equity. I want to make an appeal to the Prime Minister to consider very carefully this proposal. Will he consider consulting the various leaders of industry, the people whom he wishes to tax, and asking them how best the tax can be imposed so that it does not bring injustice upon any of them? I do not believe that any injustice was intended when this tax was designed, but it does not work out equitably at the present time. I do no: know whether hon. Members have had their attention drawn to a letter in the "Times" this morning, signed by the leaders of a great many of the greatest industries in this country. I would like to refer particularly to one paragraph in that letter, in which the writers say: The modifications of the original pro- posal have done little to rectify the inequalities of the tax as between different classes of investors, or as between different classes of business, or as between different businesses of the same class. It is just that which makes it very difficult for those of us who have studied the Bill carefully to accept it in its present form. I firmly believe that this money can be found by industry and that industry is ready to find it. I merely ask the Prime Minister to be so good as to consult further with industry and to see whether he cannot design a method of securing this money from the people from whom he wishes to secure it without causing these injustices. I cannot see that that will open him to any criticism. Surely there would be nothing unreasonable in going to these men from whom this money has to be got and saying to them, "Some of you think that you are going to pay too much; some of you think that you are going to pay too little."

Mr. Gallacher


Mr. Assheton

I would like to draw the hon. Member's attention to the fact that the letter in the "Times" includes the signatures of men representing several companies who will not bear the burden imposed in this tax as it stands and that these men are anxious that the burden should be fairly placed on industry. I am suggesting that the Chancellor should say to industry, "I want £25,000,000, and I want it from you gentlemen. How can it best be done equitably and without injustice?"

Colonel Wedgwood

So that they can pass it on to the consumer.

Mr. Assheton

I believe that the answer to the right hon. Gentleman is that the tax as designed in this Bill is designed in such a way that it can be passed on.

Colonel Wedgwood

No, it is not.

Mr. Assheton

It can be passed on more easily in this Bill than ordinary Income Tax can be passed on. There is one more point I would like to make, and it is this. Nothing is more disastrous to trade and industry than uncertainty. This tax is so complicated that none of those who will be called on to pay it can find out how much they are to be called on to pay. I have taken the trouble to investigate several companies and, with the assistance of most adept accountants and learned lawyers, we cannot find out how much they will have to pay. That will make the task of professional men very difficult. Take the case of those whose duty it is to advise people who are investing money, and that does not mean only rich people, but those who invest on behalf of insurance companies and trade unions. Those men who have to advise on investment are unable to ad- vise their clients because they do not know what the value of shares may be if this tax is imposed. The uncertainty is so great that it is almost impossible to give advice. I ask the Chancellor to bear that in mind; that nothing is more serious for business than uncertainty.

Already I know of more than one example of new issues of capital which were going to be made for building up new industries which would produce new revenue giving more employment, but which have had to be cancelled. In the interests of business and trade I beg the Prime Minister to reconsider this proposal. He knows very well that we in the Conservative party have to-day pledged him our loyalty. I know he will realise that there is nothing more difficult for anyone than a conflict of duty. Nothing is more difficult than to decide between two rights. It is easy enough to decide between right and wrong, but when you have to decide between two rights it is not so easy. On the one hand, we have our loyalty to our Leader, and, on the other, the anxiety that this tax may cause injustice and inequity. I ask him to make it easier for us by remodelling this tax, not by withdrawing it, so that the same amount of money is taken from the same people but in a way that will do justice to everybody.

10.55 p.m.

Mr. Boothby

Before I deal with the main subject of the Debate I wish to make a brief reference to the speech of the right hon. Gentleman who spoke last from the Front Opposition Bench. He said that we on this side, while very ready to borrow money for rearmament, were very critical of the Labour Government between 1929 and 1931 for borrowing money in order to help the unemployed. As far as some of us on this side are concerned and incidentally, as far as I am concerned, for nearly two years we hammered away at the late Lord Snowden in an effort to get him to adopt an expansionist policy and to borrow on an adequate scale in order to meet the requirements of the situation, and it was not the fault of the Conservative party that the Labour administration of that time did not adopt an adequate expansionist policy to meet the internal requirements of the country.

