HC Deb 29 November 1955 vol 546 cc2127-74

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

3.41 p.m.

Mr. Roy Jenkins (Birmingham, Stechford)

We now come to a part of the Bill which is more complicated but perhaps less controversial than that which we have been discussing so far. The main provisions of Clause 2 are that the Profits Tax should be increased from 22½ per cent. to 27½ per cent, and that there should be a corresponding increase in the rate of non-distribution relief from 20 per cent. to 25 per cent.: so that the tax on distributed profits is increased by 5 per cent. and that on undistributed profits remains the same.

This Clause is much more acceptable to myself and to my hon. Friends than the provisions which we have been discussing up to now. It cannot be denied that, given the fact that the Chancellor was to bring in this autumn Budget and the particular fact that he was going to impose extra burdens on a wide range of articles, it was right and essential that profits should bear an additional imposition. We have to remember as a background to our discussion of Clause 2 that, as far as we can tell from the published figures, dividends in general, and not merely those of the British Petroleum Company, which stand almost in a class by themselves, have been rising very fast. The figures which have appeared this year show a rate of distribution 20 per cent. above that of last year.

As time goes on and we see more published figures, the rate of increase in the rate of dividend distribution, compared with the relevant period of the previous year, begins to be more and more. This year is 20 per cent. up on last year, which itself was very near 20 per cent. up on the previous year. It is no longer a question of once-for-all increase from a comparatively low stabilised level to a higher level, but of a continuing increase over high levels previously recorded. A new imposition on profits was, therefore, very desirable.

I hope that in discussing the Clause the Chancellor will not attempt to make us believe that as a result of his financial policy throughout 1955 there is no additional net burden upon profits from companies. So far from that being the case, there will be a small additional net gain from the two Budgets of this year taken together. We note from the figures which the Chancellor has given us, and I imagine that the figures stand, that the amount which companies gained from the Income Tax concession last April was rather more than £40 million in a full year, whereas the amount that they will lose under the new Profits Tax imposition is a little less than £40 million.

Furthermore, we have to realise that there was a period between the April Budget and the present Budget in which companies will have borne neither Income Tax at the old standard rate of 9s. in the £ nor the new, increased Profits Tax. While the provisions in Clause 2 make the Budget somewhat less unacceptable than it would otherwise be, I hope the Chancellor will not try to represent that extra burdens are placed on companies by the two Budgets this year such as are placed on a very wide range of articles by the increase in Purchase Tax.

3.45 p.m.

We have to consider whether the changes which are being carried out are being done in the most desirable way. I am always a little nervous of the Chancellor's playing about with company taxation because we rather expect a similar sleight of hand to that which he performed over the Excess Profits Levy in 1952–53. The tax was brought in as part of the newly-elected Government's policy of equality of sacrifice and was to realise £200 million a year, but underneath it the Profits Tax was reduced, to the extent of £100 million in a full year. The E.P.L., as we said at the time, was a very bad tax. The Chancellor had to get rid of it after a year, but when he did so he did not put back the Profits Tax which he had removed. There is inevitably a slight suspicion of what the Chancellor is doing in the Bill.

Assuming that the Chancellor had to repair some of the damage which he did to company taxation in April, the question is whether he has done it in the best way by this change in distributed Profits Tax. In considering the matter, we must bear in mind, whatever our views may be, that the Chancellor has gone directly against the recommendations of the majority Report of the Royal Commission on the Taxation of Profits and Income. He would not find much support in what the minority Report has to say either. The majority Report was very firmly opposed to the existing degree of differentiation between the tax on distributed and undistributed profits. The men who signed that Report cannot welcome the fact that in the very year in which they produced it the Chancellor has still further widened that gap and has apparently taken no notice of what they said.

I would not accept many of the recommendations of the majority Report of the Royal Commission and, in particular, I would not accept the premise upon which they built many of their recommendations on the subject of Profits Tax. Perhaps the Chancellor is being a little hard on these Commissioners, who laboured over long years to produce this very exhaustive Report. In the very year in which they produce it he introduces two Budgets, the second of which takes no notice of the Commission's recommendations—flies directly in the face of them—and because of the way in which the Financial Resolution is drawn, we are unable to bring before the Committee in the discussion on either of those Budgets any recommendations of the majority and of the minority Reports of the Royal Commission, while the Government provide no time to debate the matter outside the discussions on the Finance Bill.

As the Chancellor is asking us to accept a tax change which flies directly in the face of the Royal Commission's majority Report—and I would not say that he is wrong in that—and as he is giving neither the Committee nor the House any opportunity to consider these extremely important recommendations, I would ask him to give an assurance that he will consult the Leader of the House and set aside a very early date on which to debate them. It is really very undesirable that recommendations of this sort, brought out after a great deal of work, should be lying around for nearly nine months without anyone, apparently, taking any notice of them, and without the House having an opportunity to express its views. It cannot be encouraging to those who put in such hard work on reports of this kind.

Looking at the change in Profits Tax, one can at least question whether, in present circumstances, the House should not have been allowed to consider an increase in the rate of undistributed Profits Tax as well. I am not sure, after the experience of the last two years, that a high distributed Profits Tax is a very effective bar to high dividend distributions. With undistributed profits we are in a different situation from that when we discussed those matters some time ago.

It is quite clear that, over the last few years, companies, broadly speaking—there are, of course, always exceptions—have not had any difficulty in finding money to finance their investment projects. That was before the Chancellor's recent change of policy on investment matters, but it must be clear, now that the Chancellor is contemplating a general restriction of the volume of investment throughout our economy, that the broad range of companies are to have in their hands cash considerably in excess of what they would need to spend if they fulfilled the right hon. Gentleman's request to cut down investment projects.

One of our worries about the general way in which the Government are at present carrying out their investment restrictions, is that far too much of the weight will fall on the public rather than on the private sector. Believing, as he does, in fiscal aids, the Chancellor should have considered whether, by making companies a little short of money and taxing them a little more on non-distributed as well as on distributed profits, he could not have made effective his policy of investment restriction, and have done something to ensure that the restrictions were more evenly and fairly shared between the public and private sectors of industry.

Another difficulty about Profits Tax as it now operates—and it is the old difficulty mentioned by the Royal Commission, and which, I know, will be familiar to the Chancellor—is that of preference dividends. On the whole, the Profits Tax has a good deal to be said for it, but there can be no doubt that its present operation is unfair to companies which—largely, perhaps, by historical accident—have a high volume of preference share capital. An increase in the standard rate of Income Tax as it affects companies is not unfair.

If there is an increase in the standard rate, the preference shareholder bears it just as much as does the ordinary shareholder. He gets the same gross, but a smaller net, dividend, because he pays more tax on the amount he receives. If there is an increase in distributed Profits Tax, such as we are now considering, that does not happen. The preference shareholder gets the same gross dividend and, because the standard rate of Income Tax remains the same, the same net dividend, but the distributed Profits Tax on the money he receives has to be paid, and is paid, by the ordinary shareholder, who pays the tax both on the portion of the profits accruing to him and on that portion accruing to the preference shareholder.

