HC Deb 02 April 1953 vol 513 cc1435-56

3.11 p.m.

Mr. Anthony Crosland (Gloucestershire, South)

The matter to which I want to draw the attention of the House may seem rather more abstruse and of less human interest than the sad experience of Mr. Fawcett, but it is nevertheless a matter of great importance, which the House should discuss.

It will be remembered that in January, 1951, my right hon. Friend the then Chancellor of the Exchequer set up a Royal Commission to inquire into the present system of taxation of profits and income, including its incidence and effects. Last summer the Chairman of the Royal Commission sought a ruling from the Chancellor of the Exchequer whether the terms of reference should or should not be interpreted as permitting a discussion of: the type of expenditure tax which has been advocated by the late Professor Irving Fisher, the American economist, namely, a graduated tax under which the measure of a person's liability is determined, not by his income as such, but by the amount of personal expenditure which he meets out of his resources of all kinds, including capital as well as income. In October last year the Chancellor of the Exchequer replied negatively. He said that this matter could not be considered as falling within the terms of reference. The purpose of this debate is to discuss the Chancellor's ruling and urge him to change it.

At this point I should like to describe the nature of the proposals which were made by the late Professor Irving Fisher and other people, in respect of which the Chairman of the Royal Commission was asking for a ruling. Put very briefly, the proposals are that instead of taxing the whole of a person's income—as income is now defined—regardless of the use to which that income is put, we should tax only that part of the income which is spent, so that that part which is saved is not taxed. In addition, we should tax that part of a person's expenditure which is met out of his capital and which is not at the moment subject to tax.

In other words, put very crudely, it would exempt current savings from tax while at the same time taxing current dis-saving. In effect, the tax would become one on a person's total annual expenditure or, in the phraseology of the late Professor Irving Fisher, it would be "a tax on net cash yield income." This involves a change in the definition of the word "income," but that definition has frequently been changed for tax purposes, and there has always been a great deal of argument as to what was the correct definition for tax purposes. The idea of changing the definition of either "income" or "profits" for taxation purposes is certainly far from being an unknown one.

After all, many hon. Members opposite and also leaders in the business world have recently been urging the Chancellor to change the definition of the term "taxable profits" for the purpose of having a replacement cost basis for depreciation instead of an historical cost basis. I mention that merely to show that there is nothing particularly novel about the idea of altering the definition of either "income" or "profits" for taxation purposes.

It will be at once clear to hon. Members that any change such as this, which would exempt current savings from tax but at the same time bring current dis-saving under taxation, would give an enormous incentive to save and provide a very strong disincentive against dis-saving.

Having given that brief summary of the point at issue, before deploying my main argument against the Chancellor's ruling I want to make two preliminary points. First, this is not, or should not be, a party matter. There is not the slightest reason to believe that all hon. Members on this side of the House would support a change in the taxation system such as that proposed by Professor Fisher—nor is there any reason to believe that hon. Members opposite would oppose it. Indeed, to judge by the insistence of hon. Members opposite on the need for more personal savings and more incentives to personal saving one could imagine that many of them might support such a reform.

The fact is that nobody has any idea how the support would be distributed among the Members of the different parties. It is not a party issue and there is no suggestion that the Chancellor was actuated by any party or political motive when he gave his ruling. My own belief is that he gave it under a misunderstanding, and either through insufficient time or inadequate advice he failed to grasp the exact nature of the issues involved.

My second preliminary point—although it is hardly necessary to stress it—is the extreme importance of this issue. When my right hon. Friend set up this Royal Commission he presumably did so because he was concerned about the effects of taxation on incentives of one kind and another, and I imagine that in his mind at that time—as in the minds of most people who think about the whole tax question—the dominant worry was the possibility that our present levels of taxation, or even lower levels, might have a serious effect on the incentive to save.

Most people would think that this was the most important single question which the Commission could discuss—how, within a rather high level of taxation such as is necessary by reason of the social services and the concept of a welfare State, we can retain sufficient inducements to save. I do not need to spend any further time in emphasising just how important the whole question of savings is under a weight of taxation which, whichever party is in power, is bound to remain far higher than before the war.

In the light of these considerations, why did the Chancellor decline to allow the Commission to discuss this very important proposed reform, which at first sight promises such beneficial results in terms of the incentive to save? In a reply to my right hon. Friend on 17th March the Chancellor gave two reasons for his decision. The first was that this proposal is equivalent to a tax on expenditure— which is quite correct—and therefore it does not come into the scope of an inquiry into the taxation of income and profits. His second point was that it was impossible to consider this tax without also inquiring into the whole system of indirect taxation, because a tax of this sort came into the field of indirect taxation and it could not be considered without the consideration of the rest of that field.

