PURCHASE TAX.

HC Deb 23 April 1940 vol 360 cc74-86

I referred a few moments ago to a novel proposal which I said I had in mind, and I must give the Committee a short account of a new form of tax which, if it is enacted and put fully into effect, should be a source of substantial additional revenue in time to come. I propose to call it the Purchase Tax. It is a form of sales tax. Sales taxes of different kinds are in operation in a large number of countries and most of the Dominions, I think, but the methods and the machinery differ considerably. The Departments for which I am responsible have examined these schemes, and we think the proposal which I am going to outline is on the whole the best. A sales tax essentially consists in securing an additional payment for the benefit of the State at the time when a purchaser is paying his supplier. As goods normally pass through several hands on the way from the producer or manufacturer to the individual who finally consumes them, it is necessary to fix at what point in the chain the percentage addition in the price which represents the tax will be applicable. To provide that there is to be a sales tax whenever there is a sale would mean that there is a tax to pay at every stage between the first producer and the final user, with the result, amongst others, that some commodities would bear tax many times and others not quite so often. On the other hand, if a sales tax were to be imposed only in connection with the final purchase, so that whenever a sale is made in a shop a tax is paid by the customer to the shopkeeper in addition to the price, that, apart from all other objections, would involve the recording of and accounting for an enormous number of transactions, many of them very small, and would interfere in many ways with the ordinary carrying on of busy retail trade.

I, therefore, reject these types and, in the scheme which I am proposing, the Purchase Tax, in the form of a percentage of the price, will be paid at the stage when the wholesaler is selling to the retailer. One great advantage of applying the tax at this point is that it makes it easy to secure what is really essential to the scheme, namely, that there should be no Purchase Tax charged in respect of goods for export. We must exclude exports. That is a most important point when, as the Committee knows, there is a most strenuous drive to increase our export trade under the leadership of the President of the Board of Trade while, at the same time, it is necessary to discourage unnecessary spending at home. It is plain, therefore, that the tax must not touch exports. Neither will it touch raw materials in industry, for it begins to apply only when the wholesaler distributes the product. I may as well mention the other principal exceptions now. There will be no Purchase Tax on food, drink or foodstuffs, whether for human or animal consumption, or on articles already subject to a heavy duty, such as tobacco or petrol. Generally speaking, it will not apply to services as such, nor to fuel, gas, electricity or waters.

An essential preliminary for the successful working of such a tax is the creation of a register of wholesalers, upon whose sales to unregistered persons the tax should be levied. It will be necessary to include in the register producers and manufacturers, in order not only to cover cases where they sell goods direct to retailers or consumers, but also to enable them to buy free of duty goods which they require for the purpose of carrying on their business of production or manufacture. Of course, I am only giving an outline, and an outline is bound to be a little confusing, but details will be available in the clauses of the necessary legislation.

If I may, I will illustrate the general nature of the scheme by inviting the Committee to consider an imaginary case. Suppose all the wholesalers in the country, together with the producers and manufacturers, were gathered together inside a ring or enclosure, and suppose they effected their sales by passing their goods over the fence to their customers assembled outside. The Purchase Tax would apply, subject to the exceptions I have named, to each such transaction. It would not in general apply to transactions between people inside the enclosure, or between people outside the enclosure. It would apply to a deal done over the fence. My metaphor may seem an echo of the arrangement which, I understand, is made at some racecourses for the convenient transaction of business but I hope that what I have said may help the Committee to follow the general idea. The only difference between my imaginary picture and the actual situation is that, of course, the wholesalers are all over the whole country, and therefore the formation of a register is an essential preliminary to the actual imposition of the tax.

