CLAUSE 24.—(Rate of the profits tax.)

HC Deb 11 June 1947 vol 438 cc1079-117

4.0 p.m.

Mr. Gammans (Hornsey)

I beg to move, in page 22, line 7, at the end, to insert: (4) Where there falls to be included in the profits of a trade or business for any chargeable accounting period any interest payable under Subsection (5) of Section ten of the War Damage Act, 1943, the amount chargeable by way of the profits tax in respect of that period shall be reduced by an amount equal to seven and a half per cent. of the amount of that interest. I think I can explain the point of this Amendment quite briefly. Under Section 10 (5) of the War Damage Act, 1943, interest is payable on value payments at 2½ per cent. from the time the building is damaged until such time as the money is actually paid. The Chancellor has not made any value payments yet, although I gather he hopes to do so before long. As the Bill stands, the interest which would be received by the owner of property on value payments would be taken into account in the computation of profits for the purposes of the Profits Tax. I hope that the Chancellor will not suggest that what an owner receives by way of interest on value payments bears any relation whatever to what he could have got on his property if it had not been destroyed. The suggestion of this Amendment is that this provision should be left out. I put it to the Chancellor that it is unreasonable that this payment should bear Profits Tax at the rate of 12½ per cent., and the idea is that it should be cut down to the old rate of 5 per cent.

The Chancellor of the Exchequer (Mr. Dalton)

If I have understood this Amendment correctly, it is proposed that where interest is payable under this Section of the War Damage Act the Profits Tax should be reduced by 7½ per cent., as compared with what it would be under the Bill. If we were to adopt the hon. Gentleman's proposal it would mean that interest on value payments would receive preferential treatment as compared with income from investments generally. I do not know on what grounds that could be justified. In effect, a trader who was liable to the Profits Tax and who received interest on value payments would obtain a special advantage under this proposal which would not apply to a trader who derived his income from some other source. I cannot believe that that can be justified. We shall come later to the argument as to whether 12½ per cent. is the right rate or not, but, whatever the general rate, I do not believe that a case can be made for preferential treatment for a group of persons receiving income from a particular source.

Mr. Gammans

Does the Chancellor regard the interest payable on these value payments as profit from investments in the ordinary sense?

Mr. Dalton

Yes, because I do not think we can differentiate for this purpose.

Sir John Mellor (Sutton Coldfield)

I am sorry that the right hon. Gentleman has taken up this attitude, and I should like to ask him to give the matter further consideration. After all, it concerns income of an exceptional kind which has accrued over a period of time during which people have been out of their property and deprived of income from it. I think it rather hard that this sort of income, exceptional as it is, should be caught by the Profits Tax provided under this Bill. It is a special tax discriminating against the distributed portion of profits. The purpose of introducing that discrimination against the distributed portion is to encourage businesses to plough back their profits rather than distribute them. Assuming for the purposes of argument that that is a reasonable proposition in the case of profits generally, I submit that it would not be reasonable to apply it to this particular and quite exceptional source of income. After all, the proprietors have been out of their property and have been deprived of any income horn it over a period of years. I think it would be rather hard to expect them to plough this deferred interest back into their businesses. Surely they should be entitled to distribute that money without paying any special penalty. If the Chancellor would be good enough to look at the matter in that light, I think he would come to the conclusion that it would be fair to differentiate in favour of this class of income for this special purpose.

Mr. Dalton

I am very anxious that we should not have any more polemics than we need. There is not a big question of principle involved in this, but, at the same time, I cannot pretend that I am persuaded up to this moment. The particular case of the grounds on which we are imposing this tax of 12½ per cent. will come up later on, and those grounds are a little wider than the hon. Baronet has suggested. If, however, he will leave it there and not press this Amendment, I undertake to have another look at it, but, I must not delude hon. Members into thinking that I am even half convinced at present.

Mrs. Middleton (Plymouth, Sutton)

Is it not a fact that if the property had received a cost-of-works award it would not come under the Profits Tax, and that it is because it comes under the value payment that it is brought within the scope of this tax? It seems to me, therefore, that there is in fact discrimination between two different categories of property that were lost as the result of the war.

Amendment negatived.

Motion made, and Question proposed, "That the Clause stand part of the Bill."

Mr. Eccles

This is, perhaps, the most important Clause in the Bill because it is that which proposes to charge the Profits Tax forming the subject of Part IV of the Bill. We on this side shall vote against the Profits Tax in principle, but even if we conceded the principle, we should certainly have to vote against the form of the Profits Tax which the Chancellor brings forward in this Bill. I take the principle of this tax to be that it is desirable to single out the earnings of companies for direct taxation and, having levied that special rate of direct taxation, then to levy an additional tax on the pro- portion of those earnings which is distributed. The clause provides a flat rate of 2s. 6d. in the £ on all company earnings, and a rebate of 1s. 6d. in the £ on such of those earnings as are not distributed.

This is a long and complicated matter, and I think it would be for the convenience of the Committee if I dealt first with the form of the tax as brought forward in the Bill, and then proceeded to make some remarks to show that it is not good sense to have a Profits Tax in any shape or form. On the assumption, therefore, that the objects of the Profits Tax are desirable, in what manner should the Chancellor have levied these two rates of tax, one on all earnings and the other on distributed profits? Quite clearly he ought to have discovered the most simple, inexpensive and labour saving way of getting this benefit. He ought to have been mindful of the fact that all clerical staffs and all the officers in his Income Tax offices are very much overworked. If any hon. Member has been into an Income Tax office in his constituency lately, I am sure he has found that these people are working extraordinarily long hours. Therefore, the Chancellor ought to have tried to bring the tax forward in the most simple form.

The tax itself is set out in Clauses 24 to 40. Are these Clauses easy to understand and to apply? I do not wish to go through a catalogue of the difficulties of applying this tax. It would take a very long time. The essential point is that the Bill as drafted means that every company every year will have to wrestle with two separate computations of its earnings, one to arrive at its liability for Income Tax and the other to arrive at its liability for Profits Tax. The Bill makes permanent the separation of these two direct taxes, Income Tax and Profits Tax. The Clauses in this part of the Bill are the rules of the jungle wherein must be computed the liability to Profits Tax. The rules which govern the liability to Income Tax are quite separate and are unaltered. The duplication involved in making these two sets of calculations every year is very real and will take much labour, time and money.

On the assumption that the Chancellor's principles are correct, there should have been one tax instead of two. He should have imposed an additional 1s. in the £ on the ordinary Income Tax in respect of the earnings of companies. If he had done that, only one computation a year would have been necessary in order to assess the liability of a company to Income Tax. Had he done that, thousands of black-coated workers would have heaved an immense sigh of relief, but as it is, they are bound to say hard things about the Chancellor because he has dressed up in a very thin political disguise what is really an additional rate of Income Tax—an additional Is. in the £—by calling it a Profits Tax. Suppose he had increased the rate of Income Tax on company earnings from 9s. to 10s. in the £ How would he have gone on to tax distributed profits? There is a quite simple method in use in other countries. He could have imposed a withholding tax on dividends. He could have instructed all companies to hold back a certain percentage of all the distributions they made, whether dividends or the equivalent of dividends. That is very easy to collect, and it is done in other countries. I do not defend it in principle, but it is a far simpler way to apply what the Chancellor wants to apply under these Clauses.

There is a further objection to the form in which the Chancellor is hitting distributed profits. The proposals in this Clause place the entire burden of the Profits Tax, for which no rebate is allowed, on the ordinary shareholders. These people are the most enterprising and, therefore, the most desirable type of investors that we can have. The heyday of the fixed charge, whether it was a debenture or a preference issue, was in the Victorian era when it was thought that the capitalist system would go on from strength to strength, creating assets like the British railways which our grandfathers imagined would never be superseded. It seems to me that a fixed interest bearing irredeemable security is man's most insolent demonstration of his belief in the perfection of his own creations. We have passed that age. We no longer believe that assets last for ever and should have raised upon them irredeemable charges. It is the same in the economic sphere as it is in the military sphere. We have passed from the static warfare of barbed wire, sandbags and trenches to the mobile warfare of aircraft, tanks and commandos. We have also passed in the economic sphere from the static kind of company finance and production to an age of new inventions and ever-increasing changes in fashions.

4.15 p.m.

It is quite clear that in such an age the right kind of capital is ordinary capital. Indeed that was written into the book which the right hon. Gentleman the Chancellor of the Exchequer published some years ago. Therefore, if the Chancellor is right in principle to lay a tax upon dividends, why does he pick on that class of shareholder which is the best partner that labour and management can have? I described the ordinary shareholder as the best partner for two good reasons. First of all, ordinary capital represents what the Americans call venture capital. It is the kind of capital which is ready to run a risk on a new business or a new process. It is not very easy to raise a fixed charge until the earning capacity of the business has been proved. All our famous firms began with small sums of ordinary capital. Beginnings are adventurous. How will any firm which is to become famous in the future, start? It will start with ordinary capital. Yet it is exactly that kind of capital which this tax is hitting.

