§ Section fifteen of the Finance Act, 1925 (which, as amended by Section eight of the Finance (No. 2) Act, 1931, makes provision for an allowance in respect of earned incomes), shall have effect as if the word "one-fourth" were substituted for the word "one-fifth."— [Mr. Lees-Smith.]
§ Brought up, and read the First time.
§ 8.48 p.m.
§ Mr. Lees-SmithI beg to move, "That the Clause be read a Second time."
My object in moving this new Clause is to raise the question of the differentiation between earned and unearned income. As hon. Members know, at present those who pay Income Tax on earned income are allowed to make a deduction of one-fifth before they pay the tax. The object of the new Clause is to enable that deduction to be increased to one-fourth. In order to put the arguments for the Clause, I will work it out in an ordinary case. I think the best case to take is that of a doctor, who is earning, say, £600 a year. [Interruption.] Not a docker. He is allowed to make a deduction of one-fifth of his income before paying Income Tax, so that actually he pays
§ the tax on £480 a year; that is to say, he pays the same tax as a man with an unearned income (who cannot make a deduction) of £480 a year.
§ The new Clause lays it down that the position of those two taxpayers is not the same. A man having an unearned income of £480 a year derived from investments is, in our opinion, in a safer and more advantageous position than a man who is dependent on an earned income, year by year, of £600. The doctor's income is a precarious income. When he dies, the income ceases; when he goes on holiday, it ceases; if he falls ill, it ceases; some day it is bound to cease because he has to retire; and probably he must make a deduction from it for purposes of insurance. On the other hand, the man who is living on income from investments, say, War Loan, and who has £480 a year, is subject to none of those changes and chances of life. If he dies, the income goes on for his heirs; when he goes on holiday, it continues; he need not trouble about saving for his retirement, and he need not insure. He has the whole of his time in which to do as he wishes. Therefore, we say that there is no comparison between the two cases.
1039§ It is very interesting to notice the difference in the capital value of these two incomes. A man who is living on an income of £480 a year derived from War Loan, if one assumes that he is living on a 3½ per cent. investment, has a capital of £14,000. What is the capital value of the practice of a doctor who is earning £600 a year? It is two years' purchase; that is to say, £1,200. The difference between £4,000 and £1,200 represents the difference calculated on the stability of the two incomes. I venture to say that in two or three years' time a great deal will be heard in this House about this sort of calculation of the difference in capital value, and I believe that this proposal will then be regarded by both sides of the House as being very moderate. For we are bound, some time or another, to balance the Budget, and when that time comes we shall be bound to get the money from somewhere. The difficulty which is always put to us is that an earned income is an income coming from the vital and the active factors in the production of wealth, and, of course, it is the case that one cannot push Income Tax on them beyond a certain limit without diminishing the production of wealth itself. There will be some limit. But in the case of earned income, the effect of an increased tax is far more distant and indirect. Nobody has yet calculated how far it can be pushed without influencing the production of wealth, although, of course, it influences the distribution of wealth.
§ Therefore, within two or three years, when the House will be faced with the problem of raising fresh taxation from those sources from which it can be secured, the proposal I am now making will be regarded as very moderate. Indeed it is very moderate, if one looks at the recent story of this exemption. When I first began to pay Income Tax, I had a small income, and at that time the exemption on that small income was as much as one-third. I was able to deduct one-third from my income before paying Income Tax. A few years later, the House, in connection with another reform, without very much discussion, cut the fraction down to one-tenth, and a person paying Income Tax on earned income was allowed to deduct only one-tenth. Ever since then the House has been retracing its steps. The Coalition Government increased the amount to one- 1040 sixth,and the Labour administration increased it to one-fifth, at which it now is. I have no doubt that eventually it will go back to one-third, and as a step in that direction, I have moved that it shall go to one-fourth.
§ 8.54 p.m.
§ Captain WallaceI am afraid—
§ Mr. GallacherYou have plenty to be afraid of.
§ Captain WallaceI may have, but certainly not on this Clause. This proposal was put, as the right hon. Member for Keighley (Mr. Lees-Smith) always does, very sanely and without any exaggeration before the House, and the right hon. Member backed it up with all the good arguments which he and his friends could muster for it. But the proposal to increase, in this year of grace, the allowance for earned income from one-fifth to one-fourth is one for which there is no real case on merits. As the right hon. Gentleman said, the amount of the earned income allowance has been increased on two occasions since it was introduced in its present form in 1920. The figure of one-tenth then adopted was that recommended by the Royal Commission on Income Tax, and may therefore be said to represent, at any rate, the considered view of a very august body. That allowance of one-tenth was in operation until 1925, when it was increased to one-sixth, and in 1931, despite the economies which were necessary in other directions, it was yet found possible on this side of the House to increase it to one-fifth, thus abating in favour of the earned Income Tax payer the increase in liability arising from the 6d. increase in the standard rate of Income Tax and the cut in the personal allowances in that year. Although the standard rate is increased, under the present Budget, to 5s. 6d., the smaller earned income taxpayer is still better off than he was under the second Finance Act of 1931, because he has higher personal allowances and there is a smaller charge of tax upon the first slice of his taxable income.