The right hon. Gentleman then somewhat startlingly accused the Prime Minister of not having settled the American debt. We have not heard much about the American debt for a considerable time, and I venture to say that the Americans are probably less concerned about it now than they have been at any time since it was incurred. I am sure that I speak for many hon. Members on this side when I say that if a debt settlement could be included in a general economic settlement between this country and the United States we should be very glad, and many of us think that the conditions were never more favourable for such an economic agreement than they are at present. The right hon. Gentleman went on to accuse the Government of being afraid of the armament manufacfacturers in this country and, in consequence, of having introduced the National Defence Contribution. While, as far as I can see, the armament manufacturers do very largely escape under this proposal, they only escape at the cost of the Government having for the moment offended practically every other manufacturer in this country. I do not think the right hon. Gentleman can accuse the Government of Machiavellian tactics in introducing this National Defence Contribution, because from their own point of view, it is, I would say, one of the most disastrous things I have ever known any Government to do—even the Government of which the right hon. Gentleman himself was a member.

As regards the National Defence Contribution itself. I would like to point out that the change from 1933–35 to any three of the years 1933–36 or any two of the years 1933 to 1935 is, from the practical point of view, negligible and I wish to ask the Government on what principle can the period 1933–36 be regarded as having been a normal period for business. It was not a normal period, and it seems fantastic to attempt to base any tax upon the conception that those years were normal years. The right hon. Gentleman who spoke from the Front Bench opposite referred to rising prices. I gathered that he was chiefly referring to the cost of living, and therefore to retail prices about which there is certainly something to be said, but when it comes to wholesale prices, we find that the average wholesale price to-day is only 79 as against 100 in 1930. If you take our export trade, the exports of British merchandise average less than 60 per cent. of the average level between 1926 and 1929. Therefore, I ask on what principle should we take the period 1933–36 as a normal period?

There is another point. No concession has been made in this Finance Bill in favour of companies which suffered excessively from slump. They are referred to the old Excess Profits Duty machinery, but the vicious thing about the present proposal is that a capital valuation is required not only when the capital value standard is chosen, but also to determine the rate of tax, even when the profits standard is applicable. As a result of that, practically every company in Great Britain has got to have, not only this year, but in subsequent years also, a complete capital valuation. Conceive of the additional labour and expense, and absolutely fruitless expense, which will be involved in that. One of the most disheartening features of this proposal is the amount of absolutely unproductive and unnecessary work which will have to be done by the best brains in business for no particular purpose whatsoever and the waste involved in that work. That is why many of us feel so strongly about it, and not only that, but the complete uncertainty into which industry will be plunged in the next 18 months or two years while everyone is busy on these intricate and difficult calculations. Many companies must await the method of computation before they can decide whether to be taxed on the capital or profits standard. Take rubber companies. Nobody at present knows what capital allowances are really made under the Schedules to this Bill or whether the rubber companies will be allowed to regard their capital as the original cost of the land plus the cost of equipment and planting or whether maintenance in subsequent years will be included. All these timings are left vague, uncertain, and haphazard, and the result is that many industrial companies, particularly those operating overseas, have not the faintest idea what they will have to pay in taxation under these proposals.

There is another point to which I should like to direct the attention of the Financial Secretary, anti that is the question of debenture shares, the non-admission of debentures into capital. I do not see how that can possibly stand examination. Why should a company, part of whose capital consists of debentures, pay a higher rate of contribution than one which bears a similar portion of its share capital in preference stock? On what principle of justice, from either a Socialist, a capitalist, or a Communist point of view, can that point be defended?