The second reason why ordinary shareholders are of advantage is one that ought to appeal to all hon. Members. The ordinary shareholder expects a good reward in good times, but he knows that in bad times he has no right to reward of any kind. Therefore, he acts as a sort of financial cushion on which management and labour can rely when orders fall off and when unemployment is threatened. If the capital of a company is not a first charge upon the earnings of a company, then it is quite clear that work and wages can come first, as they ought to. That situation can only come about when the whole of the capital is in ordinary shares. It is highly desirable that we should encourage it. The Chancellor knows this quite well, and yet he introduces a tax which concentrates the whole burden upon the kind of shareholder who is most desirable in the interests of expansion and efficiency. I hope that he will give us some explanation why he has adopted this plan.

So much for the form of the tax. The principle is bad and the arguments against it are divided into two, those which apply to the general tax on all company earnings and those which apply to the additional tax upon distributed profits. It must be wrong to single out and tax one source of earnings from all the sources of earnings, even if it is the largest source. Other sources, like the rents on property, are to escape. There is no justice in that. That is the way the tax is drafted. It is particularly bad to select a source of income which comes from the productive assets of this country, upon which our standard of life depends, and which nourishes our exports. But one ought to be quite clear about this question of profits. There are a variety of things which can be done, and can only be done out of profits as well as the payment of dividends. A profit can be used to raise wages, to cheapen the products to the consumer, and to strengthen the assets of the company. A Profits Tax diminishes the fund out of which any of these good things can be done; in fact, a Profits Tax weakens every company upon which it falls.

If any hon. Member has any doubt about that, let him consider the effect of E.P.T. which, after all, was only a 100 per cent. Profits Tax above a certain standard. It was a socially desirable standard tax, but it has economic effects in many directions which are very bad. Many expanding firms, and many farmers paid most of their wartime profits away in E.P.T.—

Mr. Alpass (Thornbury)

And they had a good deal left afterwards.

Mr. Eccles

—with the result that they are now not able to re-equip their farms as they should. The effect of a Profits Tax, if it is a general Profits Tax on all profits, must be to diminish the fund out of which improvements can be made. There is no getting away from that. I ask the Committee, is it the moment when we are seven years in arrears in re-equipping British industry, to impose a tax which falls upon a fund out of which the main part of the re-equipment would be done? I know what the Chancellor will say. He will say that his additional tax upon distributed profits will offset this bad effect. He will say that it will bully company directors to retain greater sums in the company. He may say that, but the effect of the tax will not be that. Men do not distribute less, taking Income Tax and dividend together, because a penalty is imposed upon them, any more than they work more if penalties are imposed upon them.

Suppose there is a group of men whom it is desired should work overtime. Which would be the more likely method? To raise the bus and train fares at the time when they normally knock off work, thus penalising them if they go home at 5 o'clock, or to offer them more money for working overtime than the ordinary basic rates? I need not answer that proposition because it is clear that the inducement will be far more effective than any form of penalty. Why is it that, when His Majesty's Government have to deal with the middle-class, they always prefer penalties to inducements? That is the effect of this tax. This is an important point because I do not believe there is any difference in aim between the two sides of the Committee; that is to say, we both want to see a larger proportion of profits ploughed back. There is, however, a sharp difference between us as to the method which is most likely to achieve what is really a common object. On the benches opposite they prefer penalties, on these benches we believe in inducements—

Major Bruce (Portsmouth, North)

Would the hon. Gentleman describe the Income Tax Act, 1945, which granted new capital reliefs, and so on, as being a penalty on industry? That has been maintained by my right hon. Friend.

Mr. Eccles

I am glad the hon. and gallant Gentleman has walked straight into my next argument. I was about to say, as he will realise in a minute, that the proper way to deal with this is to go a step farther than my right hon. Friend the Member for the Scottish Universities (Sir J. Anderson) went in the Income Tax Act, 1945, which, after all was introduced by another Chancellor and that is indeed the sensible way. The sensible way to secure the retention of profits in a business is, as the hon. and gallant Gentleman pointed out, to increase the allowances for wear and tear, for scrapping old machinery, for buildings and extensions. That way has great advantages and if we had been in office we would have extended the 1945 Act. We would then have been certain that any allowances that were made were only given when the company did something with the money. Under the Chancellor's system of rebate, he has no such guarantee. For all he knows, any profits which are retained as a result of Clause 24 will be kept in cash. That is not using the Budget in a sound way.

I come to the final point of principle. The Chancellor cannot defend this tax on economic grounds. He knows quite well that the tax, as has been admitted in past times and in textbooks on this subject, must injure private enterprise both in its efficiency and in its capacity to expand. He knows quite well that it is on private enterprise we depend for our exports. He will have then to defend this tax on grounds of social justice. He will have to say that although its effect—and any unprejudiced person will agree with this—is to make us all poorer, yet it has another effect: it will make some of us less vindictive and less jealous of each other, and that psychological advantage outweighs the economic disadvantage. I believe that argument to be quite fallacious. I do not defend any particular distribution of the products of industry as sacred from one generation to another. I think the distribution of the great products of industry must be looked at from time to time and brought up to date according as the thought of the country advances.

I would not wish to worry the Committee with any figures, but it is well to realise what has happened in the change of the distribution of the products of industry in recent years. In 1938 the amount of profits available for distribution by public companies in the United Kingdom was £392 million. In 1940, it had sunk to £299 million. In 1945 it was £307 million, and in 1946 it was £318 million. In other words, in 1946 it was 15 per cent. or 16 per cent. below what it had been in 1938.

Major Bruce

After E.P.T.?

Mr. Eccles

No, I do not think so.

Major Bruce

Is the hon. Gentleman sure?

Mr. Eccles

The hon. and gallant Gentleman asks if that is after E.P.T. I asked the competent statistician in the Library for the figures before E.P.T. but I am prepared to go back and check that again. Average weekly earnings in October, 1938, were 53s. 3d.; in July, 1945, 96s. 1d.; in July, 1946, 100s. 5d. That means that earnings doubled, while the amount available for distribution of profits was down by 15 per cent. I am not here to say that that transfer, which represented an increase in one case and a decrease in the other was too big or too little, but I want the Committee to notice that there has been a large transfer, and no doubt it was that transfer which was in the mind of the right hon. Gentleman the Lord President when he made his speech at Margate.

4.30 p.m.

In the closing moments of my speech I want to discuss the general question of profits. What is it in the matter of profits to which the Socialist Party really objects? I do not think they object to very large profits, provided they are distributed over a large number of shareholders—the "Co-op" for example. If all the shares in Butlin's camps were held by visitors to the camps, I do not suppose that the Socialist Party would object to a high rate of dividend on Butlin's shares. I think the real objections are two: first, to an excessive rate of profit on turnover; and, second, to very large shareholdings in very few hands. I go some way in supporting those two grievances. But the Profits Tax is one of the stupidest methods ever thought of to deal with either of them It is a most ineffective system. Let us take, first, excessive profits. They arise because of the abuse of some privileged position, such as a monopoly or a near monopoly. The Profits Tax is not the way to deal with that situation. Such excessive profits should be investigated, shown up and should have light thrown upon them, and then one of two things should happen. Either they should be used to increase the salaries and wages of the producers, or they should be used to cheapen the price of the product. The Profits Tax is quite ineffective for doing either of those things. It is too low to attack monopoly profits because it can easily be passed on. On the other hand, it hits a tremendously large number of reasonable profits.

With regard to large shareholdings, here again the appropriate instruments for dealing with them are the Income Tax and Surtax which deal with the income when it is in the hands of persons, having regard to the total size of their income, and the Estate Duties when large fortunes pass at death. The Profits Tax is a hopelessly clumsy and inefficient system to deal with excessive profits or what may be considered by hon. Members opposite to be too large, sums flowing out of businesses in the direction of too few individuals. I would impress upon the Committee that the Profits Tax is bound to injure the source of revenue which it is designed to tax. We cannot afford that at this time, when any objective relating to social justice can be achieved in a much simpler and fairer way without injuring this very vital part of the mechanism of our economy. I object to the Profits Tax principle, and I also object to it in the foolish form in which it is brought forward in Clauses 24 to 40, the folly of which will become more apparent as we go through the Amendments. I do not expect the Chancellor to have the courage to take these Clauses away and bring forward a simple and just tax, but I do expect any hon. Member who cares more for the expansion and efficiency of British industry than for soaking the rich, to know that the right hon. Gentleman ought to do so.

Mr. Douglas Jay (Battersea, North)

I believe this tax is a good one, and that this is the right time to raise it; and I am prepared to defend it not on grounds of social justice, but on economic grounds. The hon. Member for Chippenham (Mr. Eccles) quoted some figures relating to profits before the war and at the present time, but, to put the matter in perspective, we should remember that if we take the total amount of wages on the one hand, and profits and interest on the other, as a percentage of national income, we find that between 1938 and 1945 profits and interest have risen more than wages. I say that merely to put the matter into perspective.