I want to deal briefly with those two points in reverse order. The first argument is that we cannot consider a proposed reform of this nature without considering the whole field of indirect taxation. Is there any reason for believing that this is true? What is the difference in principle between direct and indirect taxation? I am not aware that there is the slightest argument as to what is that difference in principle. I want to quote from a standard and well-known text book on taxation which sums the matter up in a way which I think would be agreeable to everybody—Mrs. Hicks, on "Public Finance." Mrs. Hicks defines direct taxation as including. … taxes for which the liability varies with the circumstances of the taxpayer and indirect taxation she defines as: Those taxes whose liability depends on the amount or value of a particular product or service purchased. That is a perfectly clear distinction, agreeable both to common sense and a normal usage.

If one accepts those definitions, it cannot be considered that the sort of reform which has been suggested falls into the category of indirect taxation. If we modify Income Tax in the way proposed, so as to reduce the liability to tax to the extent that people are currently saving and to increase the liability to tax to the extent that people are currently dis-saving, it is quite clear that the tax will still involve a liability which varies according to the circumstances of the individual concerned. In other words, it is a direct tax. It is equally clear that it will not involve any liability which varies with the price or amount of any product or service consumed.

It is clear, therefore, that it does not fall into the category of indirect taxation. I do not think there can be any possibility of argument about it; the definitions are precise, and it is clear into which of the two categories this proposal falls. It falls very clearly into the category of direct taxation, and the Chancellor of the Exchequer has allowed himself to be misled by the phrase "expenditure taxation" into thinking that what is proposed is a general tax on all commodities —and that, of course, is not what is proposed in the slightest degree.

So much for the argument that this is merely a matter of indirect taxation. The other argument which the Chancellor used in reply to my right hon. Friend—and it was couched in rather vague and general terms—was that this proposal does not come within the scope of an inquiry into taxation on income and profits. This was rather a surprising argument to fall from the lips of a Chancellor of the Exchequer who, when he was at Cambridge, was a historian.

Mr. Hugh Dalton (Bishop Auckland)

No; modern languages.

Mr. Crosland

My right hon. Friend, I fear, is misinformed. I looked this up, and the Chancellor took modern languages in Part I and modern history in Part II. His historical knowledge does not seem to have helped him in considering this point because the fact is that suggestions along these lines have formed a part, historically, of every discussion on Income Tax and Profits Tax which has ever taken place in this country.

The "Manchester Guardian," in a leading article this morning, has been digging out a number of precedents into which I have already looked. If we go back to the first Government inquiry in this country into the system of income taxation, the Hubbard Committee of 1861, we shall see that a large part of the discussions of the Committee were taken up in dealing with the proposal of John Stuart Mill —very respectable antecedents after ail-that they should do precisely what is now suggested and exempt current savings from taxation. It was only the sinister influence of Mr. Gladstone's hirelings on that Committee which secured the defeat of this progressive suggestion.

Alfred Marshall wrote a very well-known article urging this reform in Income Tax while Keynes, in his evidence to the Colwyn Committee on taxation, described this as an ideal form of direct taxation. Professor Pigou has discussed this in his writings over and over again and Irving Fisher, whose name has already been mentioned, wrote innumerable books and articles about the subject in the course of a fairly long life-time.

I mention those precedents merely to show that this kind of reform has always played an important part in any debates and discussion on the principle of income and profits taxation. The reason why previous individuals and committees have turned the scheme down has almost entirely been on grounds of administrative practicability. I think that is a fair comment. That may or may not be an important argument, but it is not the argument which has been used against allowing the Royal Commission to discuss the matter. The whole question of administrative practicability is something which ought to be considered again, for it has not been considered for 30 years, since the Colwyn Committee.

If the Royal Commission do not discuss this method of reform, theirs will be unique amongst all discussions on Income Tax for 100 years past. Moreover, such proposals for reform have not only historically formed a very important part of all debates on the matter, but they are also being discussed a great deal at the moment wherever people are thinking or writing about the present weight of income and profits taxation.