I think that hon. Members on both sides of the House were startled to hear from the Chancellor of the Exchequer to-day that all that he now expects to raise on this tax, with all the enormous computation and machinery that are involved, is £15,000,000 a year, gross. Another 3d. on the Income Tax would do the trick. Industry in this country would jump at another 6d. on the Income Tax to get out of the mess into which this tax has plunged it, and so far as armaments expenditure is concerned, many of us on this side of the House wholeheartedly support the principle that the profits of industry have to be taxed to the tune of £25,000,000, or even £30,000,000, a year to pay for the cost of rearmament. We are all prepared to support that, but I would point out to the Government that they have practically had an offer from industry in this country to find another £25,000,000 per annum in an equitable way and to pay it over gladly for this purpose. Why do they not close with that offer? I suppose it is the first time that any Government has ever been offered gratuitously an additional £25,000,000 per annum by industry, if they are themselves to be consulted in the working out of an equitable scheme. I think the Prime Minister could well afford, without any diminution of prestige or anything else, to close with that offer straight away, as a result of which he would get a great deal more per annum than he will get under the present proposals.

When it comes to the actual armament firms themselves, to which the right hon. Gentleman referred, I think a greater control might have been exercised in the past and might well be exercised in the future, generally along the lines of the recommendations of the Royal Commission on Armaments. But this contribution will not do very much to damage the armament firms. I suspect, for example, that Vickers may not have to pay a very great deal, certainly not if they are free to write up their capital to the old valuation. Many aeroplane firms will not be chargeable, certainly not if the White Paper is to taken into consideration and they are to be allowed 15 per cent. If they not not, what is the point of issuing that White Paper? It is one of the things which have been puzzling many hon. Members because we cannot see what is the point of printing it. If the whole thing is to be referred to a court of referees, that Paper cannot mean anything. I do not think it ought to mean anything because the conditions of 1937 are not the same as those of 1917.

The companies which will bear the heaviest burden under these proposals are those which recovered least rapidly from the depression. That cannot be defended in equity from any point of view, whether you are a Socialist or a capitalist. It is the commodity companies, the companies trading internationally, the distressed area companies and the new companies which will be the hardest hit by these proposals. At the same time, as many hon. Members on both sides have pointed out, the consistently prosperous companies, which undoubtedly benefit indirectly from the rearmament proposals, will get off scot free. There are various other minor points to which attention would be more properly directed in Committee. For example, there is the treatment of goodwill, the difference between payment in cash or shares; and the question of companies which have made issues during the last two or three years and sold their issues to an unsuspecting public before the National Defence Contribution was thought of.

This is the point about which I would beg the serious and anxious consideration of the Government: How much are they going to lose in other forms of taxation? It is no exaggeration to say that the trade and business section of the community is in a kind of paralysis. I do not know how much the Chancellor of the Exchequer has already lost in Stamp Duties. If the present uncertainty is allowed to continue much longer he will lose in Stamp Duties alone almost the total net revenue which he expects under these proposals. Equally with Estate Duties and Income Tax. The trade and business community has been brought to a complete standstill because of one thing only—complete and absolute uncertainty. Nobody knows what he is buying when he is buying an ordinary British industrial share. This aspect of the proposal, the loss of revenue, is one of the most serious of all. Mr. Keynes, who is no reactionary, has pointed out on more than one occasion that this is essentially a tax on growth as such, on enterprise as such, and on youth as such.

Many hon. Members on both sides and I myself have pleaded for years for a new spirit in industry, for rationalisation, for improvements and for enterprise. How are they to be brought about if this proposal is allowed to prevail? It has frozen up the whole machine. I know personally of two big industrial issues of ordinary shares, each for £1,000,000, which were to be made next month for the building of factories and houses, which have been indefinitely shelved. If uncertainty is allowed to continue we shall not get any revival of new issue business. I feel strongly on this question because it raises the old issue which we have fought out for years past in the House. It is not a Capitalist or Socialist issue, but the old issue between the producer and the rentier, between what hon. Members opposite would call the man who actually produces the wealth and the parasites of the capitalist system.

