§ First I take Income Tax. In my Budget of last April I resolved not 1o propose a further increase, and the standard rate for this year is therefore at present 5s. 6d. High as that rate is, it must in the circumstances of the war be substantially increased, The Committee will of course bear in mind, though perhaps not every one outside has it so clearly before them, that while we speak of a standard rate of tax, 5s. 6d. or whatever it may be, the real effect of ourIncome Tax code, with its allowances end abatements at the lower end of the scale and the superimposition of rising Surtax at the other end—the real effect of our Income Tax code is to make the actual rate of charge on total income of different sizes mount in a steadily ascending curve which starts from zero at the bottom and reaches really dizzy altitudes at the top. What I have to do is to propose to the Committee a new curve which will secure increasing contributions from direct taxation all along the line. In endeavouring to discharge this task and, indeed, in preparing my fiscal proposals as a whole, there are certain special considerations which I have had in mind and which I should like to set before the Committee1366
§ The first is this. We are already almost half way through the present financial year—there are only about six months to go—but I have not limited myself simply to making a plan for the next six months. We shall, of course, have a further Budget at the ordinary time next spring, but it is as well at the beginning of this critical period to set standards and levels with an eye to their continuance, subject, of course, to necessary revision, in the following financial year. If we are preparing to face the possibilityof a three years war in other ways, we must make our plans with this in mind in the fiscal sphere also. My object, therefore, is to put before the Committee a whole scheme, though some parts of it, for reasons which I will state, cannot be completely applied till next year. Some of the additional taxes, at any rate, cannot produce their complete effect in the six months that remain. We shall only secure a full result later.
§ There is this further consideration. Even though we make up our minds to stiff extra taxation-and we must—the passage from existing levels of taxation, which are already pretty high, to the higher levels which war makes necessary, cannot in all cases be made in a single bound but needs to be stepped or graded. For example—and here I am anticipating what I am going to explain in detail—the increase which I contemplate in the rate of Income Tax cannot have full effect in the present year, and in the same way the reduction which I feel it my duty to propose in the existing allowances cannot be made operative in time for the collection of the tax due on 1st January. There is another consideration very present to my mind which I am sure has also been the subject of reflection by many hon. Members. There are a good many cases just at present where the dislocation that has been caused by the outbreak of war is resulting in a severe drop of the actual income. earned by individual taxpayers in the present year. Since our Income Tax system, as far as direct assessment on earned income is concerned— Schedules D and E—is based on the idea that you treat a man as having an income which last year shows him to have then enjoyed, it is very important to make a special provision, especially when the tax is raised substantially, which will meet that difficulty. I am going to attempt to do that. I have spoken enough in 1367 generalities, but these considerations really have their justification and govern and inspire the whole plan.
§ The plan I put forward is that in a full year the standard rate of Income Tax should be 7s. 6d. in the £. This, of course, must be subject to reconsideration when the time comes, but that is the basis on which I have attempted to construct my Income Tax scheme. In the present year, which is already half-way through, I propose, for the reasons I have stated, that the standard rate should be 7s. This rate may be regarded as a composite rate made up, as it were, of the 5s. 6d. for the first quarter of the year and 7s. 6d. for the other three-quarters. I should be glad if the necessary arithmetical calculation for a few moments will relieve Members of the severe anxiety they may entertain. The Income Tax due by direct assessment on 1st January next will be made out at the 7s. rate. Similarly, in the case of any payments such as dividends, interest, etc., which are liable for tax in the present financial year, the rate of 7s. will be substituted for 5s. 6d. throughout. Of course, there will be adjustments arising from the allowances and reliefs.
§ I mentioned just now—and I noted that there were indications in the Committee that the observation was approved—that I have by no means overlooked the great practical difficulties that will face many people in view of their immediate drop in income if this higher rate were charged automatically on what I may call their conventional or statutory income, that is, the figure that was arrived at of what they earned last year. Therefore, I am making special provision to mitigate the severity of this increase of tax in the case where an individual is this year experiencing a substantial drop of earned income. I say "substantial" because it would be a pity to disturb the whole arrangement for a comparatively small difference. Provision will be made to the effect that where such an individual proves that his directly assessed income this year is reduced by circumstances connected with the war below the figure of his assessment based on last year's income by as much as 20 per cent., he shall be entitled to substitute this year's actual income for last year's income as the basis on which he is assessed. The 1368 Committee will see the great importance of that provision in the case of all those who find themselves suddenly with a greatly reduced income.