I have three examples, chosen at random, of recent discussions of a reform along these lines. In the course of a debate in the columns of the "Economist," between my right hon. Friend the Member for Battersea, North (Mr. Jay) and Lord Brand—a well matched pair of extremists—a very interesting and authoritative anonymous letter was written which raised precisely this scheme of Irving Fisher's. Next, the third of the three articles recently published by "The Times" and written by Professors Edwards and Paish, also referred to the possibility of exempting savings from Income Tax. Lastly, the leader in today's "Manchester Guardian" shows that an increasing degree of interest is being aroused by this proposal.

But such a reform not only occurs in recent discussions on this subject but is actually embodied in the present Income Tax practice of at least one important country—Germany.

Mr. Dalton

Western Germany.

Mr. Crosland

The taxpayer in Western Germany can, if he so chooses, allot a part of his income to a special bank account, and, provided that the money remains frozen in the bank account for three years, one-half of that part of his income becomes exempt from Income Tax. This is a limited application of precisely the proposal which is under discussion—namely, the exemption of savings from Income Tax.

Surely, therefore, when a reform along these lines is already embodied in the tax practice of one other important country, and when it has played a large part in both present and previous discussions, the Chancellor of the Exchequer cannot possibly maintain that it does not fall within the scope of an inquiry into taxation of income and profits. I can only believe, quite seriously, that the precedents, the current discussion and the current practice were not brought to his attention by his officials when he gave his ruling.

I can go further still and say that such a reform would in fact not be a revolutionary departure or a complete departure even from the existing basis of the British income and profits taxation system. It has never been true in this country that Income Tax fell equally on all income irrespective of the use to which the income was put. That has never been the case. A great number of exemptions from Income Tax are already made, according to the use to which the income is put, and the most significant aspect of our present Income Tax system from this point of view is that income is already relieved from the full weight of taxation for one form of savings—namely, the premium on insurance payments. That is a modification precisely along the lines suggested in this scheme.

A similar position occurs with profits taxation. The profits taxation system in this country already distinguishes between profits according to the use which is made of them. There is a distinction between distributed and undistributed profits. Surely it is fair to say that this distinction between distributed and undistributed profits, one bearing a heavier weight of taxation than the other, is a discrimination in favour of profits which are saved against profits which are spent. It cannot be said to be an absolutely novel principle, therefore, to suggest that this discrimination should also be applied to Income Tax.

I should have thought that in the light of this argument the case for permitting the Royal Commission to discuss the matter was overwhelming. There is ample historical precedent for treating this as part of the whole theory of income and profits taxation. There is a great deal of discussion taking place now on the subject in relation to Income Tax. The German Government have already adopted a modified example of this principle. Our own income and profits taxation laws even now include some concessions to this principle.

I have no idea until the Royal Commission has examined and reported whether or not it would be a desirable reform. That is not what we are debating today. We are only saying that it appears to be a matter of sufficient importance for the Royal Commission to discuss. Of course, it is a matter of far greater importance today than it was when those previous discussions and debates took place, because the weight of taxation is very much heavier today, and the need for savings is very much greater today than it ever was before, so it is infinitely more important to discuss this subject now than it was 30, 50, 100 years ago.

As the "Manchester Guardian" pointed out this morning, we have a Royal Commission only once about every 30 years, and it would surely be a tragedy if a subject which everybody agrees to be of central importance to the future of our national economy were not to be discussed in the slightest degree by the Royal Commission when we shall not have another Commission of this kind for probably another 20 or 30 years. The value of their report would really be halved if they were not permitted to discuss this subject, and I do beg the Financial Secretary to carry some of these arguments, and others that will be adduced, back to the Chancellor, and to urge him to reconsider this decision.

3.31 p.m.

Mr. Austen Albu (Edmonton)

I should like briefly to support the plea of my hon. Friend the Member for Gloucestershire, South (Mr. Crosland) to the Financial Secretary and to the Chancellor to reverse the decision in this case. I have read a great deal of the published evidence that has been put to the Royal Commission, and I had the very exhausting experience of giving evidence myself for some two and a half hours. It is pretty clear, I think, that the great problem with which they are faced is this of dealing with taxation, particularly of company profits, in such a way as to enable savings to be created in the community for investment without at the same time reversing the achievement of the greater equality in the distribution of the national income.

The Commission are able, owing to the terms of reference given them when my right hon. Friend was Chancellor, to consider such matters as a capital gains tax, which they may have to consider if they have to make other concessions particularly to companies, but it may well be that that is a far more clumsy way of dealing with this problem in a socially equitable way than some sort of tax such as that my hon. Friend has been describing. I cannot pretend that I have the knowledge he has of the actual details of the tax. I know some of them.