The right hon. Gentleman made some observations on the difference between earned and unearned income with which, in general, I agree. In fact, this particular form of relief, the earned income allowance, which has been enshrined 1041 in our Finance Acts for many years past purports to reflect the difference in taxable capacity as between earned income and investment income, arising, as the right hon. Gentleman very fairly said, from the fact that investment income has capital behind it and may be generally assumed to be secure—although the experiences of some people go to show that that is not always the case—whereas the man who derives the whole of his income from his labour or professional skill has not anything like that security. It was for that very purpose that the earned income allowance was introduced, and while I accept the need for differentiation my right hon. Friend is not prepared this year to agree that there is a case for increasing it any further than by the present allowance of one-fifth.
The increase from one-fifth to one-fourth which the right hon. Gentleman proposes would cost £8,500,000 in a full year and
§ about half that sum in the present financial year. I think the House will realise that for that reason if for no other it would not be possible to make this concession without serious risk of unbalancing the Budget. As I was obliged to say when dealing with an Amendment of a similar character during the Committee stage, the smaller Income Tax payers, that is to say about 2,000,000 out of the 3,500,000 who are liable for Income Tax, have this year been protected against any increase in actual taxation arising from the increase in the standard rate by the provision that the rate of tax chargeable on the first slice of taxable income is to remain at the same figure as last year. For those reasons, I must ask the House to reject the proposed new Clause.
§ Question put, "That the Clause be read a Second time."
§ The House divided: Ayes, 127; Noes, 201.
1043| Division No. 292.] | AYES. | [9.2 p.m. |
| Adamson, W. M. | Griffiths, J. (Llanelly) | Montague, F. |
| Anderson, F. (Whitehaven) | Groves, T. E. | Morrison, Rt. Hon. H. (Hackney, S.) |
| Attlee, Rt. Hon. C. R. | Hall, G. H. (Aberdare) | Morrison, R. C. (Tottenham, N.) |
| Banfield, J. W. | Hall, J. H. (Whitechapel) | Muff, G. |
| Barnes, A. J. | Hardie, Agnes | Noel-Baker, P. J. |
| Barr, J. | Harris, Sir P. A. | Oliver, G. H. |
| Batey, J. | Harvey, T. E. (Eng. Univ's.) | Paling, W. |
| Bellenger, F. J. | Henderson, A. (Kingswinford) | Parker, J. |
| Been, Rt. Hon. W. W. | Henderson, J. (Ardwick) | Parkinson, J. A. |
| Benson, G. | Henderson, T. (Tradeston) | Pearson, A. |
| Broad, F. A. | Hicks, E G. | Pethick-Lawrence, Rt. Hon. F. W. |
| Bromfield, W. | Hills, A. (Pontefract) | Poole, C. C. |
| Brown, Rt. Hon. J. (S. Ayrshire) | Hopkin, D. | Quibell, D. J. K. |
| Burke, W. A. | Jagger, J. | Ridley, G. |
| Cape, T. | Jenkins, A. (Pontypool) | Riley, B. |
| Chater, D. | Jenkins, Sir W. (Neath) | Ritson, J. |
| Cluse, W S. | Johnston, Rt. Hon. T. | Robinson, W. A. (St. Helens) |
| Clynes, Rt. Hon. J. R. | Jones, A. C. (Shipley) | Salter, Dr. A. (Bermondsey) |
| Cocks, F. S. | Jones, Sir H. Haydn (Merioneth) | Seely, Sir H. M. |
| Collindridge, F. | Kelly, W. T. | Sexton, T. M. |