That is a real difficulty and a real anomaly. It applies particularly strongly in the case of companies that have a large amount of preference share capital, and the substantial profit-sharing schemes which the Prime Minister and the Chancellor six months ago told us they were anxious to encourage. Although hon. Members had tabled an Amendment dealing with that, it was ruled out of order, but I hope the right hon. Gentleman will turn his mind to this, because it looks as though his present action runs counter to what he and the Prime Minister said six months ago. If a company is putting a large part of its nominally-owned capital into the form of preference shares, and devotes a large part of its real equity capital to profit-sharing schemes, it does very badly under the present arrangement.

Mr. J. T. Price (Westhoughton)

On a point of order. A number of my hon. Friends are in some doubt about the course you are pursuing, Sir Charles. Are we to take it that the Amendments to Clause 2 have been declared out of order?

The Chairman

Yes. they are out of order.

Mr. Price

We did not know that.

The Chairman

I proposed the Question, "That the Clause stand part of the Bill," and I thought that every hon. Member knew by that that we had passed over the Amendments. We cannot go back again.

Mr. Jenkins

When my hon. Friend intervened, I was about to say that companies at present do not create preference shares. When they raise new capital they do so by loan, either by debenture or by unsecured note. There are companies with too much loan capital. Preference share capital has much to be said for it, and I think it a pity to distort the capital structure of companies in this way. It is difficult to suggest a concrete solution of this, but before we can regard the Profits Tax as a satisfactory weapon—and it has many counter-balancing advantages—we should try to solve the preference share anomaly. For that further reason, I hope that the Chancellor may provide us with an opportunity to debate the Royal Commission recommendations.

Our general attitude to this change in the Profits Tax is, as I say, that in view of the position in which the Chancellor finds himself, in view of the new and grievous impositions which he has put on other sections of the community, an increase in the tax borne by capital profits is inevitable and highly desirable. Speaking entirely for myself, I think it might have been better and more satisfactory had the Chancellor in this, as in many other ways, swallowed his pride and restored the standard rate to its pre-April figure, instead of using this other device. Be that as it may, we welcome what he has done. We think that he could have gone some way further, particularly in the taxation on undistributed profits. He would have raised a little revenue there, and he could have avoided a lot of damaging and unpopular—

The Chairman

The hon. Member is now discussing an Amendment which is out of order. The Financial Resolution does not deal with undistributed profits.

Mr. Jenkins

I was applying myself to that provision in Clause 2 which raises the rate of relief on undistributed profits from 20 per cent. to 25 per cent. I submit, with great respect, Sir Charles, that I would at least be in order at this stage to make a few observations on the desirability or otherwise of subsection (1, b) remaining part of the Clause.

The Chairman

I do not think that that is so. The Amendment which I ruled out of order was to increase the tax on undistributed profits, but the Resolution deals with distributed profits only. The hon. Member is going beyond that. We can deal only with the points in the Clause.

4.0 p.m.

Mr. Jenkins

With great respect, Sir Charles, that is precisely what I am attempting to do. I am attempting to address myself to Clause 2 subsection (1, b), which reads: twenty-five per cent. for twenty per cent. as the rate of any relief for non-distribution. I am suggesting, tentatively, that there might be something to be said for having some other figure than 25 per cent.—possibly 23 per cent. or 24 per cent.

The Chairman

The hon. Gentleman cannot do that on the Question, "That the Clause stand part of the Bill." That is just the point.

Mr. Jenkins

I shall, of course, respect your Ruling most closely, Sir Charles, but I shall be surprised to discover that I am completely unable to discuss on this Question something which has been clearly written into the Clause

The Chairman

The hon. Gentleman can discuss what is in the Clause, but he cannot suggest something which is not in the Clause.

Mr. Hugh Gaitskell (Leeds, South)

With great respect, Sir Charles, surely my hon. Friend is in order to discuss whether or not the proposals in paragraph (b)—25 per cent. or 20 per cent.—are or are not reasonable; and I understand that that is what he is endeavouring to do.

The Chairman

I think the hon. Member was suggesting an alternative.

Mr. Gaitskell

Surely my hon. Friend can discuss the merits of the proposal in (b).

The Chairman

Yes, but he cannot put forward other proposals.

Mr. Jenkins

I think your Ruling, as clarified, fully suits my purpose, Sir Charles. I had almost finished the point which I was making when you intervened to give me your guidance.

There might be something to be said for the Chancellor considering a slight increase in the rate of tax on undistributed profits. That might have saved him a good deal of difficulty in the past five Parliamentary days. We appear to be moving into rather calmer Parliamentary waters, however, and perhaps the Economic Secretary will again be able to read the Committee some of his engaging little economic essays. I look forward to them immensely. I think he should suit the length of his speeches to the length of an essay suitable for collection in a little book or occasional papers. I hope that he may be able to do this in the rather calmer atmosphere prevailing this afternoon. We look forward to a reply from the Chancellor or the Economic Secretary, or both, and we hope that they will deal with some of the points which I have raised.

Mr. John Arbuthnot (Dover)

The hon. Member for Stechford (Mr. Roy Jenkins) suggested that the increase in Profits Tax on distributed profits was a good thing on the ground that dividends were rising. He said that dividends this year were 20 per cent. up on dividends last year. A point which hon. Members opposite always omit is that the earning power of dividends being paid today is less by one-third compared with the earning power in 1938.

Another controversial point made by the hon. Member was his reference to the extra net burden arising from changes in Purchase Tax. If we cast our minds back to the time when my right hon. Friend took over the job of Chancellor of the Exchequer, and the height at which the party opposite left Purchase Tax generally, there is no net extra burden from the impositions which my right hon. Friend has introduced. Purchase Tax is lower today than when we took office.

My right hon. Friend said last night that the subsequent Clauses in the Finance Bill raised just as much misgiving in some parts of the Committee as those with which we had dealt up to then. He was right. Although I personally will support the Clause increasing the rates of Profits Tax, because I regard it as part of the Budget as a whole, I want to leave no doubt in my right hon. Friend's mind that in my view the earliest opportunity should be taken to rectify what is now being done in the name of the need to combat inflation.

An argument which has been used in favour of an increase in the rate of distributed Profits Tax is that, having increased the rate of Purchase Tax, the Chancellor should make some increase in direct taxation as well. That was an argument adduced by the hon. Member for Stechford. To me it seems a complete non sequitur. Everybody pays Purchase Tax. The richer a man is, the more he buys and the more Purchase Tax he pays.