Let me put this point to the Financial Secretary. One of the great difficulties we have been faced with in the years since the war, in a time of full employment and sometimes of some inflationary pressure, when we have had continuously to ask the trade unions to adopt very considerable restraint in regard to wage claims, has been the obvious retort that, however much dividends may have been limited, there has been a considerable degree of very conspicuous consumption. Try as we may, when speaking to trade unionists of these matters we cannot persuade them that there is not a very much higher degree of expenditure in this country than the figures of the actual distribution of the national income as officially printed and published show. There does seem to be a very good case for the examination of a method of taxing which is a taxing of the demands made by individuals on the product of the community, rather than entirely of their incomes.

I put that to the Financial Secretary because these matters must be very much in his mind, as they are in ours, at the present time. I suggest that there is a good case very fully put forward by my hon. Friend for reversing this decision, and for our having a report which will take into consideration the present situation in regard to taxation and income distribution, and the other problems with which we are faced.

3.35 p.m.

Mr. Hugh Gaitskell (Leeds, South)

My hon. Friend the Member for Gloucestershire, South (Mr. Crosland) has explained, in his usual lucid and able manner, the reasons why we are raising this subject today. He deployed with very great skill all the reasons and all the arguments in favour of allowing the Royal Commission to consider what has been termed an expenditure tax, and I want only very briefly to support what he has said.

We are raising this now, perhaps I may say in passing, rather than leaving it to the Budget debates, partly because we do not want it considered in the heat of party controversy, which tends to surround Budget debates, and partly because we think that this is something that should be considered on its own, as a long-term matter, quite apart from any immediate financial issues that may arise.

I think we are all agreed—at least, I would hope so—that the relationship of Income Tax to saving is a matter of the very greatest importance. I should like the Financial Secretary, if he will be so kind, as to listen to my questions on this matter. I want to know whether he agrees, as I am sure he does, that the relationship of saving to Income Tax is of the greatest importance, and that there is an obvious danger that any attempt to extract more money by increasing Income Tax is liable to be partially at least frustrated by reason of a decline in savings. To refresh his memory I would remark that the Conservative Party, when they were in Opposition, put that argument very frequently from the benches on this side of the House. Then I should like to ask him, if he agrees with that, whether he would also agree, as presumably he would, that the Royal Commission should consider the relationship of taxation and savings.

Next, I should like to ask what his attitude is to the problem of dis-saving, because it surely is perfectly clear that we cannot really consider the one without the other. If we are to consider proposals for encouraging savings by tax reliefs of one kind or another, unless we at the same time do something to prevent dis-saving, or to discourage dis-saving, there is an obvious danger that the taxpayer will get the benefit of the reliefs given to him for increasing saving by simply drawing on his capital. In other words, he maintains his standard of living by drawing on his capital and proceeds then to save and show the results of saving to the Income Tax authorities and get relief from taxation accordingly. I therefore submit that we cannot really possibly separate these two things.

The next point I would put to the Financial Secretary is that the problem of dis-saving is itself, in any case, a rather serious one. There is, with the present rate of taxation, a very great temptation to a man with a substantial amount of capital, to maintain a high standard of living, perhaps a higher standard of living than the country can really afford, by drawing on his capital.

Then I should like to ask whether the hon. Gentleman would not agree with what my hon. Friend suggested, that the present arrangements under which insurance premiums, for instance, obtain substantial reliefs in Income Tax, are a matter which the Royal Commission should surely investigate. How can it be beyond their terms of reference to consider further moves in that direction? If he agrees with these propositions how can it possibly be explained that the Chancellor of the Exchequer ruled that in effect a change in the system of taxation under which savings were exempted from taxation and dis-savings were included as part of income was not to be discussed?

I confess that I find it extremely hard to think of any plausible answer whatever to this proposal. I have looked at the original terms of reference which we laid down and at the revised terms of reference which the present Government introduced. I would draw the hon. Gentleman's attention to these. The terms of reference said Commissioners shall: inquire into the present system of taxation of profits and income, including its incidence and effects. Presumably, the effect on savings was one of them. They said: to consider whether, for the purposes of the national economy, the present system is the best way of raising the required revenue from the taxation of profits and income."—[OFFICIAL REPORT, 14th December, 1950; Vol. 482, c. 183.] Obviously, the question of whether there is not too serious an effect on savings should come into that.