| Cove, W. G. | Kennedy, Rt. Hon. T. | Silkin, L. |
| Cripps, Hon. Sir Stafford | Kirby, B. V. | Silverman, S. S. |
| Daggar, G. | Kirkwood, D. | Simpson, F. B. |
| Dalton, H. | Lathan, G. | Smith, E. (Stoke) |
| Davidson, J. J. (Maryhill) | Leach, W. | Smith, Rt. Hon. H. B. Lees- (K'ly) |
| Davies, R. J. (Westhoughton) | Lee,. F. | Smith, T. (Normanton) |
| Davies, S. O. (Merthyr) | Leonard, W. | Sorensen, R. W. |
| Day, H. | Leslie, J. R. | Summerskill, Dr. Edith |
| Dobbie, W. | Logan, D. G. | Taylor, R. J. (Morpeth) |
| Dunn, E. (Rother Valley) | Lunn, W. | Thurtle, E. |
| Ede, J. C. | Macdonald, G. (Ince) | Tomlinson, G. |
| Edwards, Sir C. (Bedwellty) | McEntee, V. La T. | Viant, S. P. |
| Evans, D. O. (Cardigan) | McGhee, H. G. | Walkden, A. G. |
| Fletcher, Lt.-Comdr. R. T. H. | McGovern, J. | Walker, J. |
| Frankel, D. | MacLaren, A. | Watkins, F. C. |
| Gallacher, W. | Maclean, N. | Watson, W. MoL. |
| Gardner, B. W. | Mander, G. le M. | White, H. Graham |
| George, Megan Ltoyd (Anglesey) | Marklew, E. | Williams, T. (Don Valley) |
| Gibson R. (Greenock) | Marshall, F. | Windsor, W. (Hull, C.) |
| Greenwood, Rt. Hon. A. | Mathers, G. | Woods, G. S. (Finsbury) |
| Grenfell, D. R. | Maxton, J. | Young, Sir R. (Newton) |
| Griffith, F. Kingsley (M'ddl'sbro, W.) | Messer, F. | |
| Griffiths, G. A. (Hemsworth) | Milner, Major J. | TELLERS FOR THE AYES— |
| Mr. Whiteley and Mr. John. | ||
| NOES. | ||
| Acland-Troyte,Lt.-Col. G. J. | Greene, W. P, C. (Worcester) | Peters, Dr. S. J. |
| Adams, S. V. T. (Leeds, W.) | Gretton, Col. Rt. Hon. J. | Petherick, M. |
| Agnew, Lieut.-Comdr. P. G. | Gridley, Sir A. B. | Pickthorn, K. W. M. |
| Albery, Sir Irving | Grigg, Sir E. W. M. | Pilkington, R. |
| Allen, Col. J. Sandeman (B'knhead) | Grimston, R. V. | Plugge, Capt. L. F. |
| Anderson, Sir A. Garrett (C. of Ldn.) | Guest, Lieut.-Colonel H. (Drake) | Ponsonby, Col. C. E. |
| Apsley, Lord | Guest, Maj. Hon. O. (C'mb'rw'll, N.W.) | Pownall, Lt.-Col. Sir Assheton |
| Aske, Sir R. W. | Gunston, Capt. Sir D. W. | Procter, Major H. A. |
| Assheton, R. | Hambro, A. V. | Radford, E. A. |
| Balfour, Capt. H. H. (Isle of Thanet) | Hannah, I. C. | Raikes, H. V. A. M. |
| Beamish, Rear-Admiral T. P. H. | Hannon, Sir P. J. H. | Ramsbotham, H. |
| Beit, Sir A. L. | Harbord, A. | Rathbone, J. R. (Bodmin) |
| Bernays, R. H. | Haslam, Henry (Horncastle) | Rayner, Major R. H. |
| Blair, Sir R. | Haslam, Sir J. (Bolton) | Reed, A. C. (Exeter) |
| Bossom, A. C. | Heilgers, Captain F. F. A. | Reid, W. Allan (Derby) |
| Boulton, W. W. | Hely-Hutchinson, M. R. | Rickards, G. W. (Skipton) |
| Bower, Comdr. R. T. | Heneage, Lieut.-Colonel A. P. | Ross Taylor, W. (Woodbridge) |
| Boyce, H. Leslie | Herbert, Major J. A. (Monmouth) | Rothschild, J. A. de |
| Braithwaite, Major A. N. | Holmes, J. S. | Rowlands, G. |
| Brass, Sir W. | Hope, Captain Hon. A. O. J. | Royds, Admiral Sir P. M. R. |
| Broadbridge, Sir G. T. | Hopkinson, A. | Ruggles-Brise, Colonel Sir E. A. |
| Brown, Col. D. C. (Hexham) | Horsbrugh, Florence | Russell, Sir Alexander |
| Bull, B. B. | Hudson, Capt. A. U. M. (Hack., N.) | Russell, S. H. M. (Darwen) |
| Burghley, Lord | Hulbert, N. J. | Salmon, Sir I. |
| Butcher, H. W. | Hume, Sir G. H. | Samuel, M. R. A. |
| Campbell, Sir E. T. | Hunter, T. | Sanderson, Sir F. B. |
