§ I have come to the conclusion that in the circumstances and needs of to-day I must look to direct taxation, covering all sections of the community, to raise the necessary revenue. The burden which I am compelled to impose will, I recognise, involve the heaviest sacrifices by all classes of the community other than those with the smallest incomes. They are, however, vital and necessary, not only to meet our existing financial situation, but, what is equally vital and necessary, for the reasons I have already given, to secure reduction in consumption. I shall be obliged not only to ask for a larger contribution from existing Income Taxpayers, but to extend the Income Tax to many persons whose incomes have hitherto not been the subject of direct taxation. I must, therefore, increase the standard rate of Income Tax, and I propose to do so by 1s. 6d., making the new standard rate 10s. in the £. I propose to make the same increase in the reduced rate which applies to the first £165 of taxable income. This rate will thus become 6s. 6d. in the £, instead of 5s. as at present.
§ As a result of these increases, the rates of Income Tax and Surtax will reach a maximum of 19s. 6d. in the £on the highest slice of income—a figure indeed approaching in that sphere the limit of taxation. In order to enjoy a tax-free income of £5,000 a year it would be necessary to have a gross income of £66,000 a year—and very few to-day have an income approaching that sum. These changes in the rates of tax will provide me with £125,000,000 in a full year, and £96,000,000 in the current year.
§ I would wish that I could stop there, for these increases are substantial and will affect in greater or lesser degree Income Taxpayers all down the scale; but it is obvious that the total revenue, 1328 and the effect upon civilian consumption to be expected from these changes fall a long way short of the needs of the situation. It is therefore necessary to add to these proposals reductions in the allowance for earned income and in the personal allowances. The importance of the children's allowances need no emphasis, and I do not propose to touch them. I propose that the earned income allowance which is at present one-sixth of earned income, subject to a maximum allowance of £250, should be reduced to one-tenth, subject to a maximum allowance of £150. The existing personal allowances are £170 for a married taxpayer, and £100 for a single taxpayer, and these I am proposing to reduce to £140 and £80 respectively. With the allowance for a single person at £100 and with earned income relief of one-sixth, liability to pay Income Tax began at £120 a year, and this point was made the exemption limit for both earned and investment incomes. While I do not propose to reduce that exemption limit as drastically as a strict arithmetical proportion might require, there must be some reduction, and I propose to make the new exemption limit £110 instead of £120. The reduction in the allowances and in the exemption limit will increase by over 2,000,000 the number of persons liable to pay Income Tax.
§ While the increase in the standard rate will fall mainly upon those with larger incomes and upon companies, these cuts in the allowances will principally affect the small taxpayer. The present allowances from many points of view are not unduly generous, and many I know will feel that only the necessities of the time could possibly justify their reduction. While I am compelled to call for these sacrifices, I have considered whether some means could be found to reconcile my present objectives with the reluctance which will be generally shared to make any permanent inroad upon the existing level of the Income Tax allowances.
§ The Committee will appreciate that the primary object of these proposals is not to obtain taxation for taxation sake, nor to raise Revenue for the sake of Revenue, but to make a considerable cut in purchasing power during the war, and thus to avoid the ever present dangers of inflation which would affect most of all those with lower incomes. There are means by 1329 which that object can be achieved without necessarily sponsoring permanent reductions in those allowances. I am proposing, therefore, that the extra tax which any individual will pay by reason of the reduction in the personal allowances and earned income allowance will be offset after the war by a credit which will then be given in his favour in the Post Office Savings Bank. In other words, the individual citizen will have to pay the tax in full, but that part of the extra tax to which I have referred, while complying with our vital war-time necessities will constitute some provision for post-war difficulties and will, I hope, form an additional fund of post-war savings for himself and his dependants.
§ The Budget White Paper will contain examples showing for a number of selected incomes, the total extra tax payable and the amount which will be treated as credit after the war; but if I quote a few examples now the Committee will have a clearer idea of how the scheme will work, and particularly the post-war credits which will follow. A single man with 45s. a. week paid no Income Tax last year. Under the present proposals he will pay 2s. a week, the whole of which will be treated as a post-war credit. The tax bill of a married man who has two children and an earned income of £350 was last year £5 8s. 4d. and will be £24 7s. 6d. under the present proposals, but of the increase of approximately £19, £17 6s. 8d. will be credited to him after the war. As one moves up the Income Tax scale, and as the effect of the allowances on the total tax bill becomes less marked, so the proportion to be dealt with in the form of credit obviously declines. For example, the tax bill of a married man with two children with earned income of £1,000 a year was £211 last year, and will be £301 under the new proposals. Of the increase of £90, rather more than £48 will be treated as a credit. In the case of.a similar person with earned income of £2,000, the amount of tax payable last year was £600; the amount payable under the present proposals will be £776, and of the increase of £176, £65 will be treated as a credit. The maximum amount which under these proposals can be treated as credit in respect of tax paid for the year 1941–42 will be £65. These alterations in the allowances will produce 1330 £125,000,000 in the full year, and £54,000,000 in the current year.
§ The total effect of the Income Tax changes which I have just mentioned will thus be an addition of £250,000,000 in a full year, of which one-half will fall to be treated as a credit. In the current year these proposals will produce £150,000,000. My hon. Friends will appreciate that the main part of the collection, which begins in January, continues for a substantial period. If I took a period from July of this year to June of next, the figure, while not reaching £250,000,000, would approach it.
§ It will only be as from the date at which a credit becomes available after the war that any payment of interest will arise. I propose to include in the Finance Bill provision for the computation of the credit to which each individual taxpayer will be entitled after the war and for the recording by the Inland Revenue of that credit. A notification will be sent in due course to each taxpayer showing the amount of tax which will in his case fall to be treated as a credit after the war. As the amount will depend upon the final ascertainment of the liability to tax and upon the full payment of that tax, it will not be possible to send those notices until after the collection for the year of assessment is completed. It must be remembered in this connection that our system allows the direct taxpayer a long period in which to complete the payment of what he owes. My hon. Friends can work out approximately the amount in any individual case, either directly from their knowledge of Income Tax rates and allowances or by reference to the examples in the White Paper. It is most necessary for me to emphasise, however, that the whole tax must be paid at the proper time, and that the taxpayer cannot claim or use his credit while the war continues.
§ While I am aware that this extra taxation will cut down income available for consumption—and it is necessarily and deliberately intended to do this—it is most important that it should not be allowed to, nor do I think it should, interfere with War Savings. The post-war credit is, of course, intended to be in addition to and not in substitution of voluntary savings, and not only should existing contributions to War Savings be 1331 maintained, but every effort should be made to increase those contributions, as I think it is quite within our capacity to do. Indeed, by providing the small saver with the promise of a substantial nest-egg, we may well increase rather than diminish his desire for adding to it, so that he may have a sum sufficient to enable him to face with further confidence the difficulties of the post-war world.