Nobody can deny that under these proposals the parasite gets off altogether and that it is the man of enterprise, with faith, vision and courage, and the young people, who will be hit first, last and all the time. It is absolutely indefensible. Why should the man who shows faith in the future of this country by investing in British ordinary shares and taking a risk receive the whole brunt of this tax, and the more timid man, the man who is not quite so sure of the future, and invests in debentures or preference shares, be let off? It is the old argument which we have had across the Floor of the House against the Treasury and the Bank of England point of view. We had it between 1924 and 1929. What was all the deflation for if it was not to benefit the rentier and hit the producer? Here we are taking up exactly the same position. I believe it is the same men who are responsible-for this National Defence Contribution as were responsible for shackling the country to that deflationary policy between 1924 and 1929. For these reasons I believe that in the end the Government will be forced by the sheer pressure of the arguments to withdraw this proposal and to substitute others which will be fair, which will be approved by the House as a whole and which will produce this revenue.

11.12 p.m.

Sir Robert Tasker

We have been invited to put forward proposals and I would submit for the consideration of the Prime Minister that in connection with this tax for national defence, which is a concern of every man and woman in the country, there is no reason why men and women in my profession or in the legal profession should be exempt. I am anxious to see everyone contribute towards national defence and I submit that that object could be secured through the Surtax and the Income Tax. The level at which Surtax becomes payable could be lowered, and the Income Tax could be increased on a graduated scale, in order that those who earn least may obtain the greatest relief. The proposed tax is due to the clamour from all sides of the House for the taxation of armaments manufacturers. They are not the only persons who will benefit from the increase in armaments. I have only to recall what happened during the last War, when not only did manufacturers of armaments make profits but operatives made £10 and £15 a week. I believe that the operatives would be willing to subscribe to this tax by stamps on their cards each week if necessary, though I do not believe it would be necessary. If an additional 3d. were put on the Income Tax we should avoid the necessity for this huge machinery of collection which will have to be set up, and which I think will prove to be as impotent as that under the old Excess Profits Duty. I ask the Prime Minister whether this easy method of raising the money is not worth his consideration.

11.15 p.m.

Colonel Ropner

I rise for one purpose only, and that is to ask the Prime Minister a question. The hen. Member for East Aberdeen (Mr. Boothby) said that trade and industry had made an offer to the Prime Minister to provide £25,000,000. I am not sure whether organised trade and industry have made up their minds as to the best means of providing the £25,000,000. I want to ask the Prime Minister whether, if trade and industry could agree to a tax on profits which would provide £25,000,000 and would have their unanimous support. he would consider withdrawing the National Defence Contribution and substitute such a tax?

11.16 p.m.

Mr. J. J. Davidson

I did not intend to intervene in this discussion, but two previous speakers have made such requests to the Prime Minister that I feel that I must do so. Speech after speech has been made telling the right hon. Gentleman of the mistakes he has made in bringing forward the National Defence Contribution proposal, and we have listened to Conservative Members asking their leader, to whom they have pledged loyalty, to go cap in hand to the industrialists and ask for their advice as to how to provide a future Budget and future taxes. We are just as entitled to ask him to be good enough to consider the poverty problems of the people we represent and to come to the working-class representatives and ask their advice as to miners' conditions, the means test, the Glasgow unemployed and poor relief in Scotland, as are the Tory industrialists, who have made millions of pounds during the last 10 years, to ask him to consider their problems.

It amazed me to see how little, when their pockets are affected, country and party mean to Tory Members. They regard themselves as patriots who place their country before all, but when the Chancellor of the Exchequer wishes to impose taxation that may, in the words of the Leader of the Opposition, mean a grant towards national Defence of only £8,000,000 or £10,000,000, those Tories are up in arms, and there is a revolt in the Conservative party. The right hon. Gentleman is told that he has brought forward proposals that are stupid, nonsensical and of no value. I listened with amusement when the hon. Member for East Aberdeen (Mr. Boothby) was speaking, and to the "Hear, hears" of the right hon. Gentleman the Member for Epping (Mr. Churchill) when he referred to "this great disaster." The right hon. Gentleman the Member for Epping is thoroughly experienced and blasé and can face disasters more capably than any other Member of this House. As we all know, he has been the chief participant in some of the greatest disasters that British politics have seen, during and since the War.

