§ It is in these circumstances that I have again examined the Purchase Tax proposals. I have already stressed to the Committee the urgent and imperative need both to limit civilian consumption and also to obtain a new source of revenue and I myself have reached the clear conclusion that a further tax on personal expenditure must form a necessary part of my present financial proposals. At the same time I have recognised the force of certain criticisms which were advanced against the tax in its original form, and I have certain fundamental changes to suggest, as I shall explain to the Committee, with a view to meeting objections, and I hope composing differences without impairing its main objects.
§ Before describing the new plan, which will involve the withdrawal of the Bill now before Parliament, I think it would he of advantage to examine very briefly the field of expenditure over which it is now suggested that the tax should operate. I think the following calculation which I shall give to the Committee is of some interest generally, apart from the question of the tax itself. While there are no official estimates of the national income and while unofficial estimates made in recent years must be regarded with considerable reserve in the light of the impact of the war, a number of calculations have been made which show that our peacetime national income is of the nature of £5,000,000,000. A sub-division of that figure has been made, and while I would not wish the Committee to imagine that I am giving official blessing to a calculation on which so many eminent economists would differ, the general conclusion which emerges is worthy of special attention in relation to this particular proposal I am discussing this afternoon. In the calculation to which I have referred it is estimated that out of a national income of the order of £5,000,000,000, £1,500,000,000 is spent on rents, rates, interest, Income Tax and savings; that £1,350,000,000 is spent on food; that £880,000,000 is spent on services such as water, gas, electricity, transport, education, domestic wages, etc., and that 651 570,000,000 is spent on coal, petrol, tobacco and drink. These items total £4,300,000,000 or, according to this particular calculation, 86 per cent. of the national income. The point I wish to make to members of the Committee is that none of this overwhelming proportion of expenditure will be liable to the tax.
§ The balance of personal expenditure is obviously only a very moderate proportion of the total. It is estimated that if the figures are adjusted to wholesale values and to other changes in prices which have occurred in recent months, the taxable field amounts to some £640,000,000. Even this figure, however, includes expenditure on children's clothing and children's boots and shoes which I recently added to the exemptions from the scope of the tax. Therefore, with the exclusion of this item, the taxable field may be taken at about £600,000,000 at wholesale prices. All food and drink will be exempted in all circumstances, and there will be no tax on services, fuel, gas, electricity or water and on some goods already subject to high duties; nor on children's clothing, boots and shoes. While I appreciate that there are certain criticisms of the cost of living index, the result is that more than 80 per cent. of that index is not affected by the tax.
§ Other important exemptions are those for machinery and equipment required by farmers and horticulturists engaged in the production of food. Another exemption is given in the case of certain medicines and medical appliances. We spend many millions annually on medicines of differing quality and differing necessity, but there are certain drugs and medicines which have to be taken for long periods, and sometimes, as in the case of diabetic patients, for life. The prime cost in such cases is heavy and, therefore, we provide that in those cases there shall be complete exemption from the tax.
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A principal objection which has been taken to the tax was that in the original scheme all other goods should be subject to a flat rate of tax to apply alike to luxuries and articles which certainly cannot be so described. My right hon. Friend the Member for East Edinburgh (Mr. Pethick-Lawrence), in an interesting and authoritative article which he wrote a few days ago, discussing the dangers of
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general inflation and certain proposals for avoiding it, stated that the original Purchase Tax scheme did not conform to them
because it involves taxation at a flat rate on a miscellaneous number of articles, including some luxuries and some necessaries.
It is in this important connection that I propose to make a radical change in the scheme.
§ I propose to abolish the flat rate of charge and to introduce two rates sharply differentiated. Under the new plan there will be a high rate of tax on the purchase of goods which are either luxuries or goods which in the hard circumstances of war we can either do without or of which we can at least postpone the replacement. That rate of tax will be one-third or 33⅓ per cent. on the wholesale value, representing about 24 per cent. on retail prices. The type of goods covered by this higher rate of tax will include luxuries like furs, articles made with real silk, lace, china and porcelain articles, cut glassware, fancy goods, jewellery, toilet preparations including cosmetics, and articles not normally requiring immediate replacement like haberdashery, miscellaneous textile piece goods and furniture.