It does not follow that there should be this additional discriminatory attack against that section of the community which has followed the advice which my right hon. Friend himself gave when he encouraged such people to "invest in success" and to put their life savings behind Britain's productive drive. When he coined that slogan my right hon. Friend did not add, "Three-tenths of your profit is all that I will let you see." Nevertheless, that is the position. A company which distributes as fully as it can will give only three-tenths to its shareholders and the remaining seven-tenths will go to the Government in taxation. If that is not "the nationalisation of the means of production, distribution and exchange," it goes very close to it.

Mr. Jenkins

Would the hon. Gentleman say what he regards as the proper proportion of a company's profits which should go to the Government in present circumstances?

Mr. Arbuthnot

I do not think the present proportion is right, and I hope that my right hon. Friend will be able to review these emergency measures which he has found it necessary to take. I do not think it would be in order, on this question, for me to embark on the rather enticing field which the hon. Member offers.

I believe that the increase in the Profits Tax on distributed profits is bad for other reasons, too. It encourages businesses to plough profits back into their own industries when it may well be to the national good for them not to do so. It may well be that those profits would be better employed in the development of other enterprises.

Another difficulty raised by increasing the tax was mentioned by the hon. Member for Stechford when he referred to the way in which the Profits Tax operates unfairly against a company with a large preference capital, since the equity shareholders must bear the whole of the Profits Tax. In this way, as the hon. Member pointed out, it distorts the normal processes of raising capital and encourages the issue of debentures when, were it not for this tax, preference shares would be just as good.

If a company cannot distribute reasonably to its shareholders, it becomes a sitting target for the take-over bidder, whose aim and object is to make a killing by breaking up the company. Surely that is not in the national interest. Furthermore, the tax is inflationary in so far as it removes from employers the incentive to resist undue wage claims.

A further point arises with respect to companies the majority of whose capital is foreign-owned, which escape Profits Tax on that capital. An increase in Profits Tax means that we give to these companies with a majority of foreign-owned capital a still greater advantage than that which they have at present over wholly British companies.

I hope I have said enough to show my right hon. Friend that many people who have the broad national interest very much at heart are profoundly disturbed by the increases in the tax on distributed profits. That tax is now higher than it has ever been in the history of our country. I hope I have said enough to persuade my right hon. Friend of the need to retrace this step at the earliest possible opportunity.

Mr. Austen Albu (Edmonton)

I am very glad that the hon. Member for Dover (Mr. Arbuthnot) spoke in the way he did, because now we are back on the old familiar ground of difference between the two sides of the Committee as to what are the effects of taxation of companies on our economic life generally and also what are their effects on the equity of the distribution of the national income. I should have thought it extremely important to keep those two issues separate, although that is difficult when dealing with taxation of companies.

There is now almost general agreement, it seems, even in the majority and minority Reports of the Royal Commission on Taxation of Profits and Income, that companies cannot be treated as individuals or aggregates of individuals, or merely as the shareholders when we are discussing the question of taxation of incomes. For a number of reasons, which I am sure would be out of order and boring to the Committee to go into now, companies have to be treated as separate entities subject to their own rules of taxation. I think that most people are now agreed that some form of Profits Tax, some form of taxation of companies, whether the profits are distributed or not, is probably one of the most satisfactory forms of obtaining for the Government that share of the national production—the national income—of the order which is needed for carrying out the purposes of government.

In this particular case, however, in this Clause it is not very clear to me whether or not the increase in distributed Profits Tax has been introduced for the purposes of what one might call justice or equity, in order to some extent to balance the severe impositions made on the ordinary mass of consumers, or whether it has been introduced for disinflationary purposes in order to have some restrictive effect on investment. I shall say a little more about that in a moment It was referred to by my hon. Friend the Member for Stechford (Mr. Roy Jenkins). Of course, it was always the argument of hon. Members opposite that when one imposed a higher tax on distributed profits that had an effect on the reserves of companies making it more difficult for them to continue to invest.

As to the first argument, that this Clause has been introduced to some extent to balance the undoubtedly inequitable provisions of Clause 1, I think that point was answered completely by my hon. Friend the Member for Stechford. Not only is the amount which is being taken back from companies far less than that which will have to be paid by ordinary consumers but, of course, if one takes the year as a whole the argument becomes ludicrous. It becomes even more ludicrous if one considers the whole course of taxation policy since this Government came into office. It would be found that the advantages given to companies and the wealthier section of the community throughout their period of office have been very substantial compared with those for the less well off and I do not think the attempt to provide a sort of psychological balance has succeeded in any way. It certainly has not deceived very many workers or many of the ordinary electorate.

If, however, an increase in companies' taxation—this small increase—is intended to have a disinflationary effect, the arguments of my hon. Friend the Member for Stechford about the relationship between distributed and non-distributed Profits Tax apply. It is perfectly true that the relief for non-distributed profits was introduced by my right hon. Friend the Member for Bishop Auckland (Mr. Dalton) after the war—in 1946. That, of course, was a general relief for this purpose which is being maintained at present. But at that time I should have thought that the arguments for a very general relief were very much greater than they are today. One had quickly to get a large expansion of investment and, on the whole, we wanted it over a very large part of the economy and there were a number of physical controls to ensure that what took place was in the general public interest. These controls do not exist to anything like the same extent today. There was also the problem at that time of the enormous fall in the value of money which had taken place during the war and which made replacement of plant extremely difficult unless companies reserved money in their hands for that purpose.

4.15 p.m.

We know that that all took place. The plant was replaced and very substantial sums were acquired by companies out of profits. There were various measures in addition to non-distribution relief, such as the initial allowances, brought in by the Labour Government of that time. Now, however, the situation is very different. The companies have adequate funds and, in fact, the policy of the Government is to restrain their use of those funds. It is extremely difficult to see how the operation of the banks or the credit system or the operations of the Capital Issues Committee can have any real effect on the vast majority of established companies at present.

I am not one who wants to see a flattening down and a stopping of all investment, but it is true as the hon. Member for Dover said that so long as companies are free to spend their reserve funds as they like there is not control over the nature of that investment. The hon. Member would like the money distributed as dividends and then presumably to depend for expansion on the operation of the market. Most of us on this side of the Committee think that under present circumstances that would be completely inadequate and that further controls are undoubtedly needed—controls which we think should be in the hands of the Government. It is true that the Government cannot exercise very much control over expansion of a very large section of the economy at present if they do not increase the taxation of undistributed profits or alternatively use some other means of controlling their investment.

It seems to me that there is a very strong conflict here. I fully realise that the whole question of taxation and Profits Tax of companies raises a large number of anomalies which arise out of the private ownership of capital. I know that what may be necessary for the economy and for the benefit of particular companies may be very inequitable from the point of view of particular shareholders in relation to the other shareholders or the community. This is one of the problems with which I do not think hon. Members opposite are likely to deal because they are not prepared to select as between one company and another and one industry and another. It is a serious problem, and I think that very soon we shall have to have a very full debate on this problem, based on the most majority and minority Reports of the Royal Commission, both of which made a number of most interesting and important points.