Finally: … to make recommendations bearing in mind that in the present financial situation it may be necessary to maintain the revenue from profits and income…. That would involve considering any schemes or suggestions put forward which in the views of, at any rate, some persons and, as my hon. Friend has pointed out, of some extremely eminent persons, which would be of considerable assistance to the national economy.

We put this forward in no party spirit. I confess that I have been very disturbed by what has happened, and I must tell the House that if I had been in the present Chancellor's position when this question came from the Royal Commission, I have not the slightest doubt that I should have ruled that it was within their terms of reference, as I had previously ruled that the question of a capital gains tax was within the terms of reference. It may be argued by the Financial Secretary that, on a narrow definition of income, this sort of thing cannot be considered—even that, I think, is open to some dispute in the light of the arguments put forward—but, as my hon. Friend has said, the plain fact is that every Royal Commission has considered as one of its major problems whether the present legal definitions of income are appropriate or not. Once that is conceded, it seems to me that really it would be absolutely appropriate and right for the Royal Commission to look into this matter.

I therefore urge the Financial Secretary to ask his right hon. Friend to think the matter over again. Could he, in particular, at least give us this assurance—I agree with my hon. Friend, and I have no doubt that there may have been some misunderstanding on the terminology— that it is no part—I particularly want an answer to this—of the Chancellor's intention that the Royal Commission should not consider ways and means of stimulating saving and discouraging dis-saving by reforms in the Income Tax. I particularly ask him to reply on that point, because that may perhaps provide a way out of the rather unfortunate situation into which the affairs of the Royal Commission seem to be in danger of drifting.

3.42 p.m.

The Financial Secretary to the Treasury (Mr, John Boyd-Carpenter)

As I understand it, the House is this afternoon not seeking to discuss the merits or the de-merits of the very ingenious set of proposals which are associated with the name of the late Professor Irving Fisher. We are on the much narrower point as to whether the elucidation of the terms of reference of the Royal Commission which my right hon. Friend gave to the Chairman of the Royal Commission was, or amounted to, a proper and accurate interpretation of those terms of reference. We are really on what lawyers would call "a point of construction."

There has been no suggestion from the right hon. Member for Leeds, South (Mr. Gaitskell) or his two hon. Friends that the terms of reference themselves required amendment or should be amended. They directed their argument to what seems to me to be the much narrower point as to whether consideration of this set of proposals did or did not come within a sensible interpretation of the terms of reference. I think it is desirable, if we are to consider this matter on its merits, that I should make quite clear the way in which the terms of reference were laid down and have developed.

Perhaps I might say in passing that I was very glad that both the right hon. Gentleman and his hon. Friend the Member for Gloucestershire, South (Mr. Crosland) disclaimed any desire to make any party issue out of this matter. It seemed to me that when the matter was earlier raised in the House one or two hon. Members, particularly the hon. Member for Stechford (Mr. Roy Jenkins), were somewhat departing from that line. I was the more glad, therefore, that this afternoon both the right hon. Gentleman and the hon. Member for Gloucestershire, South threw that line overboard and put the matter forward as a matter to be considered solely on its merits. I will certainly endeavour to follow that admirable example.