Liability to Purchase Tax, therefore, will arise on the occasion of a sale by a registered person to a non-registered person, and it will be the business of the seller to get the tax from the purchaser at the time he receives payment for the goods; the seller will be accountable for the tax to the State. The administration is intended to be in the hands of the Commissioners of Customs and Excise. What I am proposing is that the principle of the Purchase Tax should be approved in the present Budget and the necessary machinery enacted in order that a register may be compiled. Before introducing the machinery provisions, I should hope to have detailed conversations with trade organisations of different kinds in order that the machinery of collection shall be framed as conveniently as possible to fit in with the general practice of trade. The subsequent legislation would provide that the date of imposition of the tax and the rate per cent. to be applied should not be decided now, but should be determined hereafter by Resolution of the House of Commons.

Let me point out the significance and appropriateness of the proposal. It is, of course, of the greatest possible importance to restrict internal spending at this time. The tax will assist in securing that result without interfering with our plans for maintaining an adequate supply of food and for keeping its price moderate. The tax will put no sort of obstacle in the way of export trade, but we must be resolute in reducing consumption at home. It is the deliberate intention of such a tax as this to do so. My right hon. Friend the President of the Board of Trade and his Export Council are making-stalwart efforts to increase our exports, and thus to help to pay for the war, and we must recognise that this should be done even though it involves diverting the efforts of manufacturers to a certain extent from the home to the export market. That will help to conserve man-power for the essential purposes of the war, and it will reduce the demand for supplies, some of which have to come from overseas. The truth is that we have to face quite boldly the necessity of transforming our home economy for the purpose of helping to win the war, and this cannot be done without drastic and definite action. That may impose sacrifices all round, but we have to face those things so long as they are fairly adjusted between the people.

But there is another point. I have received many suggestions that the revenue might be increased by taxes on various selected articles—cosmetics, for example—and I have had many of these suggestions closely examined. But they are all open to the objection that a tax on some specially selected article would produce very little compared with the special and sometimes elaborate machinery required, and very often open to the further objection that it is difficult, or even impossible, to draw a line between what is taxed and what is not. I could give many illustrations. Everyone feels a natural sympathy with the idea that we should put a tax on luxuries—and this Purchase Tax will tax luxuries among other things—but the fact is that the luxuries of the few, taken by themselves, and taxed as you like, do not produce the great sums of money with which we are dealing now in connection with this War Budget. It is a very large sum of money which has to be found in the effort to help to meet the expenses of the war and a widening of the field of taxation is very necessary. The generality of the Purchase Tax, apart from such specific exceptions as I have mentioned, is really an essential feature of the plan.

I cannot offer at present any estimate of what the application of such a tax would produce for, of course, such a calculation can only be made when the machinery is settled and the rate of the tax is known. But I can inform the Committee of this. I have spent some months of very close labour in examining various alternative suggestions, and this form of taxation, if boldly applied, is capable of producing a larger additional sum towards our revenue than appears likely to be drawn from any other immediately practicable form of tax.

We can now sum up the anticipated results of the extra taxation which I have to impose. As usual, the additions to be gained this year are less than we should get in a full year. In the current year, the increases from Income Tax will yield an extra £42,500,000, the Post Office an extra £12,500,000, beer an extra £15,000,000, spirits an extra £6,500,000, tobacco an extra £21,000,000, and matches an extra £3,500,000. That makes a total of £101,000,000. We must add that figure to the £1,133,000,000which I have already given as the produce of taxation on last year's basis, and we then have an estimated total contribution from revenue of £1,234,000,000— 1234 happens to be the telephone number of the Treasury. An ingenious friend of mine to whom I made that small joke said, "Yes, and this is the 234th day of the war." A still more surprising coincidence is this. If—keeping to round figures—you take the £1,234,000,000 from the total of the estimated expenditure, which is £2,667,000,000, you will find that what is left is £1,433,000,000, but actually the result is nearer £1,432,000,000— 1432. These figures give us an idea of the size of the problem. I have not added anything on account of the Purchase Tax, but if the preliminary arrangements we suggest are approved by the House and carried through successfully, we hope to get something from that source before the end of the present year.