The hon. Member for Chippenham put a perfectly legitimate argument to the effect that it is undesirable to apply taxation too highly to the enterprising section of the community, as against the rentier section of the community receiving fixed interest. In general, I sympathise with that argument, but I suggest that it is totally irrelevant in the conditions of 1947. The hon. Member has overlooked two facts. First of all, E.P.T. is disappearing, and this tax will take the place of E.P.T. If we have nothing to take the place of E.P.T., a large number of companies would enjoy enormous increases in income this year, which would not be desirable from any point of view. The second point which the hon. Member has overlooked is the lesson of the Economic Survey, which is that we are living in an extremely inflationary period. In such a period prices, profits and dividends are going up. The argument that we do not want to tax enterprise as against the rentier is completely irrelevant in these conditions. The hon. Member mentioned famous companies which had built themselves up on profits. I have been looking only this morning at reports of company meetings which have been held in the last few days. Practically every one of those companies, as everyone would expect in these conditions, reports larger profits and, in many cases, larger dividends. To quote from the eloquent managing director of Morris Motors this week: The recommendation of an increased final dividend, bringing the total to 22 per cent. tax free, is fully justified by the level of manufacturing activity of the various companies. and he added that there was a 2½ per cent. tax-free bonus. I would add that that was in spite of the fuel crisis. The chairman of John Summer, Limited, said that increased profit results for 1946 were due to improved production and greater efficiency all round. That is a very satisfactory state of affairs under a Labour Government. I would also mention that prosperous and successful company, the "Daily Mirror," which raised its dividend from 15 per cent. to 30 per cent. this year, precisely for the reason that E.P.T. had disappeared, and they, therefore, had extra sums to distribute. The "Sunday Pictorial" also showed higher profits. I could also quote the case of Colvilles, the famous Scottish steel company, and many others who are doing equally well. I only mention these to illustrate the fact that profits and dividends are going up, and that, in those conditions, there is a stronger case for increasing the Profits Tax rather than reducing it.

I would like to refer to the classical and orthodox argument which the hon. Member for Chippenham put forward, to the effect that this tax is a restraint on enterprise. That is not really true today. I think the hon. Member knows that the reality in industry today is that we are not suffering from lack of enterprise. In- deed, owing to the financial conditions, we are suffering, if anything, from excessive enterprise, in the sense that far more firms are seeking to build extensions than the Government can possibly admit. If the hon. Member had had the job of licensing factory extensions in the last two years, he would know that the Government's difficulty at the moment is to pick out a small minority of extensions which they can permit to go forward. In those circumstances, the hon. Member's argument has no substance. He is suffering from a throwback to the depressing, deflationary days when his party were in power, and when there was an insufficiency of enterprise. I believe the same applies largely to enterprise in the form of increased investment in plant and machinery, as opposed to building.

There is no lack of money ready to be invested in plant and machinery today. There is any amount of money in excess of the machinery available. What limits enterprise of that kind is the productive capacity of the machinery industries. We all know of the familiar case of the textile machinery industry. Therefore, there is very little substance in that argument. In addition, the truth is that the people who make the active decisions in industry today are the managing directors of companies, the other directors, and also the general managers. To a considerable extent, if the directors can show a large profit for their company, it does not matter a great deal to them if the Treasury intervenes between them and the stockholder. Therefore, I defend this tax as a suitable tax in the conditions of 1947, and I defend it further as a notable part of the Government's general policy of counter-inflation in this year's Budget.

Mr. Nigel Birch (Flint)

The hon. Member for North Battersea (Mr. Jay) said very truly that we were living in an inflationary period. Unlike the Chancellor of the Exchequer, he does not think that the day of inflation has largely passed away. As he rightly said, as a result of that inflation we have both the inflation of profits and a resulting distortion of our economy in shortages of all sorts. That is a result of the inflation. The inflation is not caused by the increase in distributed profits. When he was bringing in his Budget, the Chancellor of the Exchequer said that these increased dividends were the clearest case anywhere in our national economy of an inflationary element. All I can say is that if he really believes that, and if he thinks they are more powerful than his monetary policy, more powerful than the level of Government expenditure, it is quite certain that inflation will continue. If we look at the relevant figures, it is nonsense—

Mr. Jay

Surely the hon. Gentleman would not question that one way of defeating inflation is to limit increased dividends.

Mr. Birch

Clearly, it mops up some but it is not anything like the main element. As I shall proceed to show, and as I think the hon. Member for Chippenham (Mr. Eccles) did show, this is about the worst way of the lot of doing it. Nobody believes that more than the Chancellor. because as my hon. Friend the Member for Chippenham recalled in various publications and speeches made at the time of the Corporation Profits Tax, which is precisely the same type of tax, the right hon. Gentleman said many things pointing out that a tax which falls upon the equity holder is about the worst type of tax we could possibly have. In those days, the right hon. Gentleman was at the London School of Economics. We may charitably assume that he was then endeavouring to follow the light of reason. He is now endeavouring to follow his political interests. He wished to be the Voltaire of the London School of Economics; now he wishes to be its Robespierre.

The present policy of His Majesty's Government relies on past capitalist successes, on present capitalist successes, and it postulates perfectly prodigious capitalist successes in the future Otherwise, all the plans for the future will go west. The Government are gambling on an enormous success for the private sector of industry in this country. At the same time, we are told that to try to distribute a profit, either as a bonus or as a dividend, is wrong, and in effect, that it would be bad to make any profit at all. The unctuous Pharisees opposite speak of profit as if it were something better not mentioned, like ringworm. What the right hon. Gentleman is doing is to enter this private enterprise horse in the National Derby, mounting it himself, and giving it no food. It is not very likely to be a winner. This sort of policy is like the sort of policy of the Shinwell school followed by many hon. Gentlemen on the front and back benches opposite. They favour an economic policy under which we can only exist if we get American charity, and at the same time abuse America. Our economic policy can only succeed if the system is allowed to work. Hon. Gentlemen opposite are following a policy both of denigration and of abuse, and taxation which will not allow the system to work.

The most weighty objection to this tax is that it is conservative in a bad sense. It will tend to freeze—to ossify—our economy. It is all very well for the hon. Member for North Battersea (Mr. Jay) to say that managers are the only people who count. They are not the only people who count. People are not out to risk their money on a 90 to one chance against. That will not work. Everyone perfectly well knows, it will not happen. Time will show that the Chancellor was perfectly right in what he said in the 'twenties and entirely wrong in what he is doing in the late 'forties.

4.45 p.m.

Mr. Norman Smith (Nottingham, South)

I detest all taxation, but I support this tax at this particular time because it is expedient. Of course, any taxation is an invasion of the liberty of the subject and, as such, I resent it. I am 57 years of age and I hope to live to see substantially less taxation than there is today. But at the moment we are in 1947, and I do not think the hon. Member for Chippenham (Mr. Eccles) ought to get away with what he said about equity shareholders. That was repeated by the hon. Member for Flint (Mr. Birch). Nor do I think that the hon. Member for Flint ought to get away with what he said about my right hon. Friend depending for the future on what the capitalists are going to do.

In reply to the hon. Member for Chippenham, I submit that, in fact, equity shareholders are not the people who take risks, except in the way that any people who gamble take risks. Many of my constituents spend their evenings filling in football pools. They put their money on their judgment, and they are taking risks. Some of my constituents buy the "Financial Times" every day and they keep graphs on squared paper of what happens to this, that or the other security. It is a fascinating game, especially if one keeps it up for a few years. I would not like people to assume that because securities go up for a few years they will always go up. Today the equity shareholder is merely the rentier who has changed his sphere of operations because he fears the possible consequences of inflation. He wants to hedge against it and he does not quite like the look of flied interest securities. It is only a case of studying the "Financial Times," and paying a competent investment adviser or a stockbroker, It is only a case of doing these graphs on the squared paper and doing them very patiently over a number of years. They are not taking risks. It is not the equity shareholders' investment that causes new industries to spring up.

My hon. Friend the Member for North Battersea (Mr. Jay) pointed out that economic enterprise and all that kind of thing today is not in the hands of the money investors. It is in the hands at the managerial classes, some of whom are on the benches opposite. They perform useful work, but the equity shareholder today is in precisely the same position as those of my constituents who turn always first to the sporting page—

Mr. Birch

Is not the hon. Gentleman arguing a little too much for himself? Not very long ago he boasted what a successful gambler he was. A great many people do not gamble.

Mr. Smith

The equity shareholders are in a similar position to those constituents of mine who turn to the sporting columns. They are not in any way forwarding industry or contributing to enterprise. They are doing nothing whatever to augment the wealth of the country, but are only looking for a reasonable way of getting an income without having to work for it, one which will hold its value against the possibility of inflation. I submit that the equity shareholder is a vastly over-rated person. I know him perfectly well; I have lived with him for 57 years.

I want also to refer to what the hon. Member for Flint (Mr. Birch) said about the future of capitalists. Of course, they are going to control the bulk of industry. The Government are going to leave about 80 per cent. of the total productivity of the country in the hands of the managerial classes, the people who have come into being as a result of the silent revolution which has been going on. Hon. Members have spoken of directors as if they were the people who had produced the great amount of wealth which the Chancellor will be able to tax, whereas the main cause has been the very rapid progress of science, invention and technology, which would not have been possible but for the wisdom of the Government in nationalising, modernising and manning-up the great sectors of basic industries, without which all other enterprise is of no avail. I think the Government have done a good job, and I hope this tax will remain.

Mr. Spearman (Scarborough and Whitby)

I think the hon. Member for South Nottingham (Mr. N. Smith) has a most disarming way of talking nonsense. He told us how easy it was to pick winners on the Stock Exchange, and how he did it with such monotony that he gave it up. I would say to him that, if he goes into the matter more carefully, he will find that many great companies through no fault of their own, have had to write down their capital and have been making losses, and I think it would be just as well if hon. Members opposite realised that nationalising industries does not necessarily mean profits for the taxpayer; it may mean liabilities. The hon. Member for North Battersea (Mr. Jay), if I understood him rightly, was stressing the increased distribution of profits on ordinary shares, as compared with wages, and he feared the inflationary effect of that distribution.