§ I will give an example, a moderate one, but enough to explain beyond question what I mean. Suppose a man's income from his business or profession or salary is assessed this year as £1,000, because that was the figure which was proper to measure his earnings last year. If in his case the consequence of war conditions is that his actual income this year is seriously reduced, to, say, £700, he will be entitled under my proposal to substitute an assessment based on £700 for the assessment last year, and will pay the 7s. rate, or whatever is the appropriate rate after making abatements and allowances: but he will pay on a smaller figure, because it is the actual figure which represents his present income.
§ Sir J. Simon
This is just a comparison between the assessment already made for this year, which in practice is based on his last year's earnings, and the figure which is shown to the authorities to be the appropriate figure for this year [Hon. Members: "Which year? '] The present fiscal year. I think that probably what my hon. Friend the Member for South Kensington (Sir W. Davison) has in mind is that he wants to be sure that the larger amount will not be demanded before it is possible to prove the figures.
§ Sir J. Simon
No, it will not. Income Tax on earnings is paid in two instalments. In most cases there will not be a question, I should think, about the first instalment, but whether there is or not I intend the arrangement to be suchas to make good the spirit of this proposal. There is a corollary to this which I must mention. It will occur to anybody who thinks out the matter closely. If an individual avails himself of this relief, which I call "specific cause," in the present year, then the amount of tax which he paid last year will be liable to be revised by reference to his actual income last year. As an illustration let us take the case over years 1, 2, 3. Let us assume that we are in year 3. The Income Tax payer comes forward and says, 1369 "The year 3 is a very bad year for me and I really ought not, in the circumstances, to be made to pay in respect of year 3 on my much larger income of the year 2." I say, "Be it so, that is the fair way." But I must also say to him, "If you do that I must be entitled to examine what was the position in the year 2, because you have already paid in the year 2 upon the basis of your income for the year 1"; and if the year 2 was a very prosperous one, with a lean year on either side of it, unless I added that corollary he would escape paying the Income Tax on the good year.
§ Sir J. Simon
Yes, you stay as you are if you like. If the hon. Member takes advantage of my offer, which I think is a very good one, he must not mind if I ask to examine how things stood with him a year ago. Of course I should not charge the new standard rate in respect of the old period. Each year will carry its own appropriate rate. [An Hon. Member: "It is very kind of you."] Anything I can do I shall be very glad to do.
I must now state the reductions in the existing allowances in order that an increased contribution may be secured, as I say, all along the line. In order that the scheme approved by Parliament may be a balanced and complete scheme I propose that these changes should be enacted now in Finance Bill No. 2, though with one exception they will not come into operation until next year. The exception, the change which will operate at once, with the increase of the standard rate to 7s., is that instead of the first £135 of taxable income being charged as it is to-day at is. 8d., the charge will be 2S. 4d., which is one-third of 7s. In the following year, however, we must revert to the fraction of one-half of the standard rate, as was done by Lord Snowden in the crisis Budget of 1931, and, therefore, if the standard rate should then be 7s fid. the half rate would be 3s. 9,d.
But I think that if we do that we should accompany it by another provision which would increase the reduced rate zone, which is now £135 to £165. The result will be to give relief to a certain section which otherwise would come under the full blast of 7s. 6d., I think 1370 unfairly so. I must also ask the Committee to support me in the following changes in allowances at the lower end of the scale. Earned income allowance, which is now one-fifth, with a maximum of £300, will be one-sixth with a maximum of £250. The marriage allowance will be £170 instead of £180, and the allowance for children will be £50 instead of £60. Those changes, as I said, though enacted now, will begin to operate only in respect of the next financial year. Taking these increases of rates and these variations in allowances together, these Income Tax changes (assuming a standard rate of 7s. 6d. in 1940–41) are estimated to produce £70,000,000 this year and £146,000,000 in a full year.