The Royal Commission, as hon. Members will be aware, was set up by, and with terms of reference settled by, the late Administration. The terms of reference were announced in a written reply by the right hon. Gentleman the Member for Lewisham, South (Mr. H. Morrison) on 14th December, 1950. I will read them, because, though the right hon. Gentleman quoted them, he quoted them only in part, and I think it is desirable, if we are to consider what they mean, that the House should have the whole of them in front of them. The terms of reference were: To inquire into the present system of taxation of profits and income, including its incidence and effects…. These are the words the right hon. Gentleman did not quote: …with particular reference to the taxation of business profits and the taxation of salaries and wages to consider whether for the purposes of the national economy the present system is the best way of raising the required revenue from the taxation of profits and income, due regard being paid to the points of view of the taxpayer and of the Exchequer: to consider the present system of personal allowances, reliefs and rates of tax as a means of distributing the tax burden fairly among the individual members of the community: and to make recommendations consistent with maintaining the same total yield of the existing duties in relation to the national income. Just to complete the picture, at the time when the then chairman, Lord Justice—now Lord—Cohen, resigned the chairmanship on his appointment as a Lord of Appeal in Ordinary, the ending of the terms of reference was modified in a way which does not, I think, affect our present discussion but which, for the purposes of completeness, I should like to mention. The closing half sentence was taken out and replaced by the words: To make recommendations bearing in mind that in the present financial situation it may be necessary to maintain the revenue from profits and income: and, in so far as they make recommendations which would on balance entail a substantial loss of revenue, to indicate an order of priority in which such recommendations should be taken into consideration. Finally, to complete the picture, at a fairly early stage of the Royal Commission's proceedings they had apparently some doubt as to the meaning of their terms of reference. They referred, as has been mentioned, to the right hon. Gentleman the Member for Leeds, South, who told the House, in reply to a Question put by his hon. Friend the Member for Edmonton (Mr. Albu), on 6th February, 1951: The Royal Commission have been informed, in reply to an inquiry received from them, that their present terms of reference entitle them to consider the question of charging to Income Tax or Profits Tax any profit ranking as a capital profit under the existing law which might reasonably be brought within the scope of those taxes."—[OFFICIAL REPORT, 6th February, 1951; Vol. 483, c. 1529–30.] Two small points arise from that First, the right hon. Gentleman con- sidered it proper—if I may say so, rightly considered it proper—to give the Royal Commission guidance as to the interpretation of their terms of reference. Secondly, he did not then seek to extend the meaning of the terms of reference beyond the original conception of taxation of profits or income. What he made clear was that the inquiry need not be limited to the sort of profit which had hitherto been regarded as a revenue profit but could properly include capital profits.

Mr. Gaitskell

In other words, a redefinition of profits and income was involved?

Mr. Boyd-Carpenter

A re-definition of profits and income was involved, and therefore we can take it at this stage that the right hon. Gentleman thought it proper by inquiry to give them the guidance as to what he understood their terms of reference to include.

I should like now to follow up the suggestion by both the right hon. Gentleman—no doubt in an inadvertent turn of phrase—and his hon. Friend the Member for Gloucestershire, South that my right hon. Friend was not allowing the Royal Commission to discuss these proposals. The facts of the matter have, of course, appeared in the first Report of the Commission. The Commission, apparently having doubt as to the interpretation of their terms of reference, asked my right hon. Friend as the Minister departmentally concerned for guidance on their interpretation. I do not think it is quite fair to use—it was perhaps inevitably telescoped into other things and I do not make great complaint about it—the phrase "was not allowed to discuss." What my right hon. Friend did was what the right hon. Gentleman did before, when he gave his interpretation as to the meaning of certain words as he understood them when asked by the chairman.

Mr. Gaitskell

This is a very important point. Am I to understand that the Chancellor of the Exchequer would have no objection whatever if the Royal Commission decided nevertheless to consider this expenditure tax and discuss it?

Mr. Boyd-Carpenter

That is quite a different question.

Mr. Gaitskell

Oh, no.

Mr. Boyd-Carpenter

Oh, yes, it is, and it is, of course, straying, as the right hon. Gentleman quite deliberately did, from the very argument which has been raised here. That argument was not whether these were good proposals or not or that it was good for anybody to discuss them. The argument raised was that my right hon. Friend's interpretation of the terms of reference themselves was wrong. Let us get this quite clear. The material parts of the terms of reference were drafted under the late Administration, and I have no doubt at all that the right hon. Gentleman the Member for Leeds, South had some considerable share in settling them. I must not be led into comments on what might or might not in other circumstances be a good or bad thing. We have been here challenged on my right hon. Friend's interpretation of the terms of reference, which the right hon. Gentleman himself had some responsibility for settling.

I particularly do not want to enter into any discussion on the merits or demerits of Irving Fisher proposals, not the least because to do so would appear to prejudice any consideration of them which may at any time have to be made. It is not, of course, material to this argument. It may well be that these proposals have conspicuous merits. But that is quite irrelevant to the present issue. The point we are concerned with is the terms of reference given to this Royal Commission.

The right hon. Gentleman and his hon. Friends have tried to establish the argument that income could be redefined so as to mean expenditure. That is a perfectly fair paraphrase of the argument advanced. It is a proposition which, I think, has only got to be stated for its invalidity to be seen.

Mr. Dalton

No.

Mr. Boyd-Carpenter

Income and expenditure are, as some hon. Members have discovered in their own personal experience, very different considerations from each other. To argue that a tax which is described by its authors and supporters as a tax on expenditure can be brought within the definition of a tax on income simply by saying that for this purpose income can be construed to mean expenditure is, I think, an argument that will not wash.