In order to get the right perspective, I would like to give figures for the distribution on ordinary shares, which amounted in 1944 to £350 million, or 5 per cent. of the national income, whereas the amount paid in wages in that year was £2,865 million, or 41 per cent. of the national income. I am not in any way suggesting that that is a wrong proportion, but I am saying that hon. Members should have the right perspective. An increased distribution on ordinary shares could not have such an inflationary effect as has been implied. If the Government really do not like ordinary dividends, they have only to repeat their fuel policy of last year and they will soon find a substantial fall. The hon. Member for Chippenham made such a very clear and forceful case against the tax that I feel like repeating the re- mark of a former Yorkshire hon. Member, a long time ago, who, when called upon to make a speech in his constituency after a tremendous oration by Mr. Burke, got out of his dilemma by saying "I say ditto to Mr. Burke."

I would like to ask the Chancellor a question on one particular point with regard to this tax. The Chancellor obviously thinks that the differentiation between distributed and undistributed profits is a way of implementing his view that dividends should not be increased. Section 21 of the Finance Act of 1922 says that if companies in the control of five or fewer directors have not distributed a reasonable proportion of their profit, the whole are portioned over all the shareholders. If I may illustrate the point, I would quote a conversation which I had with a business man who is well known to the right hon. Gentleman; indeed, a man who made such a contribution to the return of this Government to power that he carries a heavy weight on his shoulders and is perhaps less happy today than he was a year ago. He told me that, year after year, he had wanted his company to distribute a smaller proportion of its profits, but his accountants advised him that, if he did that, he would have to pay so much in Super Tax that it would be very disadvantageous. This year he said, "At last, I can do what I want, and distribute much less." His accountant said, "No, you will gain a little on the one hand on the difference in tax between distributed and undistributed profits, but you will lose far more on the other hand owing to the great increase in the amount of Super Tax you will have to pay." That may have been all very well in 1922, or even in 1932. It may then have been a good plan to encourage greater spending by increasing distribution then when there was unemployment. But I would suggest that what may have been right in 1932 is not necessarily right in 1947, and that this Government, in this case, would appear to be at least 10 years out of date. However that may be, whether right or wrong, in those years it cannot be right at one and the same time to have two influences pulling opposite ways, one to encourage distribution and another to discourage it, and I ask the Chancellor to look again at that point and see if that anomaly cannot be removed.

Major Bruce

The hon. Member for Chippenham (Mr. Eccles) seemed to have some quaint ideas as to what he regards as "sources of income," and he has been referring to ordinary shares as a source of income. Whatever may be said about ordinary shares and the money invested in the ordinary shares of companies for the purpose of capitalisation, in the sense in which we are discussing them here today we are discussing them rather as a mechanism of distribution than as a source of income. The source of income of a company, after the initial capitalisation, surely lies in the hands of the management and technicians and the workpeople inside the factories themselves, and the Chancellor made it clear from the outset that he had two reasons for the initiation of this tax.

First, he was disturbed, as anybody who has studied statistics must be, by what is described as the inflationary tendency, and secondly, he was concerned with securing the maximum stimulus in order to get companies to plough back their profits into their businesses for purposes of capitalisation. My only doubt about the existing situation is whether, in fact, this proposal will be enough to achieve the purpose which the Chancellor originally set out to achieve. From certain speeches made from the Opposition Benches on 23rd April last, in the Debate on the Budget Resolutions, one would gather that the initiation of this tax was going to have an extremely bad and most depressing effect upon industry generally. The hon. Member for Chippenham talked at some length on the former occasion about the effect on small businesses. I note that today he has dropped that point from his armoury. What are the facts? If one looks at the financial newspapers—and I am referring now to the "Investors' Chronicle," which, after all, does record, broadly speaking, the activities of the investing class—one wonders what has taken place since 23rd April, when the prophets of gloom opposite were saying that this would have a depressing effect on industry. The "Investors' Chronicle," on page 982, said: May was a good month for most sections of the Stock Exchange. Indeed, for industrial equities it was a banner month, to judge from our Industrial Share Index. For this Index last month not only wrote off the fuel crisis losses; it reached a higher level than that established at the end of January, before the crisis. These are not the signs of depression, and they completely belie some of the gloom and despondency which has emanated from the benches opposite for purely party political purposes. I revert to my original contention. I expressed doubt as to the sufficiency of the tax. Since the Debate on the Budget Resolutions, when we were discussing the Profits Tax, other company figures have been issued. I hold here a copy of the issue of the "Investors' Chronicle" for 7th June. It contains a table called "Industrial Annual Results Summarised." I find that the ordinary dividend paid by Messrs. Allied Industrial Services has gone up from 36⅔ per cent. to 50 per cent.; that British Thermostat ordinary dividend has gone up from 18½ per cent. to 23½ per cent. The Leicestershire colliery and pipe company's ordinary dividend has doubled itself, having gone up from 7½ to 15 per cent. for last year. There are many other examples. One is Oddennino's Hotel and Restaurant, whose dividend has also doubled itself by going up from 10 per cent. to 20 per cent.

5.0 p.m.

Mr. Stanley

I forget for the moment what were the rises in the "Daily Mirror" and the "Sunday Pictorial."

Major Bruce

I have not those figures here, but I should assume, in view of the very sensible policy which is very often followed by those newspapers, that the profits have gone up very much, increasing the return to the shareholders. Nevertheless, in view of the way in which those companies have seen fit to distribute their dividends, the Chancellor's intention in endeavouring to control the amount of money coming into circulation through the medium of distributed profits on ordinary shares, is wise and one which everybody should support.

I now wish to refer to a point that was mentioned by the hon. Member for Chippenham during the Debate on the Budget Resolutions. He made rather much of the idea that the Profits Tax would have a very bad effect on small businesses. I do not think the owner of a small business should be made to shudder by those words of gloom from the hon. Member. During the hon. Gentleman's speech, I pointed out: The hon. Member knows that in the small companies to which he is referring, it is the policy, where a director does have a large ordinary shareholding, subject to the limitation which the hon. Member has given, for him to draw the bulk of his remuneration by a salary or a fee. This business about a director drawing a dividend is not, in fact, in accordance with modern practice. The hon. Member replied: The hon. and gallant Member does not know what he is talking about. He has only to consider the small engineering companies, and I suggest that he has a talk with the hon. Member for East Middlesbrough (Mr. A Edwards), and he will find that what he said about modern practice is not true."—[OFFICIAL REPORT, 23rd April, 1947; vol. 436, c. 1130.] It so happens that I have looked around further, believing that in that particular regard I did know what I was talking about. I have been fortified to find that, in the Report of the Committee on Company Law Amendment which was discussed on Friday in the House, in the Debate on the Companies' Bill, paragraph 59 says: Another abuse which has been found to occur is that the directors absorb an undue proportion of the profits of the company in remuneration of their services so that little of nothing is left for distribution among the shareholders by way of dividend. That fortifies the view which I expressed. The hon. Member for Chippenham knows that the effect of the tax upon small businesses will be very small indeed. All classes of the community have now to pull their weight in the battle against inflation. Certain sections of organised workers have behaved with very great moderation in pressing their wage claims. We have had an announcement from the Government this afternoon upon equal pay. It must have been very repugnant to His Majesty's Government to make that announcement, as they have been committed fully to the principle very much longer than have the Opposition.

Mr. Stanley

The hon. and gallant Gentleman need not shake his head threateningly at me. I was not disputing his claim. There is nothing particularly enviable about having been committed for a very long time to a principle now repudiated.

Major Bruce

I cannot accept the inference contained in the right hon. Gentleman's remark. All sections of the community have to bear their share in the battle against inflation. The inflationary position is a very real one. It needs only a comparatively small amount to tip the scale. If the organised workers and the women are prepared to bear their share, as I believe the bulk of them are, it is only reasonable to ask that a section of the community whose active productive energies are not of such momentous consequences should also bear their share. I regard this tax as one method of achieving that end. My only regret is that it is not large enough. I unhesitatingly support it.

Mr. I. J. Pitman (Bath)

The hon. and gallant Member for North Portsmouth (Major Bruce) has been an assiduous reader of the "Investors' Chronicle" and he has given us many examples of something which I think is clearly irrelevant. He is a very knowledgeable man in these matters, but he rather reminds me of the man who tasted whisky and soda and found it intoxicating, who tasted brandy and soda water and found it intoxicating, and then tasted gin and soda water with the same result. So he gave up soda water as a drink, because it was too intoxicating.

The real issue is that there are many causes behind the rise in prices and the increases in dividends, and that none of these causes has been that this is a good tax. It is a bad tax and the prices-have gone up notwithstanding the tax which is a bad one. The hon. Member for South Nottingham (Mr. Norman Smith) would have us believe that the equity shareholder is not carrying out a social service. To my mind that is absolute nonsense. Somebody has to take the risk. The management must be the people to decide what risk is worth taking and what risk is not, but it is ultimately the equity shareholder who takes the risk and acts as the cushion. Profit or loss is inevitable and there must be someone whose function is to act as the cushion. The 'bus goes out in the morning and it is going inevitably to make either a loss or a profit. It is fundamentally so improbable as to be impossible that the two sides, receipts and expenditure, will exactly balance. Somebody, therefore, has to take the risk and supply the cushion, and that someone is the equity shareholder.