We are now at the last of our three problems. Having taken this large amount by taxation, we are still left with £1,433,000,000 to find—the actual figure in the White Paper is £1,432,399,000. Hon. Members may feel that this is a long speech but I have to do my duty in discussing this third problem, which is vitally important. It is really the central question of this Budget: more important than the taxes. How is this remaining amount of £1,433,000,000 to be provided? Can so large a gap be bridged by borrowing on existing lines, or are there other means to which we should now have recourse?

First, let us take account of two reliefs which will be available and which will help to reduce the gap. The first is the balance of £100,000,000 of which I reminded the Committee earlier on, which is the remaining proceeds of the recent successful 3 per cent. War Loan. Secondly, in so far as we meet our large purchases abroad this year by the use of some portion of our gold reserves, that process itself reduces proportionately the Budgetary problem.

As to the problem that remains, everything depends on these three things: first, the extent of the funds that become available for loans to the State; secondly, the effectiveness of the appeal that is made that they should be so lent; and, thirdly, the effective discouragement and prevention of undesirable private outlay from wages and other income. The immense expenditure which we are incurring in pursuance of our war effort is continually putting increasing sums into private hands, and those sums, if they are not squandered upon unnecessary consumption, but are saved, as they should be, and lent to the State, constitute a steady, increasing fund of genuine savings, from which central needs may be continuously replenished. The success of the recent £300,000,000 Loan augurs well for the future issues that we shall have to make from time to time. The success of this Loan is all the, more significant because it was issued before Government payments had percolated through to the community to the extent to which this may be expected in the near future. It is quite true that there has been an increasing use of Treasury Bills during the past year, but the quantity at the beginning of the year was quite unusually low, and there is still room for some further increase.

Lastly, let us consider the quite remarkable success of the National Savings Campaign, which was re-started in connection with the present war, last November. Already, in the first 21 weeks of this movement—less than half a year—no less than £131,849,559 has been invested in Savings Certificates and Defence Bonds. That shows the immense power of the small savings movement, and the readiness with which people in receipt of very modest incomes are coming forward to support the finances of the State, to the great benefit also of themselves. I think the Committee will join with me in expressing the gratitude of us all to the fine organisation of voluntary workers, inspired by Sir Robert Kindersley and other leaders of the movement, who are working on this campaign every hour of the day.

Now I come to a matter which is very much in the minds of some of us. It will be noticed, of course, that the methods of borrowing to which I have referred are the issuing of further loans on the markets, the use of Treasury Bills, and the development to the very full of the small savings movement. They all depend on the voluntary action of the lender. Another method has now been put forward. It has been advocated by its author with much brilliance and persistence. According to this scheme, despairing of the sufficiency of voluntary action, we should supplement our system of taxation by a system of compulsory deductions from wages and other income. These deductions are described as "deferred earnings," because the scheme is to provide for repayment some time after the war, but the plan, as it seems to me, is really a plan for a forced loan, to be collected, so far as the wage-earner is concerned, by deductions effected by the hand of his employer. These deductions, in Mr. Keynes's scheme, are very severe. I will give one example from his book. Take a married man without children, earning £400 a year. I said, earlier on, that, under the increased taxation this year, he would be paying£31 in Income Tax. According to this plan, he would not only pay £31 in Income Tax, but also compulsorily contribute out of income a loan of a further £68.

I need not say that I have examined these proposals, and several variants of them, with the most anxious care. If they appeared to be the best means, at this stage, of financing the war—still more, if they provided the only real solution of the very serious financial problem which we are facing—I should not hesitate to urge their adoption by the Committee. But I am far from being convinced that such a scheme has all the merits which in some quarters are claimed for it. Experience goes to show, in many cases, that the first effect of compulsion is to kill the voluntary method. (The reason why taxation is put on a compulsory basis is that so few people make taxation contributions voluntarily.) We should run the gravest risk of losing at one blow what the National Savings Movement has done for us. I would rather make it plain to the wage-earners of this country and to all others who can lend a portion of their income to the State, that, so far from having lost faith in their willingness to help the country at this crisis in our fate, we are confident that the response will be greater than ever.