§ In addition there will be a schedule of goods at a much lower rate of duty. This rate will be one-sixth, or 16⅔ per cent. on the wholesale value, representing about 12 per cent. on the retail prices. This is half the basic rate. There will be included in the lower rate schedule articles like clothing, boots and shoes, other than children's clothing, boots and shoes which are completely exempted, and other than certain types of such articles of a luxury category which will be liable to the higher rate of duty. Domestic hollow-ware like pots, pans and kettles will be taxed at only half rate, as also will cups, saucers and plates if made of earthenware; if made of china or porcelain they will be charged at the full rate. Domestic brooms and brushes will be charged at the reduced rate of duty. In addition I propose to include at the lower rate medicines and drugs other than those completely exempt: and finally, newspapers, periodicals and books. This places at the low rate those personal and household goods which require fairly frequent replacement.
§ It is interesting to observe, studying the effect of this tax, that expenditure 653 on these goods, that is, those in the lower-rate schedule, represents rather more than 12 per cent. of the household expenditure in the cost-of-living index. Thus, in addition to exempting altogether from the tax 80 per cent. of the average household expenditure in that index, I propose to place a further 12 per cent. at the half rate of duty. I think, therefore, that I can fairly claim that care has been taken and consideration given to the consequences of the tax upon the cost of living of our people, and particularly of the lower-paid wage earners. I am sure the Committee will realise that this is so and that, while with a tax of this kind it is not possible to differentiate according to the personal circumstances of the buyer, other alleviations outside the scope of this tax have been granted in recent months by the Government which will be of special help to the poorest sections of the community.
§ The introduction of the two rates will require another substantial change from the present Bill. I propose to schedule goods which are liable to tax showing the types of goods liable to the full duty and those liable to the half duty respectively. The class of goods on which the duties are falling will thus be defined and this will be of considerable advantage to traders. I also propose to make certain simplifications in the machinery of registration.
§ I might perhaps say that I have also examined again with care the method by which the tax is to be imposed. There are alternative forms which this type of tax takes in various countries, and only after careful consideration was it decided that here it should take the form of a merchant sales tax which should be applied normally when goods pass from the wholesaler to the retailer. I have satisfied myself that this is the most practicable and convenient method, and an appreciable majority of the Trade Associations who have discussed this matter with the Board of Customs and Excise share this opinion.
§ I know that some advocate a retail sales tax, but I believe that in war-time it would be an impracticable proposition involving, in the innumerable daily transactions of retail trade, a great mass of accounts and stamps of varying ranges of value and paper and printing of a most extensive character. It is interesting to 654 observe that there are in this country some 300,000 retailers, exclusive of street traders, who keep no accounts but who carry on on the "till basis," who do not give bills and often do not know the value of the stocks they hold. It is difficult to see how to surmount the difficulties which would arise in connection with a retail sales tax, and there might be much confusion and evasion and often, no doubt, a growing sense of unfair competition. We do not believe that the machinery will be unduly difficult, nor will it be costly to administer. It is not expected that any appreciable number of additional officials or staff will be required. Customs work, owing to the course of the war, has been reduced, and this will enable the initial work of registration to be carried on without additional numbers of civil servants. The necessary adjustment of staff and organisation for verifying the quarterly returns by registered persons can also be made without undue difficulty and little or no expansion.
§ The Committee will wish to know what procedure is contemplated in connection with the recasting of these proposals. The Resolutions to be put from the Chair to-day will include a new Resolution to impose the tax as from a date to be fixed by Treasury Order, at rates of one-third and one-sixth respectively, on articles to be specified in the necessary legislation. The existing Purchase Tax Bill will then be withdrawn and the provisions of the new scheme will be included in the ordinary way in the forthcoming Finance Bill. The tax cannot operate until the preliminary process of registration has been completed, but I see no reason why that should occupy more than a month or two. The alterations in the scheme which I have outlined will involve a reduction in the amount that the Exchequer would have obtained under the original proposals. They will, however, secure, I am advised, the substantial sum in a full year of approximately £110,000,000. The yield in the current year will depend upon the date on which the tax can be brought into operation, but I hope to obtain revenue of about the order of £40,000,000.
§ The two main purposes for which such a tax is designed are even more imperative now than they were at the end of April, when a scheme was first outlined in the Budget statement. We must reduce considerably civilian consumption 655 which is not absolutely necessary in order to set free resources and energy for the urgent needs of the war and to avoid inflation—and we need imperatively more money at the disposal of the Exchequer as soon as possible. It is said by some that such objectives are an attempt to do two contradictory things, but I am satisfied that the scheme now proposed will produce a necessary reduction of civilian consumption and, at the same time, bring considerable sums to the State. This tax has also the merit of being of a comprehensive character. It is a tax which will obtain a contribution from the people of the country as a whole, and it is one in respect of which all may well pay something unless they are able or willing to abstain from certain purchases. I recognise that a considerable contribution will have to be made by the wage earners of the country, but I believe myself that they will be just as willing as others to play a further part in financing the war.