I personally am considering a risk at the moment. If I go into it, I shall be an equity shareholder both as entrepreneur and as a "cushion." One of the wrong, nesses of this tax is that it is a tax upon the entrepreneur and not a tax upon the debenture holder. The hon. and gallant Member for North Portsmouth has said that all of us must share in the task of stopping inflation. If the tax had been levied upon debenture holders and the others who take no risk as well as upon equity shareholders, I do not think that anybody on this side of the Committee would have objected in the slightest. If the real issue is that unearned income should be differentiated and more heavily taxed than earned income, that would have caused us no difficulty. We have that principle already; it is one of which we have approved on all sides of the Committee and it is a principle capable of extension. I should not be opposed to such an extension. What I object to is the selection of one particular kind of alleged receivers of profits for discriminatory taxation, and that the most enterprising kind. May I again give a personal example of the unfairness of this tax? In my own company, we have redeemable preference shares. I thank the Chancellor very much indeed for his cheap money policy, because it has enabled us to substitute a 3½ per cent. Note Issue for a 5½ per cent. preference share. [An HON. MEMBER: "What about the poor widow?"] The Chancellor was responsible for his policy, but there is going to be quite a nice premium on redemption for the widow; she is not going to do badly, but whether she is swindled or does well is not relevant. The issue is that, whereas now the company has to pay tax on all the preference dividends distributed, when we have substituted notes there will not be any such tax to pay. Therefore, the situation is that, when we can least afford the tax, and when we are a relatively poor company, the tax is great, but when we become a rich company and can more afford it, the tax will fall off.

It is because this is an unfair and illogical tax that we object to it. Last year, I nearly put down an Amendment to change the name of the Profits Tax to the "Equity Profits Tax" for that is what this tax really is. The Chancellor of the Exchequer has already allowed me to change the name of one Bill, and the President of the Board of Trade has allowed me to change the name of another. The objection to the tax is that it discriminates against those people who are prepared to take the risk and to do the developing—those who take the cushion. The debentune holder—the rentier—is the fellow who sits tight and takes his set dividend, but no risk. All the risk falls on the equity shareholder. Later, if you are good enough to call me, Mr. Beaumont, I shall be taking the case of the Lewis Partnership where the whole of the equity is owned by the employees. The whole of this new tax will fall on these employees of that firm because it is a tax discriminatory against the equity holders, who are the staff. I want hon. Members opposite to realise that our opposition to this tax is based on logical thinking and real conviction, and that it is a wholly bad one in principle.

Mr. S. N. Evans (Wednesbury)

The hon. Member for Bath (Mr. Pitman) said that he thinks this is a bad tax. I think it is a very good tax, and am sorry it does not go very much further. It is only right and proper that we should have regard to the inflationary trend. That is a very important matter indeed; but, quite frankly, I do not think that this very small tax will have much influence on that. There is a psychological aspect of this matter which, apparently, escapes the notice of hon. Members opposite. We are living in a period in which the workers are being asked to forgo long coveted prizes in terms of improved wages, hours, and conditions of work. Some of us are having to go into the country at weekends to explain to our constituents why this is necessary. I must say that wherever I go the position that I pose is generally accepted after a good argument; but, very often, one is asked, "What about the industrial concerns which are substantially increasing their dividends in this period during which you are asking us to forgo these long coveted advances? That, of course, is a natural and reasonable thing for them to ask.

I have said before, and I say again, that at the present time many boards of directors are acting in a manner which can only be described as flagrantly antisocial and psychologically stupid. It is true that we are passing through a revolution by consent, but we can gat through only if a high degree of responsibility is evidenced by all sections of the community. I say very definitely that boards of directors who are engaging in these anti-social practices in the present circumstances are in a very high degree irresponsible. I am not averse from a progressive alleviation of taxation on earned income; I am not opposed to helping those managers and technicians upon whom very largely depends that industrial renaissance without which our living standards cannot be maintained. I understand these people. I know that men are prone to reveal their worth to the community by the clothes on the backs of their women folk, by the number of horses under the bonnet of their cars, and by the size of the house in which they live. Some may think that deplorable but, nevertheless it is human nature. As I have said, I am not opposed to a progressive alleviation of taxation on earned income, but I am opposed to increased doles for somnolent rentiers in present circumstances. For that reason, I support this tax wholeheartedly, and am only sorry that the Chancellor did not make it stiffer than it is.

5.15 p.m.

Mr. Pitman

Before the hon. Member sits down, will he say whether the difference between the debenture holder and the note holder, on the one hand, and the entrepreneur, on the other, is not that the debenture and note holders are somnolent rentiers, whereas the equity shareholder is the lively risk taker?

Mr. Evans

That could be an argument for carrying the tax further.

Lord Willoughby de Eresby (Rutland and Stamford)

I wish to make only one small point as briefly and as quickly as possible. I think that most hon. Members who have spoken in the Debate on this Amendment have directed their remarks to public companies. I would like to say a word about the treatment of private companies in connection with the Profits Tax. As the Chancellor knows, private companies are not allowed to put more than a small proportion of their profits to reserve. The remainder has to be distributed, and comes under this 12½ per cent. Profits Tax. But it is hard to button up that with the statement which the Chancellor has often repeated that he wishes to see money ploughed back into business and put to reserve. I think that that is a policy with which all sides of the Committee agree. In the case of a private company which is not allowed to place money to reserve, it is illogical and unfair to make it pay an extra tax on the money which it has to distribute. This dual policy is particularly unfortunate at the present moment, especially with regard to landed estates.

As the Committee know, we have had the Third Reading of the Agriculture Bill which makes statutory certain obligations and responsibilities on owners of properties as regards fixed equipment, improvements, maintenance, and so on. These obligations were always theirs, but were not statutory, and owners did not incur the penalty of dispossession if they were not carried out. As the hon. Member for North Battersea (Mr. Jay) so fairly and accurately pointed out, it is impossible to carry out these improvements at the present time. One cannot get the licence, the timber, or this, that and the other. It would be better in the general interest if some vigorous opposition were made to these deferred payments, if I may describe them as such. I can understand the Chancellor's difficulty. If the private company is put on the same basis as the others, a loophole is given for tax evasion; but if we cannot abolish this tax altogether, which this Amendment seeks to do, I hope the Chancellor will give instructions to his inspectors to be a little more lenient in their treatment in the future than they have been in the past.

Mr. Gallacher (Fife, West)

As I have sat here this afternoon, my mind has gone back 45 years. I remembered an old song of that time which began with the words: You have got a long way to go. I heard the Chancellor this afternoon say that he was carrying through a peaceful revolution. Good luck to him. I hope he makes progress. When I listened to the hon. and gallant Member for North Portsmouth (Major Bruce) quoting from the "Financial News," I could not help recalling that old song: You have got a long way to go. Forty-five years ago the proletarians of this country, particularly in Glasgow, used to march through the streets with banners flying, and carrying slogans. That recollection has made me think of hon. Members opposite who always seem to have the mistaken idea that capitalists are honest men. One of the outstanding slogans among the proletarians was: Rent is robbery: profit is plunder. The people of this country are absolutely certain, from all their experience, that just as the landlord is not necessary for the adequate use of the land, so the capitalist is not necessary for the adequate use of capital. The people can get on very well without him. He is there only to drain the vital lifeblood of the nation whenever he can. The proletarians of this country—the whole trade union moveinent—will support the Chancellor in this tax, and will support him to any further extent he wishes to go in the matter of the taxation of profits, because, as we have often said, when the workers of this country get what they are entitled to get—the full fruits of their labour—there will be no profits left to tax. I ask the Chancellor to go ahead in the action he is taking. I shall be happy if he succeeds in carrying out a peaceful revolution. He will certainly have the support of the proletariat in the line he has taken.

Mr. Dalton

It might be convenient if I said a few words at this stage, after a lively and interesting Debate in which my hon. Friends behind me have not abstained, as they sometimes do, out of kindly feelings towards the Opposition, from playing their full part in the exchanges, [Interruption.] We often think very kindly of hon. Members—we remember when we were in opposition. Several of my hon. Friends have encouraged me to go forward along this path—my hon. Friend the Member for Wednesbury (Mr. S. N. Evans), my hon. and gallant Friend the Member for North Portsmouth (Major Bruce), and my hon. Friend the Member for West Fife (Mr. Gallacher). I take note of what they have said. This emphasises the fact that it is a very moderate tax indeed which we are discussing this afternoon. I feel almost like Clive, when he said "I am astonished at my own moderation"—2s. 6d. in the pound after Income Tax has already been deducted from the liability. Whereas without Income Tax deduction I would have got an additional £36 million, I am going to get only an additional £20 million in a full year. I shall give an example of what should be balanced against this very small increase in this tax upon distributed profits.