Mr. Crosland

The Financial Secretary is not dealing now very seriously with the argument. It is frivolous to dismiss the whole of our case as resting on an odd-sounding definition of income as being the same as expenditure. He must know there is a great deal of argument from a tax point of view as to a sensible definition of income. Irving Fisher, after all, did not define these proposals as a tax on expenditure but as a tax on "net cash yield income." These proposals have always been treated as a form of Income Tax, and cannot be swept away with a lot of very amusing but not very serious juggling about with income and expenditure.

Mr. Boyd-Carpenter

If the hon. Gentleman can contain his impatience, I think I shall satisfy him on that aspect. I gather that I start with his assent to the proposition that merely to define income as meaning expenditure is not an intellectually respectable way of bringing these proposals within the terms of reference which his right hon. Friend gave to the Royal Commission.

I will concede for the purposes of argument that there is within the body of these proposals a part which relates to exemption, not from Income Tax but from Surtax, of savings, which are matters material to the taxation of incomes. I concede that at once. We are being asked, not to rule that particular and arbitrarily selected parts of the Irving Fisher proposals are within the terms of reference of the Royal Commission, but to say that the whole body of those proposals comes within the terms of reference,

Hon. Members: No.

Mr. Gaitskell

I am sorry, but I must interrupt the hon. Gentleman again here. The report does not say there was any suggestion that it was precisely this tax. The words in the report are: The second ruling concerned the type of expenditure tax which has been advocated by the late Professor Irving Fisher, the American economist … namely, a graduated tax. It is the type of expenditure tax to which reference is made.

Mr. Boyd-Carpenter

The right hon. Gentleman need not argue about the exact tax, but he must, for the sake of his argument, deal with the general body of the proposals and not with an arbitrarily selected part of them. For the purpose of his argument he has, quite legitimately, selected those parts which relate to savings, no doubt for very obvious reasons. He did so no doubt because they have a greater appeal.

It is an essential part of these proposals to include in the liability for taxation on expenditure, expenditure financed out of, for example, bequests and gifts. The right hon. Gentleman really cannot argue that these proposals, taken as a whole, are within the terms of reference of a Royal Commission inquiring into taxation on profits and income unless he says that a tax on expenditure from bequests and gifts also comes, as a matter of ordinary definition, within the definition of a tax on profits and income. It seems to me that whatever we may say about a proposal to exempt savings or—and this is going still further—whatever we may say about taxation on expenditure, it is straining the English language beyond the limits of its not inconsiderable elasticity to say that if the right hon. Gentleman receives a bequest and spends it on the purchase of a television set the tax falling on that expenditure is a tax upon income.

Mr. Gaitskell

On expenditure.

Mr. Boyd-Carpenter

It seems a complete misnomer to suggest that on a specific capital sum bequeathed to the right hon. Gentleman by some benevolent admirer—I hasten to express the hope that this is not merely a theoretical possibility —can attract Income Tax when it is spent. That it should be taxed may be a good or a bad thing, but such taxation is quite clearly not upon income or profits.

Mr. Albu rose—

Mr. Boyd-Carpenter

No. I have given way already quite a lot. What I have said applies with redoubled force to imposing taxation in respect of gifts. Suppose some one gave to the right hon. Gentleman a sum of money at Christmas to buy a bottle of lemonade and the right hon. Gentleman, in loyal fulfilment of the gift's purpose, went out and bought it. It is quite beyond the limit to say that any taxation of the expenditure on that gift which comes—rightly or wrongly, I am not arguing that point—under expenditure taxation has any relevance to taxa- tion on income or profit. That, I think, is the essence of the difficulty.

These ingenious proposals contain a number of conceptions and ideas which, without undue pressure upon the terms of reference, might well come within them. They also contain elements—on my view, I should say essential elements of the proposals, without which the proposals would seem to be wholly incomplete—which, such as the examples I have quoted, seem to us to be quite outside any question of taxation of income or of profits.

That is why it seemed to my right hon. Friend, when this matter was referred to him as a matter of doubt upon the construction of the terms of reference, quite inevitable that he should have to say to the Royal Commission that proposals for an expenditure tax, some items of which have, quite clearly, no relevance to taxation of incomes and profits, could not be held to be within those terms of reference. That is the matter as I understand it on the narrow point.

