§ I now come to the last feature of the operation which I have undertaken. A true and lasting solution for our present troubles can be found only through increased production, harder work and in-increased output. It is by increased production and a new spirit of satisfaction in rewards well earned that we shall pull through. I am convinced that the present weight of direct taxation, particularly on the lower and middle income groups, acts as a very positive discouragement to extra effort.
§ We spoke of the need for differential rates of taxation in our policy statement. We must sweep irritations aside and make people feel that if they work harder they will be allowed to enjoy a proper reward for so doing. Austerity and restriction alone are not enough we must give positive encouragement if we are all to pull through together.
§ I propose, therefore, to make radical changes in the incidence of the Income Tax designed to lighten the burden of the tax, particularly on extra earnings, and thus to encourage people when they put in longer hours overtime or earn more by harder work. We must ensure that the tax works with, and not against, economic forces, and that it encourages rather than damps down people's natural aspirations.
§ The Income Tax in its present form suffers from three major defects: the starting points of liability are too low, the rates of tax are too high and the graduation is too steep. I propose to make a start this year in tackling these defects. I propose that the single allowance shall be increased from £110 to £120, the married allowance from £190 to £210 and the child allowance from £70 to £85. The earned income relief will be increased from the present one-fifth to two-ninths. I should have liked to have increased it to one-quarter, but I am afraid that this year I cannot afford to go as far as that.
1303§ The maximum of the allowance will go up from £400 to £450 at an income level of about £2,000. The professional classes need an incentive as much as any other. The present reduced rates, which take the form of charging the first £50 of taxable income at 3s. and the next £200 at 5s. 6d., will be replaced by an improved structure under which the first £100 will be charged at 3s., the next £150 at 5s. 6d. and the next £150 at 7s. 6d.
§ The effect of these proposals taken together will be to increase the starting point of liability on earned income for the single person from £2 17s. a week to £3 3s. a week; for the married person without children from £4 15s. a week to £5 8s. a week; for the married person with one child from £6 9s. a week to £7 10s. a week; and for the married person with two children from £8 3s. a week to £9 12s. a week. In this way, no fewer than two million people will be exempted from tax altogether.
§ The change in the reduced rates structure will mean that the standard rate will not now become payable until earnings reach £13 1s. a week for the single man; £15 6s. for the married man without children; £17 8s. for the married man with one child; and £19 10s. a week for the married man with two children. I have now so set these income levels that they will mean that in the great majority of cases overtime may freely be worked without risk of liability to tax at the standard rate.
§ If I may put the situation in a graphical form, I would refer to perhaps the most important person for the balance of payments in the country. A miner at the coal face, doing the hardest and most valuable work in the country, may curse the cuts of which he has been told a great deal, and yet, by more production, make extra earnings under this Budget which will recompense him several times over for any cuts made. I have carefully considered various suggestions which have been made from time to time for exempting overtime altogether from Income Tax, but so far no fair or practical way of doing this has been found. The proposal I have put forward, is, I think, the best way of ensuring that overtime is not unduly penalised for taxation purposes. I hope that this alone will provide a very 1304 real and positive incentive to greater production.
§ The increase in the earned income relief will mean a reduction in the effective rates of tax charged on earned income, including overtime. Tables published in the White Paper will give figures to indicate the extent of the reduction in tax which will be given to single and married men under these proposals. The Committee will remember that the family man with children is already free of Income Tax worries in the lower ranges. He will get the benefit of the family allowances. Also, he will get some increasing degree of relief under these schemes once he and his family come within the present scale
§ As the tables in the White Paper show. I can count next year on a considerable increase in the revenue from the Excess Profits Levy and in other ways. I consider that we can well afford the £180 million which these reliefs will cost in the current year. The figure for a full year will be £228 million. For P.A.Y.E. deductions on the new scale will commence on the first pay day after 8th June.
§ There is one further relief I propose in the Income Tax field, designed primarily to help retired people and people living on small fixed incomes. Pensions already qualify for the earned income relief and will benefit from the increase in the rate to two-ninths. I propose to go further and do something special for small investment incomes which do not at present benefit from the earned income relief, and which do not qualify for the age relief because the taxpayer has not yet reached the age of 65. Many hon. Members who have relatives or friends living under these modest circumstances, whether they be retired, single or married, an aunt or cousin, a friend or neighbour, will surely welcome this simple act of grace.
§ I propose that, in future, all incomes below £250 a year shall receive the earned income relief, which will, of course, be at the new rate of two-ninths. There will be a marginal relief where the income slightly exceeds £250. The cost of this proposal, which represents a well-deserved measure of relief to people on whom the rise in the cost of living is bearing and will bear very hardly, will be £¼ million this year and £1 million in a full year.