| Cary, R. A. | Hurd, Sir P. A. | Selley, H. R. |
| Cayzer, Sir C. W. (City of Chester) | Hutchinson, G, C. | Shaw, Major P. S. (Wavertree) |
| Clarke, Colonel R. S. (E. Grinstead) | Joel, D. J. B. | Shaw, Captain W. T. (Forfar) |
| Clarry, Sir Reginald | Jones, Sir G. W. H. (S'k N'w'gt'n) | Shepperson, Sir E. W. |
| Clydesdale, Marquess of | Jones, L. (Swansea W.) | Simon, Rt. Hon. Sir J. A |
| Conant, Captain R. J. E. | Kerr, Colonel C. I. (Montrose) | Smith, Bracewell (Dulwich) |
| Cook, Sir T. R. A. M. (Norfolk, N.) | Kerr, J. Graham (Scottish Univs.) | Smith, Sir R. W. (Aberdeen) |
| Cooke, J. D. (Hammersmith, S.) | Kimball, L. | Somervell, Rt. Hon. Sir Donald |
| Cooper, Rt. Hn. T. M. (E'nburgh, W.) | Lamb, Sir J. Q. | Somerville, A. A. (Windsor) |
| Craven-Ellis, W. | Leech, Sir J. W. | Southby, Commander Sir A. R. J. |
| Crooke, Sir J. Smedley | Lees-Jones, J. | Spens, W. P. |
| Crookshank, Capt. H. F. C. | Levy, T. | Strauss, E. A. (Southwark, N.) |
| Croom-Johnson, R. P. | Lewis, O. | Strauss, H. G. (Norwich) |
| Cruddas, Col. B. | Lipson, D. L. | Stuart, Hon. J. (Moray and Nairn) |
| Davies, Major Sir G. F. (Yeovil) | Little, Sir E. Graham- | Sueter, Rear-Admiral Sir M. F |
| De la Bére, R. | Llewellin, Colonel J. J. | Tasker, Sir R. I. |
| Denman, Hon. R. D. | Locker-Lampson, Comdr. O. S. | Tate, Mavis C. |
| Denville, Alfred | Loftus. P. C. | Taylor, C. S. (Eastbourne) |
| Despencer-Robertson, Major J. A. F. | Mabane, W. (Huddersfield) | Thomas, J. P. L. |
| Dixon, Capt. Rt. Hon. H. | MacAndrew, Colonel Sir C. G. | Thorneycroft, G. E. P. |
| Dodd, J. S. | MacDonald, Rt. Hon. M. (Ross) | Touche, G. C. |
| Doland, G. F. | Maitland, A. | Tufnell, Lieut.-Commander R. L. |
| Dower, Major A. V. G. | Makins, Brigadier-General Sir Ernest | Turton, R. H. |
| Duckworth, Arthur (Shrewsbury) | Margesson, Capt. Rt. Hon. H. D. R. | Walker-Smith, Sir J. |
| Duckworth, W. R. (Moss Side) | Marknam, S. F. | Wallace, Capt. Rt. Hon. Euan |
| Dugdale, Captain T. L. | Maxwell, Hon. S. A. | Ward, Lieut.-Col. Sir A. L. (Hull) |
| Duncan, J. A. L. | Mayhew, Lt.-Col. J. | Warrender, Sir V. |
| Eastwood, J. F. | Mellor, Sir J. S. P. (Tamworth) | Wells, Sir Sydney |
| Elliot, Rt. Hon. W. E. | Mills, Major J. D. (New Forest) | Whiteley, Major J. P. (Buckingham) |
| Ellis, Sir G. | Moore, Lieut.-Col. Sir T. C. R. | Wickham, Lt.-Col. E. T. R. |
| Elmley, Viscount | Moore-Brabazon, Lt.-Col. J. T. C. | Williams, H. G. (Croydon, S.) |
| Emmott, C. E. G. C. | Moreing, A. C. | Willoughby de Eresby, Lord |
| Entwistle, Sir C. F. | Morgan, R. H. | Wilson, Lt.-Col. Sir A. T. (Hitchin) |
| Errington, E. | Morris-Jones, Sir Henry | Windsor-Clive, Lieut.-Colonel G. |
| Erskine-Hill, A. G. | Morrison, G. A. (Scottish Univ's.) | Wise, A. R. |
| Findlay, Sir E. | Morrison, Rt. Hon. W. S. (Cirencester) | Womersley, Sir W. J. |
| Fleming, E. L. | Muirhead, Lt.-Col. A. J. | Wood, Hon. C. I. C. |
| Fyfe, D. P. M. | Munro, P. | Wragg, H. |
| Gilmour, Lt.-Col. Rt. Hon. Sir J. | Nall, Sir J. | Wright, Wing-Commander J. A. C. |
| Gledhill, G. | Nicholson, G. (Farnham) | |
| Gluckstein, L. H. | O'Connor, Sir Terence J. | TELLERS FOR THE NOES.— |
| Grant-Ferris, R. | Peake, O. | Mr. Furness and Major Harvie Watt. |
Question, "That the Clause be read a Second time," put, and agreed to.