It is very difficult to suppose that when individual circumstances differ so widely, so much, in addition to Income Tax, can be justly claimed from all of the same income, while adjustments to meet a difference in circumstances would be very difficult to work satisfactorily. One man, for example, may be suffering from a disastrous fall from a higher income which has left him because of the war, and may be loaded with liabilities which he cannot escape. He may be a schoolmaster, who has done well, with a lot of pupils, but has lost his pupils, who have been evacuated from a school in the eastern counties, and his income has dropped. Another man, enjoying the same figure of income, may never have been so prosperous and well off in the whole of his life. I would add only two other points. It must not be assumed that the forcible deduction of so considerable a part of wages would necessarily leave the level of wages untouched. Yet if, in consequence of the scheme, the level of wages rose, the results claimed for the scheme in preventing inflation would be gravely modified. Finally, a close analysis of the proposal goes to show that it would raise administrative difficulties of so serious a character—adding, for example, enormously to the number of cases in which total income must be precisely ascertained—that it is doubtful whether it could, with our available machinery, be worked.

I would advise the Committee, therefore, to rely on the results to be obtained by stimulating to the utmost the response to our existing methods of borrowing. Why should we suppose that the willing exertions of our people, if properly roused and directed, will produce less result than if we attempted to apply a cast-iron formula and compel our people to lend? Nobody is better qualified than the British trade unionist to know what is at stake, for the victory of Hitlerism means the end of Trade Unionism. Nobody has better reason than we who enjoy freedom to be willing to pay the full price necessary to preserve it.

I have an observation to make at this stage, which, I hope, will help the conclusion which I ask the Committee to reach. I am informed that in some quarters there has been a hesitation in making full use of the opportunities for small savings on the ground that, in the event of the individual hereafter losing his employment and continuing unemployed until he is obliged to apply for unemployment assistance, his war savings might be taken into account in determining the amount of assistance to which he would be entitled. [Hon. Members: "It would."] I am told that this is a feeling which is widespread. There is no need to discuss whether the objection is really justified, but I am so much concerned to encourage war saving in every possible way that I am prepared to see the existing rules governing the application of the means test modified so as to remove this objection altogether.

Mr. Woodburn (Stirling and Clackmannan, Eastern)

The old age pensioners too?

Sir J. Simon

I understand the hon. Member's interruption. This will require legislation. The general effect of the legislation will be to withdraw from the calculation of means for purposes of unemployment assistance the new money lent to the nation during the war up to a total of £375. I have taken £375 because it is the cost of purchasing 500 National Savings Certificates, which is the maximum that any individual can purchase. The provision must be equally applied whether the new money is in fact invested in National Savings Certificates, in Defence Bonds, in subscriptions to War Loans on the Post Office Register, or deposited in the Post Office Savings Bank, or in the Trustee Savings Banks. But, of course, the total amount excluded under the arrangement must not exceed £375 in the case of any one person. It will be necessary in the legislation to make provision to secure that the investment really is of new money and is not a transfer of money from previous funds of the same sort, since the object of the arrangement is to help to gather in the largest possible amount of additional savings for the war.

I am glad to answer the question put by the hon. Gentleman opposite. I explained about the supplementary old age pensions, that the pensioner applying for one was not to be treated worse than he would be treated under the Unemployment Assistance Board. It follows that the new arrangement will also apply to the calculation of supplementary pensions.

The statement that I have just made is in line with the advice that I have received from the two sides—(Employers and Trades Union Congress); I was fortunate to see both sides—of the National Joint Advisory Council. I have advisedly made a full concession. I have not argued whether it should be £200 or £250. I think the simple thing is to take the full amount, and I have done so in the belief that it will attract the support not only of all parties in this House, but also of all concerned in industry.