This is a very moderate proposal. I am more astonished at those who oppose it altogether, than at those who have chided me for being so very moderate about the rate proposed. I would like to recall the point made some time ago by my hon. Friend the Member for North Battersea (Mr. Jay). This tax is in partial substitution for the Excess Profits Tax, which has now ceased. It is a very partial substitution when we think of the substantial sums which the Exchequer received during the war from the Excess Profits Tax. If that tax had been continued in peace time, although its yield would have been much less, due to the running out of war contracts, it would still have yielded a much larger sum than I am proposing to get from this tax. It is extraordinary how ungrateful certain sections of the community are. When the Excess Profits Tax was reduced, in my first Budget, to 60 per cent., there was a great blaze of excitement on the Stock Exchange—they could not believe that it was coming down lower than 80 per cent., and when we took it off altogether in the second Budget, there was another blaze of excitement on the Stock Exchange, very naturally. All that has been forgotten, apparently, by a number of hon. Members. It would have been a mistake, for reasons which I have argued previously, to have continued the Excess Profits Tax, because it was designed for war purposes and the war period. It was based on a standard period which it was not convenient to carry forward into peace time. It should always be kept in mind, in discussions on this tax, that this is a very mild and partial replacement of the Excess Profits tax, the removal of which has undoubtedly enabled a large number of industrial concerns very substantially to raise their dividends.

There are three broad arguments in favour of having this tax at the present time. First, it was necessary to have some partial substitution for the revenue which would be lost through my repeal of the Excess Profits Tax. Secondly, as the hon. Member for Flint (Mr. Birch) has recalled, there is no doubt that whatever may be said about other elements in the income of the community, this steep increase in the income of persons who draw their income from investments in industrial concerns is inflation—an increase in purchasing power without an increase in production for which those persons are responsible. These are people who have the good fortune to have their investments in certain ordinary shares in various ordinary companies, from which they are receiving larger dividends for no more work than before. That is inflation in the freest sense of the word. I emphasise that, in view of the onslaught being made upon the livelihood of widows by the hon. Member for Bath (Mr. Pitman), taking advantage of the cheap money drive and reducing interest from 5½ per cent. to 3½ per cent. Having regard to this sort of thing, which is going on all over the country, it seemed to me that there should be a balance so that the widows should not suffer any more, and that people who were getting substantially increased dividends on their investments should make a certain contribution.

Mr. Pitman

If the Chancellor is aiming this personally at me, I would ask him to accept my assurance that there has in the case of our company been no such "substantially increased dividends."

5.30 p.m.

Mr. Dalton

The argument still holds. If other people have a smaller amount of money by reason of the cheap money policy, it is quite right, in my opinion, that it should be regarded as a piece of fair dealing that where certain people are having their incomes reduced in the national interest, by reason of the cheap money policy, others who have increased their income, largely through the operation of the cheap money policy, should pay a little more.

The hon. Member for Scarborough and Whitby (Mr. Spearman) and the noble Lord the Member for Rutland and Stamford (Lord Willoughby de Eresby) have raised questions to which I should like to reply. I should like to give them some reassurance against the fear that we shall so administer the rules about distribution of one-man company profits as to cancel out the gain which lies behind this particular tax. The position is this. Where a one-man company does not make what is regarded as a reasonable distribution of its profits, the whole of the profits may be brought under charge to Surtax. That is not an iniquity that I have perpetrated. It has been the law for many years.

Mr. Pitman

Made in 1922

Mr. Dalton

It goes a long way back—to 1922, yes. The law does provide that, in considering whether distribution is reasonable under the terms of this statute, the Special Commissions are to have regard to the desirability of ploughing back profits into a business for its maintenance and development. That is in the statute. What I should like to make clear is that where there has been—this is the change in taxation now being proposed—a dividend payment made in past years and accepted by the Special Commissioners as reasonable, even if profits have increased, as they may well have done—this is an administrative arrangement to which I desire to give publicity—no objection will be taken by the Board of Inland Revenue to the continuance of the same rate of dividend even on increased profits. I hope that that will go some way to reassuring the two hon. Gentlemen. It is designed to prevent any sort of contradiction, which they thought might arise through the administrative practice of this new change in the law.

All these taxes have roots in the past, and this tax which we are discussing was the invention of Mr. Neville Chamberlain. He called it the National Defence Contribution. It was his idea. Originally he had a different idea. There was the National Defence. Contribution Mark I, which was not viewed with great approval by Parliament at that time; and, indeed, the Conservative Party, in particular, did not like it. There was substituted for it National Defence Contribution Mark II. That is the tax which I am slightly developing and amending now. What that tax had in common with what we are now discussing was, that it deliberately picked out and discriminated against profits derived from equities and from ordinary shareholding. The only difference I am making is that I am introducing a differential element. We put the same rate as Mr. Neville Chamberlain put—there is no change here—a shilling in the pound, 5 per cent., on profits when ploughed back. The only change being made is, that I am raising the rate to 12½ per cent. on that part of the profits which is not ploughed back. I share the view of my hon. Friend that this is a very mild proposal.

The hon. Member for Chippenham (Mr. Eccles), who always commands our attention by the way he marshals his arguments and the very clear way in which he puts them, thought it would have been better to increase Income Tax so as to achieve substantially the same result. I am inclined to differ from him. It would have involved, had we followed that course, a further differentiation within the Income Tax scheme—for this reason, I suggest: the Income Tax does now simply differentiate between earned income and investment; that is differentiation as between sources; but this tax imposes a differentiation as between use—not as between sources—but as between the use and purpose to which the moneys are put. If, in one case, it is ploughed back, it is at the lower rate; if distributed, at the higher rate. Therefore, we should have had a further complication grafted on to the Income Tax system. We did consider the alternatives, and it did seem to me, after consideration and advice, that it would be a very troublesome method, and it did, therefore, seem to me that this was the right way to do it.

What part this tax will play in the future years remains to be determined, and I do not express any view here today. I merely say that I shall not get much out of this this year, as I explained in my Budget Speech. The additional £20 million which will come from this proposal will come in a full year, the next financial year. I think that this is a modest way of obtaining some of the money needed if we are to balance our finances in the year to come. I hope, therefore, we shall get the Clause.

Mr. Stanley

We have had an extremely interesting Debate upon a Clause that my hon. Friend the Member for Chippenham (Mr. Eccles) quite rightly described as one of the most important Clauses in the' present Finance Bill. Our objections to the Clause were so well put by my hon. Friend—and by others, including my hon. Friend the Member for Scarborough (Mr. Spearman) and my hon. Friend the Member for Flint (Mr. Birch)—that there is very little for me to add. I should, however, like to say a few words about the course of this Debate. It has been well sustained from both sides of the Committee. We have had, as I expected, from the benches opposite speeches from those two hon. Members whom we have now come to regard as the classical economists of the Socialist Party, the hon. Member for South Nottingham (Mr. N. Smith) and the hon. Member for North Battersea (Mr. Jay). The hon. and gallant Member for North Portsmouth (Major Bruce) I put in a rather different category. It is not only the engaging youthfulness of his appearance and the corresponding irresponsibility of his words; but I do detect In him a danger which, unless he checks it, may militate, not against his influence with us on this side of the Committee, but against his future progress in the party to which he now belongs; and that is, his inveterate habit of reading the "Investors' Chronicle." The "Investors' Chronicle," among other qualities, has the excellent attribute of taking a very poor view of the present Chancellor of the Exchequer, and I think that it is unwise of the hon. and gallant Gentleman to disclose so publicly that he regards that journal as one of his chief sources of economic information.

I was particularly struck by one passage in the speech of the hon. Member for North Battersea, because it really showed what an Alice in Wonderland life—political and economic life—we are now leading. In order to combat an argument of my hon. Friend the Member for Chippenham that this tax was a tax upon enterprise, he attempted to comfort him—and he sincerely thought that he was comforting him—by saying, "After all, there is no point in encouraging enterprise nowadays, because even if people want to be enterprising they cannot be enterprising," and he went on to describe, I gather, his experiences—his happy experiences—when he was able for two years to turn down applications made by enterprising people to extend their factories or to improve their machinery, and he contrasted that with those unhappy days before the war when, if a man wanted to build a new factory, he was actually able to do it.

Mr. Jay

Would the right hon. Gentleman really deny that, if all who wish to build new factories today were permitted to do so, there would be nothing like the quantity of materials for those factories?

Mr. Stanley

I quite agree that—I will not say because of, but certainly after two years of the present administration—it is quite impossible for the vast number of people engaged in private enterprise who want to be enterprising to do all they would like to do. All I am objecting to is, that that should be put forward as proof of the excellence of the age in which we are now condemned to live. The Chancellor, in his defence of this tax, repeated in a briefer form the arguments which he had used on a previous occasion. He started by saying that this tax was a very moderate one; and he proffered that as the first excuse for it. Well, of course, in proffering an excuse of that kind he was not original. A housemaid did it some years before. I do not think that is a really substantial argument.

I entirely agree that the present level of this tax, even after the passage of this Finance Bill, is not yet high; but what we say is, that this is a bad tax in itself. The danger is, that once a had tax is embarked upon as a permanency, a level which is moderate one year becomes successively less moderate in succeeding years; and it is at the start, and only at the start, that it is possible to challenge the principle upon which the tax is based, even if one is not at the time seriously disturbed by the level which the tax has reached. I cannot accept as a great excuse for this tax—as put forward by the hon. and gallant Member for North Portsmouth—that after the tax was imposed the Stock Exchange values increased. I think it is probably true that they expected or feared a higher rate. But surely the hon. and gallant Member must have realised by now that Stock Exchange values depend on quite other considerations than the prospects of the companies concerned?