I should like, if I may, to trespass further on the time of the House very shortly in order that I should not seem discourteous to the right hon. Gentleman and his hon. Friends on the broader issues which they were good enough to raise. I say at once that my right hon. Friend's view, for the reasons which I have given, that on a proper construction of the terms of reference this body of proposals or anything like them was not within those terms of reference, does not mean that he takes any detached view, or feels that the Commission should take any detached view, on the inter-related questions of taxation of income and profits on the one hand, and of savings and dissavings on the other hand.

I give the right hon. Gentleman that assurance without any hesitation because, as he knows, my right hon. Friend has on a number of occasions in public stressed, as did the right hon. Gentleman himself today, the very great importance in our present position of encouraging and stimulating savings. And it is, of course, clear that an analysis of our system of direct taxation, particularly at a time when it is at such high levels, obviously would be incomplete and unreal if the repercussions of the system upon savings were excluded. I have no difficulty in reassuring the right hon. Gentleman on that point. Indeed, I should only weary the House by repeating the obvious if I said that my right hon. Friend is immensely concerned that a proper level of savings should be maintained and encouraged from the point of view of the very broadest national interest. My right hon. Friend has himself made that point far more eloquently than I could do and I need only refer the House to what he has said.

There is one other practical point The Royal Commission was appointed as long ago as 2nd January, 1951. It has now been at work for a considerable time and, as hon. Members are aware, has produced its first report, mainly dealing with certain aspects of taxation on overseas enterprise. Hon. Members will appreciate that the question of the system of taxation upon profits and income is, obviously, of the very greatest significance for a country which is fighting for its economic life, and which is doing so at a time when it has to sustain the massive burden of a great defence programme. As the right hon. Gentleman or one of his hon. Friends said, when taxation is at present levels, that the system should be sound becomes proportionately the more important as the burdens themselves become the heavier.

I therefore suggest that unless there were some compelling reason to amend the terms of reference at this stage, there is a very strong weight of considerations which go in favour of our not doing so. We do not wish, if we can avoid it, to delay the consideration by the Royal Commission of the major matters remitted to it and the receipt from it of its report. I am sure that all hon. Members are anxious that while work of this seriousness and importance calls for hard thought and serious work, nothing that we do should operate in any way to delay the bringing forward of the Royal Commission's report or reports. It was no doubt that reason therefore which impelled hon. Members opposite to found their argument on the narrow point of interpretation rather than, as I thought they might, on the probable suggestion that new terms of reference might be devised and transmitted to the Commission.

I think I can speak for all hon. Members when I say how grateful we are to the noble Lord, Lord Radcliffe, and his most eminent colleagues for the tremen- dously valuable public work they are engaged in doing. I know we are extremely anxious that they should be able to carry on that work with the greatest possible expedition and speed. It will be a matter of great satisfaction to my right hon. Friend and all hon. Members when that Report becomes available and we are able to see what the result of this expert analysis of our system of taxation of profits and income has produced.

I am sure the right hon. Member will appreciate that the fact that we do not think these matters come within the terms of reference of the Royal Commission does not by any manner of means exclude their consideration in other ways by other people at other times. My right hon. Friend, as I think hon. Members will admit, has a very open mind and I should not like to seem, by saying what I have said on the narrow point, to imply any disrespect for the late Professor Irving Fisher and those perfectly sincere and honourable people who share his views. What I have said relates solely to the terms of reference of the Commission and if the right hon. Member, or those associated with him, have any proposals or suggestions to make on any part of our complex system of national taxation, I am sure he does not need telling that my right hon. Friend is always very glad to hear the views of right hon. or hon. Members.

Mr. Gaitskell

I am slightly reassured by some of the remarks made by the hon. Gentleman towards the end of his speech, but may I ask him this? Do I understand him to say that, so far as the Chancellor is concerned, he would regard it as perfectly appropriate for the Commission, within their existing terms of reference, to consider the relationship of taxation to saving and dis-saving and to make recommendations for encouraging saving and discouraging dis-saving?

Mr. Boyd-Carpenter

I think I can say that my right hon. Friend would clearly take the view that in doing what the terms of reference tell the Royal Commission to do, questions of saving and dis-saving must inevitably arise on a proper construction of the terms of reference. That does not mean that every proposal which could have such an effect—such, for example, as those we have been discussing —is necessarily within the terms of reference. But my right hon. Friend could not rule that questions of saving and dis-saving are divorced from questions of taxation on income and profits.

Mr. Gaitskell

Therefore, recommendations on these matters can be made.