It is impossible on a single Clause in this Bill to discuss that matter because the whole question of company taxation and Profits Tax is related to a number of other taxes and to the question of capital gains, which we cannot discuss this afternoon. Nevertheless, the sort of difficulties which are indicated have been well brought out by my hon. Friend the Member for Stechford and the hon. Member for Dover. I hope, therefore, that we shall have an opportunity of a very full discussion such as in the context of a discussion of a single Clause or change in our financial arrangements cannot be embarked upon at present. I hope we shall get some idea from the Economic Secretary—not necessarily an economic address, but some idea—of what is in the mind of the Government in introducing this increase of tax and whether they think of it purely as a matter of justice and an attempt to balance the Purchase Tax Clause and those changes, or whether it is that they believe it will have some effect on the economy generally and, if so, what? I think we ought to have a great deal more explanation of how this Clause and the changes in Profits Tax are related to the rest of the Bill.

Mr. Denzil Freeth (Basingstoke)

Before I address myself to the Clause, perhaps I may declare an interest in the subject of the Profits Tax. Everybody perhaps has one, but I happen to be employed by a stockbroking firm as part of the "paid help," or, more accurately, as one who is paid, and as the payment of higher dividends increases Stock Exchange turnover it might be argued that a higher rate of turnover may increase my annual bonus by an infinitesimal amount.

If I may take up again the point of the preference shareholder and the effect on the equity shareholder of the amount of the distributed Profits Tax that has to be paid out in respect of preference share dividends, I think that this can, in fact, be very onerous, particularly when we are increasing the distributed Profits Tax in the way in which the Chancellor has increased it in this Clause, and particularly where the preference capital is very large and the company itself is not very prosperous.

Even in times of prosperity, it happens that a company barely covers its preference share dividends, and if that happens and the dividend on the preference shares is barely covered or not covered at all and the company endeavours to maintain the dividend on the preference capital, it has to find from reserves a very much greater amount, since if it allows its preference shares dividend to lapse, it would undoubtedly on any future occasion find the raising of new capital almost impossible, while, if the preference shares dividend lapsed, it would upset the whole balance of voting power in a particular company. That means to say that the cost to the company of maintaining the dividend on the preference shares, when that dividend has not been earned and when we raise the tax on distributed profits in the way we are doing in this Clause, can be particularly onerous.

The whole effect of the Clause seems to me to make a situation in which companies, while ostensibly equally free to make profits, are not equally free to distribute them. After all, as the hon. Member for Stechford (Mr. Roy Jenkins) said, the capital structures of these companies have grown up under many different types of taxation and in response to very many different types of economic conditions, and it has the most unfortunate effect, as my hon. Friend the Member for Dover (Mr. Arbuthnot) said, of encouraging or almost forcing companies to raise an undesirable proportion of their capital in the form of redeemable debenture capital, which, at the present time, under the "credit squeeze," has to be paid out of their funds on redemption.

Another factor is that any increase in the distributed Profits Tax gives companies an unascertainable liability in respect of profits which are retained and later distributed, possibly because profits sufficient to cover the dividend have not been earned in any particular year; and if that has an awkward effect in these conditions it has an additionally unfortunate effect should the company wish to go into liquidation, when, if the distribution of assets exceeds the paid-up capital and cash premiums of the shares, that surplus is again liable to the distributed Profits Tax.

One question which one has to ask oneself when it is proposed to increase the tax on distributed profits is whether distributed profits are less or more inflationary than undistributed profits. I was most interested in the speech of the hon. Member for Edmonton (Mr. Albu), since he seemed to be leading up to this sort of question. After all, distributed profits do represent savings and quite substantial amounts are saved, and I think that the proportion is likely to increase as the years go by, as a greater percentage of the equity shares of British industrial companies are held by pension funds, insurance companies and the like.

I think, also, that we ought to remember that retained profits—and this increase in the distributed Profits Tax does encourage the retention of a greater share of companies' profits—do not necessarily reduce consumption, and do not necessarily reduce demand, particularly at the present time. They do not necessarily reduce the demand for those capital goods which at the present time are in very short supply. The ordinary shareholder, who has, presumably, bought equities in the hope that higher dividends will be paid from year to year in order to give some compensation for the falling purchasing power of the £, might then say "If I do not get an extra dividend from this company, I shall sell a few of my shares and live on capital to make up the difference, because if I do not spend that particular piece of capital today, the Chancellor will get it when I am dead."

Another question which we ought to ask, as a background to this, is whether retained profits are an overall national advantage. My hon. Friend the Member for Dover dealt with the problem of the way in which too high a tax on distributed profits naturally tends to encourage monopolistic tendencies in industry. After all, it is not necessarily axiomatic that profits which are retained by the company which earned them could not be put to more fruitful use elsewhere; and I would suggest that while we on this side of the Committee, in theory, at any rate, believe in free enterprise and capitalism—[HON. MEMBERS: "Only in theory?"]—we should always remember that capitalism requires mobility of capital just as much as a changing and expanding economy requires mobility of labour, and that where we have to freeze capital, inevitably we also freeze our economy.

If we accept, as, presumably, we all do accept, that capital investment in general is a good thing, is it advantageous for capital investment to restrain dividends, bearing in mind that, because of the inequality in the way in which the tax falls upon different companies, some companies are very much more affected than others? If a company which is, unfortunately, carrying a high proportion of preference capital wishes to raise new money it will find it difficult, as compared with a company with a low proportion of preference capital or none at all, when it goes to the market to raise the capital.

I think this tax also has a harmful effect in general upon the smaller companies. My right hon. Friend the Chancellor has said in his Budget speech that he thought the proposals of the Royal Commission would have a harmful effect upon the small company and the developing company, where, quite likely, the earnings to cover the dividend were not as large as those of an established company. I think that the converse of that is equally true. The money which would be distributed in dividends by the larger company, if the tax on distributed profits was smaller, would be in the capital market and would be available for the small company to use when it made its new issue. At present, it remains in the hands of the big company, and the higher profits become the richer and the stronger does that company become, and it is then in an easier position to buy up the smaller companies competing with it in the same industry.

I think I might say that there are two other reasons why I do not take kindly to this increase in the Profits Tax, even though it has my right hon. Friend's blessing. First, it attacks only a symptom of inflation and not the root cause. High dividends can come only from high profits, which themselves are also an inflationary symptom. They might add to inflation, but certainly they are a symptom of it. The other reason is that to a very large degree this tax takes back the concessions which were given in April.

4.30 p.m.