I want, as a result, to ask the Prime Minister that the unprecedented position of no reply being given to the continual charges that have been made to-night, should be remedied. I want to ask the Prime Minister whether he will not answer to-night the charges that have been made from his own benches and from these benches; I want to ask the Chancellor of the Exchequer or the Prime Minister to see to it that the country is not faced in the morning with the position that a new Prime Minister has been appointed, and not one member of the Government can reply to charges that have been made by his own supporters and by the Opposition. I want to ask seriously for a reply to that very pertinent question. Are we going to have a reply from the Government Bench?

11.21 p.m.

Mr. Garro Jones

Important as the issue of the Finance Bill is, I venture to say that it is merging into an issue even more important than any purely financial issue. I do not think the oldest Member of this House can recollect an occasion when the House has spoken with such a unanimous voice. I have observed on previous occasions a strange reluctance on the part of Ministers to make concessions in circumstances of that kind, but never so inexplicable a reluctance as we see on the part of the Front Bench this evening. We have heard suggestions made that there is some hidden controlling hand which has governed and guided our financial policy in the direction of a deflationary policy for the last 10 or 15 years. Has the Prime Minister made any promises to the Bank of England or to any quarters that he will not withdraw this proposal without consultation with them? Surely the Prime Minister must recognise that, after what has happened to-day, it is impossible for him to carry through the proposals in their present form without offering an affront, not only to his own party, but to the House of Commons, and, indeed, to the most elementary principles of democracy; and I think it would be a more dignified action on his part to get up and say now that he will call a meeting of his associates either to-night or to-morrow morning, and come prepared and authorised to withdraw these proposals. Unless the House of Commons insists upon that course, it will be an affront to it as well as to the party that has spoken almost unanimously against these proposals. Therefore I hope that, if the Motion has to be moved that this Debate be adjourned, hon. Members will take advantage of that opportunity to insist upon the answer to which we are entitled.

11.23 p.m.

Mr. James Griffiths

I want to remind right hon. Gentlemen on the Treasury Bench and hon. Gentlemen opposite that we have heard a suggestion here to-night which is not new, but which is in a new setting. I was not a Member of the House during the time of the Labour Government, but I was at that time a student of politics, and I followed with keen interest the life of the Labour Government. I remember more than one occasion—one in particular—when the Labour Government was charged with being ruled by an unrepresentative body outside. I am not sure that I could not quote chapter and verse from speeches made by Conservative Members in Opposition to the effect that this country was coming to some pass when we had a Government that took orders from Transport House. I wish, as a young Member, to direct attention to the fact that the centre of government is being transferred from this House, not to Transport House, but to the houses of the bankers and financiers of this country. I hope that this will be noted in the country.

An hon. Member opposite a moment or two ago asked the Prime Minister, who begins his career to-day, whether he would be prepared to withdraw this tax if the financiers and business people of this country, if the organised forces of employers in this country—not the trade unions, not the Trades Union Council, not Transport House—will promise to find the money in some other way. Behind that is the implication, "If you do not accept the offer, if you retain the tax, we will fight it." Hon. Members said in 1924 and 1929 that dictation of the Labour Government by the trades unions could not be tolerated. We shall say to the workers that we will not tolerate dictatorship, or the ruling of the country, not by the House of Commons but by financiers and capitalists outside. If there are to be consultations outside with anyone, will the Prime Minister remember that there are interested in industry people who invest their lives in it, those who depend upon their earnings? Why should there always be consultations on a matter of this kind with people who represent the money invested in industry and never with those who invest their lives and their livelihood in it? It is setting an example which, I hope, the workers will not miss. The City and business are having a stay-in strike. The hon. Member for East Aberdeen (Mr. Boothby) said he knew of two issues of capital—two new ventures—which would have been made but for this tax. That means that, because the Chancellor of the Exchequer is prepared to ask industry to pay some of its extra profits to meet rearmament, capital is going on strike.

Mr. Boothby

It means no such thing. I merely suggested that industry could find very much more money than will be found under this tax in a very much fairer way. I never suggested that the trade unions or any other ouanisations should not be consulted.