On that basis, what are we to do about the sum to be found by borrowing—£1,433,000,000—it might turn out to be even greater than I have estimated. But be that as it may, I say with confidence, and I think that everybody here will confirm it, that it will be found, and it must be found. What we have to do is to foster and improve the conditions under which the flow of voluntary contributions to Government loans may be stimulated and inflation may be avoided. Whatever measures will help to restrict the misuse of spending power, and especially the misuse of increased spending power coming into the hands of an individual as a consequence of war conditions are of vital importance.

I apologise, but I would like just before I sit down to present the economic policy which is involved in this conception of our war efforts. I would like the Committee to realise how the effort of the Government in the economic sphere has been directed from the outset to the securing of these objects. A series of steps have been taken, and are being taken, all converging on this end. What are we aiming at? We are aiming at maintaining a level economy in which prices and profits and remunerations are kept as steady as war conditions will allow, and in which the flow of such goods, as are available for civilian consumption, is kept in regulated supply. Let us examine some of these measures. The first is the strict control of imports. The import licensing system was brought into operation at the outbreak of war with the object of conserving our resources of foreign exchange by reducing imports of those goods which are not essential goods or goods which we can do without in war-time. It is all the more important, because, for the purposes of the war, there are other kinds of goods which we must import in increasing measure. The system applied, at the outset, to a wide range of manufactured goods and to non-essential foodstuffs, and by successive extensions the range has been greatly broadened. Let me give a figure. It is estimated that the operation of this part of our import system is reducing less essential imports, which, in 1938, were valued at about £125,000,000, to a figure in the first year of war of about £50,000,000. But the system of import control is not confined to non-essential articles. It has been extended to many raw materials, such as steel, timber and flax, for the purpose primarily of enabling the Ministry of Supply to control the whole of the trade and to ensure that available supplies are used to the greatest national advantage. The licences of those commodities are issued by the Import Licensing Department on the advice of the Ministry of Supply. For similar reasons the system has now been extended to the import of all foodstuffs, which, with minor exceptions, are licensed on the advice of the Ministry of Food. This system of controlling, checking and directing imports and shutting out what we can do without and bringing in the things we must have, now applies to 75 per cent. in value of the whole of our imports. The Committee will see, therefore, how powerfully this system of import control helps to prevent unnecessary spending and concentrates purchases on the things that are essential.

Take this further example. We are exercising control of raw materials under a system which we are continually elaborating by which the available supplies of these essential goods are carefully allocated. The first priority must be assigned to the war effort. Subject to the essential claims of the war effort, the next priority must go to the export trade. It is the residue which is being made available at appropriate prices for civilian use. Similarly, we are exercising control over staple foodstuffs, and it has been our policy to secure that the price of certain essential foodstuffs—in rationed quantities where the circumstances of the case require—should be kept moderate even if this involves a considerable cost to the Exchequer. The Committee will like to know that we are now finding about £60,000,000 a year to cheapen the price of certain essential foods.

Take further examples. Control has been taken of a variety of industries which are now working on Government account as an integral part of the war effort under agreements which limit profits. We have control of our foreign exchange resources. We have marked out strictly moderate interest rates for the financing of the war. The Prices of Goods Act is aimed against unreasonable increases due to scarcity or otherwise in the price of common necessities which were not controlled, and by a system of costing and contract procedure we endeavour to secure that the rate of profit upon Government work shall not be more than is reasonable in amount. Nevertheless, it may still be true that businesses which are putting forth very greatly increased volumes of output, may show increased aggregate profits, and the Excess Profits Tax has been imposed to take over into the Exchequer the greater part of any such increases. I wish the Committee to observe that all these matters are part and parcel of a single economic policy, and that the effort of the Government in every sphere, concentrated upon the winning of the war, is being carried through under conditions which are the best that we can make for securing that object.