I am well aware, as the hon. Member for Stechford said, that there is a slight gain on the credit side to companies by the reduction in Income Tax and the increase in distributed Profits Tax, but the effect of this can be very unequal. I was talking the other day to a director of a brewing company—[Laughter]—in a place, I might say, where one does not normally meet directors of brewing companies—when he said that the reduction in Income Tax in April was calculated to benefit his company to the tune of £14,300. It had been a company, like most breweries, which had paid out fairly fully and, like most breweries, its profits had not risen in line with the growth of profits in large industry.

But the increase in distributed Profits Tax which the Budget is taking away from that company is £14,400. The company, therefore, finds itself slightly worse off. I do not quite see that it is beneficial to industry in general that within six months money can be given to it and taken away again. [HON. MEMBERS: "Hear, hear."] Is there, then, a real justification for this tax, apart from the natural desire of hon. Members opposite to "have a go" at the investor?

This is a fairly high increase. If one calculates the amount paid out in taxation, calculating it as a percentage of the net dividend, it increases the percentage tax on a net dividend from 142 to 161 per cent. The main justification must be to regard it as an interim measure, more psychological than financial. At an earlier stage of the Committee's proceedings I suggested that the main effect of the Purchase Tax upon exports would be psychological in that it would turn the mind of the manufacturer to the export market. Here again, the effect will be psychological rather than factual, because, as the Royal Commission pointed out, it has never been proved that a higher tax on distributed than on undistributed profits has altered the investment policy of any company when other forces were contending strongly.

On that justification, I accept as a psychological measure the restraining of dividend increases until the "credit squeeze" makes it unnecessary by making profits harder to earn. We must, however, realise that the increases in dividends which we have had, though proportionately substantial, are relatively small in relation to the total earning power of the country. In the Blue Book on National Income and Expenditure, one sees that in 1954 total personal incomes rose by £820 million while equity dividends rose by £89 million. That is not such a very large amount anyway, but quite a proportion of the £89 million has been taken back by the Chancellor in Income Tax and Surtax. I have seen only one calculation of the kind of proportion in which these are taken back—

Mr. Albu

I think that the figures quoted by the hon. Member are net figures and would not apply to Surtax. They are certainly net of Income Tax.

Mr. Freeth

I read them as being gross figures, and I apologise if they are net. It is not set out very clearly. Immediately beneath "Gross trading profits" comes "Payments of dividends and interest." I therefore assumed that as the word "net" did not appear and "gross" followed, they were gross figures; but I am quite willing to be corrected.

In any case, one thing at least is worth remembering in the minority Report of the Royal Commission, when it says that even the doubling of all dividend payments, which would do no more than restore the pre-war relationship between dividends and earnings, would mean an increase of only about 2 per cent. on total consumer expenditure. Therefore, the increased amount of income that has been poured into the economy by dividend increases over the past two years has been exceptionally small.

The reason why I would vote for the Clause, should it be taken to a Division, is that it would be very wrong if the impression were to go forth from the House of Commons that hon. Members who have any connection with finance or industry were unwilling to play their share in a Finance Bill of this kind. My right hon. Friend the Chancellor of the Exchequer spoke last night about broadening the tax basis. It is, therefore, only right that industry and finance should pay willingly the share of the general burden which the Chancellor has called upon them to do. I hope, however, that it will not be long before my right hon. Friend will not only take back this increase which he has put upon us, but that he will allow the House to have an opportunity of discussing the recommendations of the Royal Commission, particularly those dealing with the tax on distributed and undistributed profits.

Mr. Douglas Houghton (Sowerby)

The Committee has made a new discovery in the course of the interesting and informative speech of the hon. Member for Basingstoke (Mr. Freeth). We have discovered a new political phenomenon—the theoretical capitalist. We welcome this addition to a new kind of Fabian Society. I am sure that the Committee will wish to hear much more from the hon. Member about his new approach to Conservative philosopy in economics.

I do not, however, think that we ought to consider the Clause in its detailed effect upon the taxation structure, This is one of the two main Clauses in the Bill and both of them are, I believe, part of the Chancellor's psychological warfare upon inflation and are not really part of a box of tools to cope with it. The remaining two Clauses of the Bill are, so to speak, incidental. The general mass of the public would never have missed them had they not formed part of the Finance Bill, important as they may be.

My hon. Friend the Member for Edmonton (Mr. Albu) asked whether the Clause is the counterpoise to Clause 1. I think that it is. But both of them, taken together, are more of a warning note than grappling irons to deal with the problem of inflation. I might almost describe them as a foghorn in the mists and obscurities of Government economic policy. They sound all right and there is no doubt that they make a noise. The question is: what sort of noise do they make and what notice are people taking of them?

The speech of the hon. Member for Basingstoke, to which we listened with close attention, would not make the slightest impression upon a branch meeting of a trade union. It just would not be interested. It would be much more concerned with the general effect of the Bill upon the present economic situation through the impositions which are being made upon the consuming power of the great mass of the people.

My quarrel with the proposals in the Clause is that they are not strong enough. They sound a warning note, but it is not strident enough. I repeat, the proposals are part of the Chancellor's psychological warfare upon inflation. The Chancellor has moved to strike and has been afraid to wound. He hopes that the Bill's proposals as a whole will convey a warning of the danger of the situation, to bring about a change of atmosphere, and a new approach to consumer expenditure and to capital investment. He hopes that, in consequence, there will be a sufficiently strong influence upon the excessive expansion of the economy at the present time. We have to judge whether the proposals will succeed in fulfilling their purpose.

One great advantage the Chancellor of the Exchequer has is that after some days and weeks of discussion he can look at his policy afresh in the light of public reaction. The Chancellor, as we have frequently heard, has to go into purdah, as it were. Before introducing his Budget, whether in the spring or autumn, he has to use his best judgment, after taking all the advice—and there is not much—which is available to him in advance, on what the effect will be, and whether it will do the trick. After he has unfolded his proposals, and they have been subjected to public and Parliamentary discussion he has to assess again the measure of success of his proposals, and whether they will turn out as he first hoped and believed they would. I think that, perhaps, in general Chancellors of the Exchequer owe it to the Committee to tell us what their second and third thoughts are, and whether they think their Budgets will turn out as they first hoped they would. This Budget has not made the impression upon the public or upon industry which the Chancellor hoped.

There was certainly a tendency in industrial profits and especially in the distribution of dividends which the Chancellor was right to check. While profits this year have been on the whole falling slightly, dividend distributions have been rising sharply. In the first quarter of this year, taking the figures of 583 companies, the increase in profits was 12 per cent. but the increase in dividends was 16 per cent.; in the second quarter, taking the figures of 1,000 companies, the increase in profits was 13½ per cent. but the increase in dividends was 24 per cent.; in the third quarter, taking 588 companies, profits increased by 10 per cent. and dividends by 27½ per cent.

That, I think, is a quite striking comparison between the steadiness of profits, but tending to fall slightly, and the sharp increase in dividends.

Mr. Freeth

Are those most interesting figures net? If so, there would be a natural increase on the reduction in Income Tax. Do those figures make any allowance for the dividends paid upon new money raised?