Mr. Griffiths

Suppose in the next Budget there is some tax that the workers deeply resent. Will you then admit that they have a right to withhold their labour and go on strike in order to put pressure upon the Chancellor to withdraw the tax? That is the example that you are setting to the workers. If it is permissible for the chambers of commerce, for the Federation of British Industries and the Mining Association to use their economic power to compel the Chancellor to withdraw this tax, it is equally permissible for the workers to use their economic power to compel the Government to do something else. I will see that the workers whom I represent will be made aware of the facts. [Interruption.] I invite the hon. Member to come with me to South Wales and see if they do not trust me.

Mr. Davidson

On a point of Order. My hon. Friend stated that he would give his people information, and a very audible statement was made by an hon. Member opposite that they would not believe him. Is it in order for an hon. Member to allege that another hon. Member's constituents believe him to be a liar?

Mr. Speaker

I did not hear the word "liar," but I fancy Members often suggest that Members' constituents may not believe what is told them.

Mr. Boothby

Is the hon. Member for Llanelly (Mr. J. Griffiths) prepared to defend at the present moment planting shares on the British public without knowing their real value? That is the only reason why they are not put out to-day.

Mr. Griffiths

I would say to the hon. Member opposite who previously interrupted that my people believe in me to such an extent that they gave me a majority of 17,000 which is probably more than the majority he enjoys. What has been suggested here to-night is really no argument. The hon. Member for East Aberdeen used arguments, the force of which I appreciate. I am not for a moment defending this tax. I rose to point out that it has been suggested that the Prime Minister should withdraw the tax and go outside the House of Commons to settle the financial affairs of the nation. That is the invitation which has been made to him to-night. It is a plain question put to the Prime Minister. The industrialists of this country really promise to find £25,000,000, which may prove that the money is there now and that they are making extra profits. The real gravity of the situation is that the House of Commons and the Prime Minister are being invited to give up their functions to bodies outside this House. I hope that the workers of the country will realise what has been said and suggested here to-night, and that if it is permissible for the owners of capital to use their economic power in order to influence the policy of the Government, surely it is equally permissible for the workers to do the same.

11.33 p.m.

Mr. Loģan

I should not have taken part in this Debate to-night if it had not been for the preposterous statements that have been made, and the intimidation which is being used against the Prime Minister. I do not propose to hand out bouquets to the Prime Minister, but I am as much aware of what has happened in this House during the last nine years as any other hon. Member. It is unprecedented to find that there has been no response in regard to the statements that have been made, but it is stranger still that those who have received benefits in subsidies to the tune of £30,000,000 are now coming forward with a ridiculous proposition to a Prime Minister to whom they have pledged their loyalty. They say, "Will you not discard all that you have brought forward; humiliate yourself, and come forward with a new proposition which will be more agreeable to us than the one now before the House?" I do not know whether this is a kindergarten. I should have thought that no one outside an asylum would have dared to come forward with such a proposition in regard to the management of the affairs of the country as has come from those who are loyal adherents of the Tory party.

The financiers of the City who cry out against this tax are ready to take any dole from the Government. One would think that the Treasury have no knowledge of finance, according to the City. Would it not be better for the hon. Members who are protesting on behalf of the City to go home and try to understand the problem that confronts us? We have been told that if we do not have armaments we shall have trouble. An unprotected Britain will not be able to resist the tyrant. The Government take steps to get the armaments and ask industry to respond by paying a special Defence Contribution. They could not ask the unemployed to respond, the working man is already taxed high enough. If any sections of the community ought to be asked it is those who are making wealth out of the country. I am at a loss to understand why those who ask for doles for their industry should, when the nation requires munitions, protest against paying. I believe in defending the nation because it is worth defending. If we must have armaments we must find the means. I am prepared to do what I can, as those in my home have been prepared, at the risk of a great deal of inconvenience, to do what they could in the front line defences of the country. I am surprised that men who speak of their patriotism and boast of their loyalty to their leaders, should ask the Minister to take his proposal back and reconsider his appeal for £25,000,000. When the nation called, men came forward, blood was spilled and life was lost. To-day the Chancellor of the Exchequer appeals for money for national protection, and we find the cravens of the city coming here to protect their god, the only god they know—Mammon. As a humble Member of the Labour party, I say that that is not patriotic, it is not doing their best in the interests of the city, and it is mean and contemptible on the initial day of a new leader of the Tory party. It is most degrading for the rank and file of the party to put Mammon before their country and to ask the Minister to come forward with fresh legislation.