Major Bruce

The right hon. Gentleman probably realises that the figures to which I was referring were not the immediate post-Budget figures, which, it is quite true, reflected a rise. There was also a further rise after 23rd April, when the Debate on the Budget Resolution took place, despite the depressing speeches of hon. Members opposite.

Mr. Stanley

That is exactly the point I am making, that Stock Exchange values are, in fact, no more influenced now by the prospects of the companies than they are influenced by the speeches of hon. Members in this Committee. The main influence in the rise in the capital value on the Stock Exchange today is the fear of inflation, and I beg the hon. and gallant Member not to point to increasing Stock Exchange values as a sign of the economic health of the country.

Major Bruce

Would the right lion Gentleman apply that argument when we come to consider compensation on the basis of Stock Exchange values? Would he agree that Stock Exchange values should be written down for compensation on, the basis of what he has just said?

5.45 p.m.

Mr. Stanley

That depends entirely on whether in the case of the particular shares, as against the fear of inflation, people have not had to take into account the fear of Government confiscation, as has been the case with those shares which, for many years, have been under the threat of nationalisation when it became the power of the Government to do so.

Now let me continue to deal with the arguments which the Chancellor put forward. First, he said that this, after all, was not his baby at all; that it started by being the baby of the late Mr. Neville Chamberlain. That is quite true; but Mr. Neville Chamberlain introduced this tax under quite different circumstances. It was introduced as a crisis measure, to meet an impending crisis; and, now that that particular crisis has passed away, we question the necessity for retaining as a permanent tax one which was temporary in its character. Even so, there was no fiercer critic of that tax when it was imposed than the present Chancellor of the Exchequer. It was no good Mr. Neville Chamberlain saying to him: "This is only a moderate tax"—and it was a moderate tax; only 5 per cent., and not 12½ per cent. It was no good Mr. Neville Chamberlain saying that to the right hon. Gentleman, because the present Chancellor then took a much higher view: he objected to the tax in principle. His ringing words—perhaps it would be an extension of truth to say that I hear them ringing in my ears still, after all these years; but certainly I felt their effect for some time afterwards—were echoed much more mildly today by my hon. Friend the Member for Chippenham. Perhaps my hon. Friend had not time to read the speech of the present Chancellor on that occasion, and his fierce denunciation of the effect that this tax would have upon enterprise; of the iniquity of singling out for taxation one form of property, and one form of property only, and that, if anything, the most socially desirable form of property, the form of property in which risks as well as benefits were taken.

Mr. Gallacher

That was Simon's time.

Mr. Stanley

Well, the hon. Member is only a few years out of date. By that time it was, I think, Mr. Neville Chamberlain.

Mr. Gallacher

No, Chamberlain first, then Simon.

Mr. Stanley

The right hon. Gentleman then proceeded to give three reasons why he had to have this tax. The first was that, having given away a lot of money by the surrender of E.P.T., there was a gap to be filled, and that it had to be filled by some means or other. We quite recognise that. We are not at all ungrateful for the relief which was given to industry by the taking away of E.P.T. Quite clearly, as a matter of pure cash accountancy, the ordinary company' is better off now under this moderate Profits Tax than it was under the 100 per cent. E.P.T. But, as I say, it is the principle and the fear of the continuing tax, with the continually increasing rate, which adds point to our opposition to this Clause today.

We realise that some other taxation had to be raised in order to meet this gap, but we suggest that a tax of this kind—especially if it is to be a permanency—imposed upon one section, and one section only, is an unfair way of filling it, and that it would have been far better to distribute the burden equally among property owners as a whole. I accept that in this case, as an anti-inflation measure; it is probably right that this extra money should be raised, not in a way which would be a burden upon the actual producer, but upon unearned income. We say, however, that it should be spread over unearned incomes as a whole, and not over merely one section of them.

The second argument of the right hon. Gentleman was the need to combat inflation. I was very glad to hear the hon. and gallant Member for North Portsmouth talking about inflationary dangers, in terms which would a few months ago almost have secured his expulsion from the party. At that time the word "inflation" was one which could not be used; it was like that other word to which my hon. Friend the Member for Flint drew attention. If we on this side of the Committee then mentioned inflation, howls were heard from hon. Members opposite. Of course, that was before the Leader of the House told them that they must behave nicely to the Opposition. Indeed, it is only a few months ago that the Chancellor first brought himself to use, not the word "inflation," but the phrase "resistance to inflationary pressure." We are very glad to see that these dangers are now being frankly recognised and spoken of by hon. Members opposite, because the first step towards defeating inflation is to recognise its existence.

The right hon. Gentleman has picked out the increases in dividends which have taken place in the last year as the most potent inflationary force with which he has to deal. I believe that that is wholly inaccurate. I would say that far the most inflationary forces of that character with which lie has to deal has been the increase in capital values on the Stock Exchange, and I would say that that has been largely caused by the actions of the right hon. Gentleman himself; it is the surplus of bank money he has created in order to pursue the cheap money policy beyond the normal tendency of the times, coupled with the immense amount of new stock he has created in compensation for nationalisation. These are the actions of the Government, which have caused this inflated rise in capital values, and that has been much more inflationary in its effect than any rise in dividends during the period.

Lastly, there is the argument that he had done the widows a dirty deal, and he thought that everyone else ought to share in it—equality of misery if we cannot have equality of anything else. What has become of the old defence of the cheap money policy? That was not doing people a dirty deal, that was not so hitting widows that he had to hit the ordinary shareholders to make it up to them. He was offering them an equal advantage for what they had lost. It was true that their income was to be smaller, but how much greater was their security. There he was, the Chancellor who had been able to offer the poor widow security greater than any of his predecessors, since Gladstone. The security was well worth sacrificing ½ per cent. The right hon. Gentleman cannot have it both ways. He cannot claim that he has been benefiting the widows, and at the same time claim that he has got to be unkind to the equity holders in order that they shall share equally with the widows. I do not believe any of the three reasons the Chancellor has given for this tax. There is a fourth reason. If he had advanced it, it would not have altered my vote, but it would have given me more respect for his argument. The fourth reason is this: He had to do some- thing in this Budget in regard to the Tobacco Duty which was very unpleasant to the great masses of his own supporters, and he could not have a Budget which did something unpleasant to them, unless it were possible for him at the same time to point out how unpleasant he had been

to all tile other classes of the community. In that lies the explanation of this tax, and because that is the explanation, we shall vote against it.

Question put, "That the Clause stand part of the Bill."

The Committee divided: Ayes, 259; Noes, 118.