Mr. Houghton

No, I think these are gross figures, but they show the general tendency of distributions in comparison with profit earnings. That is a tendency which, I am sure, the Chancellor was right to check.

I was about to say that during this period wages have remained steady at only 7 per cent. above their levels for the corresponding periods of last year.

4.45 p.m.

I know that one can use figures until the cows come home to prove arguments. One could say, "The total amount of dividends compared with the total amount of earnings is comparatively small. "One can argue that an increase in dividend distribution amounting to some millions but not many millions is really not inflationary, and that the effective demand on our resources, so far as purchasing power is concerned, comes from the great mass of the wage earners, the millions of them, to whom a wage increase of a comparatively small percentage represents hundreds of millions of pounds of additional purchasing power. All that I fully accept, but I come back to the point that in our democratic system, at a time when the trade unions have considerable power, when the workers are an enlightened body of people who are studying the economics and the social implications of our affairs, then psychology matters a lot. No Chancellor can afford to disregard that fact.

The Chancellor has merely scratched the surface. He has injected an irritant rather than a deterrent into the economic system. His additional 5 per cent., or increase from 22½ per cent. to 27½ per cent., tax on distributed profits will make very little difference to the resources available to companies after distribution. The Financial Times a little while ago gave some figures to show what a slight effect it would have. It said that the effect on earnings of leading companies would be between 1 per cent. and 2 per cent. only, and the names of some companies were mentioned to show what a slight effect it would have.

Everywhere one turns for comments on the Chancellor's proposals one finds that he can derive very little satisfaction from them—very little. Indeed, in this Committee the debate has lacked cut and thrust because the two sides have united in opposition to the Government, and that has been a most painful and discouraging experience to us on these benches, because we have had, as it were, nothing to bite on. Both sides have, from their different points of view, joined in criticising the Chancellor's proposals.

Will the proposals of this Clause do more than the Purchase Tax has done, do more than irritate and inflame opinion? Will they have the effect the Chancellor wishes? I believe myself—I speak personally, and my judgment may be of little value—that a sharper increase in the tax on distributed profits would have had a bigger effect upon trade union opinion. It would have seemed that the Chancellor was attacking the distribution of unearned income more considerably, and that at the same time he was making accompanying impositions upon the purchasing power of earned income. I think the Committee will appreciate the very great difference between the two things in the eyes of the great mass of the workers.

They say of what the Purchase Tax affects, "This is our earned income. This is our toil and sweat. This is our overtime. This is our night duty. These are, in an enlightened age, necessities which are keeping the wheels turning." That is what the Chancellor is now taxing indirectly by increases in the Purchase Tax. They think of the dividend holder differently. A dividend may, of course, be a legacy of somebody else's toil and sweat. It may be the result of gains untaxed, some of them ill-gotten. It may be the result of an inheritance of money which the holder has done nothing to deserve. Indeed, the taxation system differentiates, by common consent, between earned and unearned income, and the Chancellor cannot complain, nor can this Committee, if people outside distinguish between the two kinds of income, especially when they see the discrimination which is made in the Income Tax system.

I believe that the Clause fails in its purpose on those counts. I think that is a great pity. One thing that I am anxious to do is to bring stability into our economy and restrain all elements that might upset it. That is fundamentally important. Anything that will assist to achieve that purpose is to be applauded from these benches. That is why I think that the Chancellor's proposals have not gone far enough.

I know that one has to look at this as part of the right hon. Gentleman's general strategy, and that this is not the complete picture. We fully understand that, but we have to discuss this as one element in the general situation. I am not sure that I agree with my hon. Friend the Member for Stechford that there is any particular magic in equalising or balancing up the restraint of investment in the private sector and investment in the public sector. It does not seem to me to matter very much whether investment is in the public sector or in the private sector. What really matters is what kind of investment it is. That is the important question.

We do not want, even for psychological reasons and the effect on general opinion, to restrain valuable investment which may be essential to higher productivity and a rise in the national income later. What we want to do is to squeeze out of the system unproductive investment—and there is a good deal of it going on at present and quite a lot in the private sector—while the strain on the resources remains as great as it is; but this does not achieve that at all.

The Chancellor has made his job much more difficult by rejecting physical controls in a matter of this kind. Even economists of his own political way of thinking comment on that very fact. The Chancellor is trying to do by these blunter and indirect methods what could be achieved in the same direction more quickly and more surely by direct action. I am not saying for a moment that physical controls alone would do it—I do not believe that they would—but a combination of direct and indirect methods might. I am sorry to say that my verdict on this Clause is still unfavourable, after reflecting on it for some time since the Chancellor introduced it. I do not think that this is the moment for the Chancellor to recast the whole of the Profits Tax. I think that that would be asking too much and introducing too many other problems which would have to be dealt with expeditiously and effectively at this moment. I forgive the Chancellor for taking the thing ready at hand, without paying too much attention, at this stage, to the majority report of the Royal Commission.

I think that the Chancellor is probably wise in saying, "I will do the best with the Profits Tax structure as I find it, because I want speedy action and to make it as effective as possible without raising all sorts of incidental problems either of either administrative or taxation policy." My complaint is that even on that basis he has not used this weapon boldly enough. If he had wanted to sound a warning and send a steadying message to the mass of the workers, he could have done it by doubling the increase in Profits Tax. It would have shown that, despite the inconvenience and difficulties which would flow from that temporarily, the Chancellor meant more business than the Clause suggests.

Viscount Hinchingbrooke (Dorset, South)

He might have meant more business, but what effect would a more steep Profits Tax have on the trade union movement? Would that cause it to refrain from putting forward these claims?

Mr. Houghton

I am afraid that the noble Lord is so far removed from the way of thinking of the trade unionist that he does not understand the impact of things on the trade union mind. I can only say that collective trade union opinon is influenced by all sorts of social and economic factors.

Viscount Hinchingbrooke

Towards what?

Mr. Houghton

Towards the restraint which the Chancellor is asking them to exercise. After all, Sir Stafford Cripps, when Chancellor of the Exchequer in the Labour Government, did manage to capture that response and, for the first time in trade union history and contrary to all trade union experience and tradition, the Trades Union Congress passed a resolution in favour of wage restraint, and asked its members to hold back pressing their claims further in the light of the economic situation.

That would not be impossible even under a Conservative Government, provided that the indications were that it was necessary in the national interest, and that the Chancellor was trying to distribute all the sacrifices as fairly as possible. That is the answer which I give to the noble Lord. Opinion is moulded by many factors and aspects of a comprehensive and complicated situation, but the trade union mind is not governed solely by motives of greed and by motives of acquiring a higher wage or greater wealth. The trade unionist has a national responsibility. He has a desire to help the country recover from its economic difficulties.