11.39 p.m.

Mr. Gallacher

I would point out that I am the only really enthusiastic supporter of this tax. I warned the Prime Minister when he was Chancellor of the Exchequer what was going to happen unless he stiffened his attitude. It was obvious that if he once started running in front of the hounds, they would never stop until he was torn to shreds. That is what is actually happening. A tax on profits. Profits are sacred. Profits are the one god of hon. Members who sit on the Tory Benches. Last June when we were discussing the Civil List I said that they had only one loyalty—loyalty to profits. I said that as long as the King who was then reigning assisted them to get their profits they would keep him there. And they will be loyal to the Prime Minister as long as he protects profits. It is a question of two loyalties—loyalty to the Prime Minister or loyalty to profits. And the choice is not difficult. They will choose loyalty to profits. I ask the Prime Minister not to accept the invitation to meet these industrialists, who, of course, will find the £25,000,000; although they do not tell us where they will find it. It will not be out of their profits. I can tell lion. Members where they will find this money—out of the masses of the people of the country. That is where they are always concerned to find money.

I do not want the Prime Minister to consult these people. If he will consult me I will give him some good advice. It is a sound tax, a sensible tax, and if he will make up his mind to carry it through, having with great courage brought it forward, and discuss it with me, I will show him how to operate it, and make firms like Marks and Spencer and Lyons pay more than £25,000,000. [An HON MEMBER: And Co-operators."] No, Sir. If the Prime Minister consults me the Co-operative movement, which is a great social movement, would be absolved from any tax. Anyone who is concerned with the welfare of the masses of the people would be only too ready not to tax the Co-operative movement but would encourage it in its great work.

The great thing is to get at the profits of these armament makers. We have been told that they are poor people who have been living in the poor house for the last five or six years, who have been keeping their factories going just to give some people work.

I wonder whom lion. Members opposite think they are fooling when they tell hon. Members on this side of the House or the working class that some employers were keeping their factories open during the years 1932 to 1935 out of philanthropy. There never was such a thing as a philanthropic business man. The one thing which concerns a business man is profits, and he will not keep a factory going or a worker employed unless he is going to get profits. Therefore, I shall not start shedding tears of agony because of the stories we have been told about some employers who suffered during the depression and now have to pay this tax.

If we are prepared to face up to the proposals in this Finance Bill, there is no reason for not changing them so that all businesses will have to pay the tax. I ask the Prime Minister to harden his heart against the City. I would like him at the same time to soften his heart towards those who suffer from the means test and those who are faced with an increased cost of living on old age pensions of 10s. a week. There has never been any question of the Chancellor of the Exchequer or any Minister meeting the men and women who suffer under the means test. Is there any proposition that the Prime Minister should meet the old age pensioners to find out how they live on 10s. a week? Is any hon. Member opposite prepared to put forward a proposal that the new Prime Minister should start his career by receiving a deputation of old age pensioners? No, they ask that he should meet a deputation of business men in order that he may explain how they can dodge the tax and pass it on to somebody else.

I ask the Prime Minister to stand firm. The House may be against him, his own supporters may be against him, but if he will go forward fearlessly with this tax on profits, if he will make it heavy and make it good, he will get the masses of the people of this country behind him, because they understand what happened during the War and what is happening now. If the Prime Minister, because of the noise these people are making and because of the letter to the "Times," runs away from his own proposals, he will not save himself, for the hounds, once let loose, will drag him down. I advise him to carry on with this tax, and I am prepared to give him all the assistance I can to make it a really effective tax.

Ordered, That the Debate be now adjourned.—[Captain Margesson.]

Debate to be resumed To-morrow.