Division No 243.]	AYES.	[5.53 p.m.
Adams, Richard (Balham)	Fernyhough, E.	Manning, Mrs. L. (Epping)
Allen, A. C (Bosworth)	Follick, M.	Marshall, F (Brightside)
Alpass, J H	Foot, M. M.	Medland, H M
Anderson, A (Motherwell)	Forman, J. C.	Mellish, R. J.
Anderson, F (Whitehaven)	Freeman, Peter (Newport)	Messer, F.
Attewell, H. C.	Gallacher, W	Middleton, Mrs. [...]
Austin, H. Lewis	Ganley, Mrs C. S.	Mikardo, Ian
Ayles, W. H.	George, Lady M. Lloyd (Anglesey)	Mitchison, G. R
Bacon, Miss A	Gibbins, J.	Montague, F.
Barstow, P G	Gibson, C. W	Moody, A. S.
Barton, C.	Gilzean, A.	Morgan, Dr. H. B
Beattie, J. (Belfast, W.)	Glanville, J. E. (Consett)	Morley, R
Bechervaise, A E	Goodrich, H. E.	Morris, Lt.-Col. H. (Sheffield, C.)
Benson, G.	Gordon-Walker, P. C	Morris, P. (Swansea, W.)
Berry, H	Greenwood, Rt. Hon A. (Wakefield)	Morris, Hopkin (Carmarthen)
Beswick, F	Greenwood, A. W J (Heywood)	Mort, D. L
Bevan, Rt Hon A (Ebbw Vale)	Grenfell, D. R.	Moyle, A.
Bing, G. H C	Grey, C. F.	Murray, J D
Binns, J.	Griffiths, D. (Rother Valley)	Nally, W
Blackburn, A R	Griffiths, W D. (Moss Side)	Naylor, T E
Blyton, W. R.	Guest, Dr. L. Haden	Neal, H (Glaycross)
Bowden, Flg.-Offr. H. W	Gunter, R J	Nichol, Mrs. M. E (Bradford, N.)
Bowles, F. G. (Nuneaton)	Guy, W. H.	Nicholls, H. R (Stratford)
Braddock, Mrs. E M. (L'pl, Exch'xe)	Haire, John E. (Wycombe)	Noel-Buxton, Lady
Braddock, T. (Mitcham)	Hall, W. G.	Oldfield, W H
Bramall, E. A.	Hamilton, Lieut. Col R	Paget, R. T
Brook, D (Halifax)	Hardy, E. A.	Paling, Will T. (Dewsbury)
Brooks, T. J (Rothwell)	Harrison, J.	Palmer, A M F
Brown, George (Belper)	Hewitson, Capt. M	Parker, J
Brown, T. J (Ince)	Hicks, G.	Parkin, B. T
Brown, W J (Rugby)	Hobson, C. R	Paton, J (Norwich)
Bruce, Maj. D W T	Holman, P.	Pearson, A.
Buchanan, G.	Holmes, H E (Hemsworth)	Peart, Capt T. F.
Burke, W A	House, G.	Poole, Major Cecil (Lichfield)
Butler, H W (Hackney S.)	Hoy, J	Popplewell, E.
Byers, Frank	Hudson, J H (Ealing, W.)	Porter, E. (Warrington)
Callaghan, James	Hughes, H. D. (W'lverh'pton, W)	Porter, G. (Leeds)
Carmichael, James	Irving, W. J	Price, M. Philips
Castle, Mrs B A	Janner, B.	Pritt, D. N.
Chamberlain, R A	Jay, D. P. T.	Proctor, W. T
Champion. A. J	Jeger, G. (Winchester)	Pryde, D. J.
Chater, D	John, W.	Pursey, Cmdr. H
Chetwynd, G. R	Jones, D. T (Hartlepools)	Randall, H. E
Cocks, F S	Jones, Elwyn (Plaistow)	Ranger, J.
Coldrick, W	Jones, J H. (Bolton)	Rankin, J.
Collindridge, F	Jones, P. Aslerley (Hitchin)	Rees-Williams, D R
Collins, V. J.	Keenan, W	Reeves, J.
Colman, Miss G. M.	Kinley, J.	Reid, T. (Swindon)
Comyns, Dr L	Kirkwood, D	Rhodes, H
Corlett, Dr J	Lang, G.	Richards, R
Daggar, G	Lee, F. (Hulme)	Roberts, Goronwy (Caernarvonshire)
Daines, P	Lee, Miss J (Cannock)	Robertson, J. J. (Berwick)
Dalton, Rt Hon H	Leslie, J. R.	Rogers, G. H R.
Davies, Edward (Burslem)	Levy, B. W	Ross, William (Kilmarnock)
Davies, Ernest (Enfield)	Lewis, A W J. (Upton)	Royle, C.
Davies, Harold (Leek)	Lewis. J (Bolton)	Sargood, [...]
Davies, Hadyn (St Pancras, S. W.)	Lipton, Lt.-Col M	Scott-Elliot, W
Davies, R. J (Westhoughton)	Logan, D. G.	Sega, Dr. S.
Deer, G	Longden, F	Shackleton, E. A A
Delargy, H. J	Lyne, A. W	Share, Granville
Dodds, N. N.	McAdam, W	Shinwell, Rt. Hon E
Driberg, T. E. N	McAllister, G.	Shurmer, p.
Dumpleton, C. W	McGhee, H. G	Silverman, S. S. (Nelson)
Ede, Rt. Hon. J. C.	Mack, J. D	Simmons. C J.
Edwards, Rt. Hon. Sir C. (Bedwellty)	McKay, J. (Wallsend)	Skeffington-Lodge, T. C
Edwards, N. (Caerphilly)	McKinlay, A. S.	Skinnard, F. W:
Edwards, W. J. (Whitechapel)	Maclean, N (Govan)	Smith, C (Colchester)
Evans, S. N. (Wednesbury)	McLeavy, F	Smith, H. N (Nottingham, S)
Ewart, R.	Mainwaring, W. H	Snow, Capt. J. W
Farthing, W. J.	Manning, C. (Camberwell, N.)	Solley, L. J
Sorensen, R. W	Thomson, Rt. Hn. G. R (Ed'b'gh, E.)	West, D. G.
Soskice, Maj. Sir F	Thurtle, Ernest	White, H (Derbyshire, N. E.)
Sparks, J. A	Timmons, J	Whiteley, Rt. Hon. W.
Stamford, W.	Titterington, M. P.	Willey, F. T. (Sunderland)
Stephen, C.	Tolley, L.	Willey, O. G. (Cleveland)
Stewart, Michael (Fulham, E.)	Tomlinson, Rt. Hon. G	Williams, D. J. (Neath)
Straus, G. R (Lambeth, N.)	Usborne, Henry	Williams, J. L. (Kelvingrove)
Stross, Dr. B	Vernon, Maj. W F	Williams, W R (Heston)
Stubbs. A. E.	Viant, S. P.	Williamson, T
Summerskill, Dr. Edith	Wadsworth, G	Willis, E.
Swingler, S.	Walkden, E.	Wills, Mrs. E A
Sylvester, G. O.	Wallace, G. D. (Chislehurst)	Woods, G. S
Symonds, A. L.	Wallace, H. W. (Walthamstow, E.)	Yates, V. F
Taylor, R. J. (Morpeth)	Warbey, W. N.
Taylor, Dr. S. (Barnet)	Watson, W. M.	TELLERS FOR THE AYES
Thomas, D. E. (Aberdare)	Webb, M. (Bradford, C.)	Mr. Joseph Henderson and
Thomas, I. O. (Wrekin)	Wells, P. L. (Faversham)	Mr. Hannan
Thomas, George (Cardiff)	Wells. W T (Walsall)
NOES.
Assheton, Rt. Hon. R	Hudson, Rt. Hon. R. S. (Southport)	Poole, O. B. S. (Oswestry)
Astor, Hon. M.	Hutchison, Lt.-Cm. Clark (E'b'rgh W.)	Prescott, Stanley
Baldwin, A. E.	Hutchison, Col. J. R. (Glasgow, C.)	Price-White, Lt.-Col. D
Baxter, A. B.	Jarvis, Sir J.	Prior-Palmer, Brig. O
Beamish, Maj I. V. H.	Jeffreys, General Sir G.	Raikes, H. V.
Boles, Lt.-Col. D C. (Wells)	Joynson-Hicks, Hon. L. W	Reed, Sir S. (Aylesbury)
Boothby, R.	Kerr, Sir J Graham	Reid, Rt. Hon. J. S C (Hillhead)
Bower, N.	Kingsmill, Lt.-Col. W H	Ropner, Col. L
Boyd-Carpenter, J. A	Lambert, Hon. G.	Ross, Sir R. D. (Londonderry)
Bracken, Rt. Hon. Brendan	Langford-Holt, J.	Sanderson, Sir F.
Braithwaite, Lt.-Comdr. J G	Lennox-Boyd, A. T.	Savory, Prof. D L
Bromley-Davenport, Lt.-Col W	Linstead, H. N.	Scott, Lord W.
Buchan-Hepburn, P G T	Low, Brig. A. R. W	Shephard, S. (Newark)
Challen, C.	Lucas-Tooth, Sir H.	Smiles, Lt.-Col. Sir W
Clarke, Col. R. S	Lyttelton, Rt. Hon. O	Smithers, Sir W
Clifton-Brown, Lt.-Col. G	MacAndrew, Col Sir C	Snadden, W. M.
Conant, Maj. R. J. E	McCallum, Maj. D	Spearman, A. C. M
Crookshank, Capt. Rt. Hon H F C	Macdonald, Sir P. (I. of Wight)	Spence, H. R.
Crosthwaite-Eyre, Col. O E	Mackeson, Brig. H. R.	Stanley, Rt. Hon. O.
Crowder, Capt. John E.	McKie, J. H (Galloway)	Stewart, J. Handerson (Fife, E.)
Cuthbert, W. N.	Maclay, Hon. J. S.	Stoddart-Scott, Col. M
Donner, Sqn.-Ldr. P. W.	MacLeod, J.	Stuart, Rt. Hon J (Moray)
Drayson, G. B.	Macmillan, Rt. Hon. Harold (Bromley)	Sutcliffe, H
Drewe, C.	Macpherson, Maj. N. (Dumfries)	Taylor, Vice-Adm [...]. A. (P'dd't'n, S.)
Dugdale, Maj. Sir I (Richmond)	Maitland, Comdr. J. W.	Thorp, Lt.-Col R. A. F.
Duthie, W. S.	Manningham-Buller, R E	Touche, G. C.
Eccles, D. M.	Marlowe, A. A. H.	Wakefield, Sir W W
Eden, Rt. Hon. A.	Marsden, Capt. A.	Walker-Smith, D.
Fraser, H. C. P. (Stone)	Marshall, D. (Bodmin)	Ward, Hon G. R.
Gage, C	Molson, A. H. E.	Webbe, Sir H. (Abbey)
Galbraith, Cmdr. T D	Morris-Jones, Sir H.	Wheatley, Colonel M. J.
Gammans, L D.	Morrison, Maj. J. G. (Salisbury)	White, Sir D. (Fareham)
Glyn, Sir R	Morrison, Rt Hon W. S. (Cirencester)	While, J. B. (Canterbury)
Gomme-Duncan, Col. A	Muilan, Lt. C. H.	Willoughby de Eresby, Lord
Grant, Lady	Neven-Spence, Sir B	Winterton, Rt. Hon Earl
Hannon Sir P (Moseley)	O'Neill, Rt Hon Sir H	York, C
Hare, Hon. J. H (Woodbridge)	Osborne, C
Haughton, S. G.	Peake, Rt Hon. O	TELLERS FOR THE NOES
Head, Brig. A. H	Pickthorn, K	Mr. Studholme and
Headlam, Lieut.-Col. Rt. Hon Sir C	Pitman, I. J.	Major Ramsay
Herbert, Sir A. P	Ponsonby, Col. C. [...]

Question put, and agreed to.

Clause ordered to stand part of the Bill.