If right hon. and hon. Members opposite do not accept that view and respect it, they will fail in their dealings with the trade unions. I hope that I have made that point, and I certainly hope that the Chancellor's policies will succeed. We do not want to see them fail, but we have serious doubts as to whether he is setting about this in the right way. He may succeed, more by luck than good judgment, and if he fails the consequences may be very serious indeed. I believe that it would have been much better and would have improved the general atmosphere greatly if the right hon. Gentleman had struck a firmer note in this Clause and had shown to the world that the rise in distributed profits should be checked, but investment should not be discouraged where investment for future productivity was possible. Then we should have had a more tolerant general approach to the Government's financial proposals which, at the moment, are receiving a very bad reception throughout the whole of the country.

Viscount Hinchingbrooke

The hon. Gentleman the Member for Sowerby (Mr. Houghton) said that I did not know much about the trade union movement. That may very well be true, but I hope that I know a little about human nature. The last thing that the trade unionists are going to rest upon in determining whether they put in wage claims is whether or not there is a swingeing Excess Profits Tax imposed by the Government. That may very well work with the T.U.C. on the higher levels, because of its close association with the Treasury and the Government, and the hon. Gentleman himself may very well hold that point of view; but the idea that in order to avoid wage claims coming forward we must have this highly-exaggerated Profits Tax will not wash. The final logic of the hon. Member's position is that there will be no demand for extra wages if there is imposed a level of taxation on profits sufficient to extinguish them altogether. I do not believe that the trade unions argue in that way.

The reason there are wage claims now is because of the demand which comes from the lower-paid workers that they must have increased wages to meet the rising prices of the present day. That is why I do not like the Purchase Tax and also do not like the provisions of this Clause. The hon. Member for Edmonton (Mr. Albu) said that he hoped that the Government would be very forthcoming on this matter. I hope so too. I should like an explanation of the philosophic approach of the Government to the tax.

5.0 p.m.

In the spring of 1952, on the instigation of my right hon. Friend the Member for Woodford (Sir W. Churchill), an Excess Profits Levy was imposed. It was a very weighty charge indeed, and from the beginning hon. and right hon. Members on this side of the Committee, in public and in private, began to argue against it. The Chancellor of the Exchequer himself gave the impression at the time—I cannot quote the exact words—that he was carrying out his duty, that it was a hideous burden for him and that he was anxious to get rid of it as soon as possible.

It will be within the recollection of the Committee that in my right hon. Friend's speech a week or two ago there were words which quite clearly indicated that he was very glad of the day when he got rid of the Excess Profits Levy, and he thought that the Committee ought to congratulate him on what he had done. We do. We are delighted that he got rid of this undue load upon the industrial life of the nation. But if this is the scheme of things, why do we have to return to the attack on this front now? I cannot understand the justification for it. My hon. Friends, in speech after speech in this debate, have given cogent reasons against the tax.

I believe that the inflation argument against the Purchase Tax applies to this tax also—that the price of goods is increased by it. When a big industrialist is casting up a possible balance sheet for the coming year he has regard to wages, to salaries, to the costs of production and to the costs of his raw materials, and then he has a good look at the prospective taxation figure which is already in the previous year's profit and loss account. If that is a high figure, he instructs those below him who are the price fixers in his organisation to see that the price charged for the goods reffects all the costs, including taxation. That process is conducted every year, and is a commonplace in industry. If, therefore, the Profits Tax or the total taxation on industry is increased substantially in a year, we may be quite sure that within a very short space of time the prices of commodities will also increase.

Mr. Albu

Assuming, of course, that prices are fixed by the manufacturer without any relation to a competitive market.

Viscount Hinchingbrooke

Competition and, of course, some other considerations apply, but I should have thought that these were the factors in the decision; if manufacturers see that taxation is very high, they will also see, within reason and within the possibilities of competing in their markets, that the price is raised as high as it can be raised.

Then there is the other question of differentiation of tax. I mentioned this a few nights ago during one of our debates. I was hoping very profoundly that the Government would be able to get away from differentiation in taxation as between one purpose and another and to cease to apply special directives to industry saying, "We will tax you so much if you distribute and so much less if you save and invest in your own concern." It is the idea of the dirigiste economy coming out again. Here is a Conservative Government increasing differentials, using taxation as a weapon of compulsion towards a State objective, but that is my idea of Socialism and I was hopeful that we were going to depart increasingly from it.

Then there is the "Clore" argument, that is to say an artificial diminution in the value of the company, a result of high taxation and the limitation of dividends. After a time the company builds up pressures inside it and a take-over bid comes along. A mild explosion occurs in the concern and probably many people are thrown out of work. It is a bad idea to create a false set of values in an industrial entity and one tends to do that by this differential method of taxation and by appeals for dividend limitation.

Mr. J. T. Price

Has the noble Lord not realised or considered the point that the period of dividend restraint and wage restraint, which was practised very honourably by the trade union movement, was followed by a period in which equity values were grossly inflated and great tax-free gains were made because the product of wage restraint was being disgorged in inflated dividends?

Viscount Hinchingbrooke

After a long period of Crippsian and Daltonian finance, during which a large section of industry was shaped into an unsatisfactory and unreal mould, my right hon. Friend the Chancellor of the Exchequer began to release the pressures on industry, with the result that events occurred which showed all too clearly the falsity of the previous position.

The hon. Member for Sowerby said that dividends have increased very sharply in recent months. That is so, but they are not back to the ratio to wages at which they were before the war. [HON. MEMBERS: "Why should they be?"] One has to take a pattern, a basis upon which one can make calculations, and the average of the twenty years between the wars is as good a reference point as any other.

Mr. Houghton

Does that mean that the noble Lord is taking as his pattern a time when two million people were unemployed?

Viscount Hinchingbrooke

I am quite willing to make some adjustments. I do not base myself entirely on those days. They were deplorable days. I am certainly willing to make some adjustments, but we are still nowhere near the ratio of dividends to wages which existed before the war.

Mr. Douglas Jay (Battersea, North) rose

Viscount Hinchingbrooke

I have given way sufficiently, and my right hon. Friend the Chancellor wants to reply.

I am becoming more and more convinced that if we continue to soft-pedal our belief in capitalism, if we continue to show a frightened attitude towards it and to deny the full provision of capitalism, we shall begin to lose ground overseas. There is no other answer to Communism and all its totalitarian methods than full-blooded capitalism. Hon. and right hon. Members opposite thought they had a partial answer, a middle way. They governed from 1945 to 1951 and made an unholy mess of it.

I am not talking of the kind of capitalism that gets us back to serious unemployment. I am talking about the establishment of full employment in a free society, maintaining the Welfare State within a classical economy. If we can achieve that, it is the answer to Communism. These rather shame-faced attitudes towards the full realisation of capitalism will not do us any good overseas. We should discard them and go forward to a new faith.

Mr. Donald Chapman (Birmingham, Northfield)

We have had a strangely contradictory speech from the noble Lord the Member for Dorset, South (Viscount Hinchingbrooke). For a start, he denied the proposition of my hon. Friend the Member for Sowerby (Mr. Houghton) that there could be restraint on wages, given some evidence from the Government and industry generally of a restraint on profits and dividends. Then, half-way through his speech, he suddenly recalled the events of 1950 and 1951, when there was indeed restraint, and he began to discuss it. His speech sounded at first as if the noble Lord did not remember living through the years when that experiment in restraint was successfully carried out.

Viscount Hinchingbrooke

We had devaluation.

Mr. Chapman

Devaluation was nothing to do in the direct sense with the question of restraint at that time. [HON. MEMBERS: "Oh."] I should be far out of order were I to continue this argument.

The noble Lord gave us the 1939 relationship between dividends and wages as something which was God-given and to be preserved for all time. Does not he realise that we have been through a social revolution in the years between and that there has been a complete change in the standard of proportion in these matters? I do not know any hon. Member on this side of the Committee, or many hon. Members opposite, who would want to go with the noble Lord as far back as 1938 to state a relationship between profits and wages. The noble Lord must try to realise that a great deal has happened in the way of changes in social thinking since those days.

I wish to say a few words on the line first developed by my hon. Friend the Member for Sowerby. I agree with him wholeheartedly that this tax is nothing but a counter-weapon in the battle to keep down the demands of the trade unions for wage increases. The Banker summarised this in the following statement: Its real purpose, in which it has already demonstrably failed, was to look to the psychological effect, and to use it as a bargaining counter with the trade unions. I do not know any hon. Member of the Committee who really thinks otherwise than is stated in that quotation. The Chancellor intended this simply as something to keep the trade unions quiet and, as The Banker says, it has demonstrably failed already.

Why has it failed? There is the fact, which I have not heard argued to any great extent this afternoon, that as against £150 million or £200 million which the rest of the Budget and the extra budgetary measures will take from the ordinary working people of this country, the effect on profits is a minor one indeed. It does not seem to have been mentioned very much that the effect of taxation on profits this year is nothing at all; that the effect next year is only £10 million, and only in the year after that does it reach £38 million or £40 million. Does anyone on the other side of the Committee really think that by the year after next the Chancellor will not have come along with an excuse for restoring the position as it is at the moment, long before the £40 million figure has had any effect at all?

The reason these proposals have had no effect on hon. Members on this side of the Committee, or on the trade union movement, is that we know that this provision is a blind, in the sense that before it comes into effect there is the greatest chance of it being removed again by another Budget in a year or two.

If we look at the figures for the distribution of dividends so far this year, they are indeed a national scandal. According to the Financial Times, the index of profits and dividends shows about a 21.9 per cent. increase in net ordinary dividends in the first ten months of this year. If we apply that figure over the full range of dividends in public liability companies, it will mean an increase this year of about £120 million in net dividends.

5.15 p.m.

What is the impact of a rate of tax such as the Chancellor is proposing in those circumstances? All that it will raise next year is £10 million, against an increase in the last ten months alone of £100 million in net dividends. If the right hon. Gentleman intended this as a counter to trade union demands for wage increases, or as an attempt to keep down their demands, what effect does he expect this sort of financial comparison to make upon them?

Another reason why I think that this tax will have no effect along the lines which the right hon. Gentleman intends, is because it has little effect on the bigger companies. The Financial Times says: Fortunately in its effect on earnings it is one which can be measured and it is small. I.C.I.'s earnings to cover its 10 per cent. dividend, for example, are reduced only from 31.7 to 30.7 per cent. and Courtaulds to cover its 10 per cent. dividend from 30.9 per cent. to 30 per cent. Cases where the increase will actually jeopardise the dividend are probably few and far between. … So what effect is this having on the larger companies?

Mr. John Howard (Southampton, Test)

Would not the hon. Member agree that the reason the new rate of tax has little effect on the cover available for the dividends is that the distribution is minor in comparison with the profits earned?

Mr. Chapman

There is something in the hon. Gentleman's argument, but I am taking that only as an example. If I took the impact on public liability companies as a whole, the basic factors of my argument would remain the same. Indeed, the tax does not have a great effect on the dividend prospects in the near future.

The next reason the Chancellor's quid pro quo has failed is because of the fact that what he is doing with this tax is having no effect on the more spectacular thing which annoys the trade unions, namely, the appreciation in share values over the last few years. My right hon. Friend the Member for Leeds, South (Mr. Gaitskell) has mentioned this time and again.

Mr. Arbuthnot

Does not the hon. Gentleman realise that appreciation in share values in the last two years has been considerably less than appreciation in wages?

Mr. Chapman

That may be so, but one has to pay regard, if the hon. Gentleman will do it, to the fact that wage increases have not, in fact, equalled the rise in productivity in the last few years.

I fail to see that the people who have had tax-free capital gains, in the form of the increased value of their dividends, have done any work comparable to the increase in productivity that the workers, who have had wage increases, have achieved in the last few years. The hon. Member cannot talk as if they were all working together for these things. He knows very well that there is a windfall capital gain on the one side, and that the wages increases have been worked hard for in the last two or three years.

Capital gains have been substantial. Ordinary shares rose by about 60 per cent. between March, 1954, and June, 1955. Although they have wilted a little since that time, like some other blooms of Tory prosperity, anyone who sold out in time has made a very nice tax-free packet in the last twelve months. On this last count the measure fails, because it does not touch this other part of the whole business which is so infuriating the trade union movement. I believe that in the main we could have had a spirit of restraint in the economy even if we would not have been able to get back to the extent that it was under Sir Stafford Cripps.

I noticed recently in the newspapers that a kite has been flown. It has been said that the Chancellor is going forward with some new and great appeal to industry about prices and profits, in return for which he will ask for a similar agreement with the trade union movement about wage increases. If this sort of new development in the Government's policy had been coming—it has been mentioned a great deal in the Press in the last few days—I think it would have been announced by the Chancellor before now. If he had announced it, I believe that he would have got the response that he desires from the trade union movement—if he was giving something real on the other side. However, if he is putting on the other side the kind of measures that he has included in Clause 2, all his efforts are completely doomed to failure, because they will be taken for what they really are, an absolutely miserable contribution towards achieving a spirit of equity.

Mr. I. J. Pitman (Bath)

I think that my hon. Friends who have interrupted the hon. Members for Sowerby (Mr. Houghton) and Northfield (Mr. Chapman) have been right to do so. To deal first of all with the fallacy on the part of the hon. Member for Northfield; I would ask whether he seriously maintains that the increase in productivity in this country per hour or per year has been brought about by a greater intensity of output in respect of any given capital equipment. Is it not obvious to anybody who observes what is happening in British industry today that the retained profits, the extra capital which has been devoted to new equipment and new machinery, better management processes and everything of that kind, have brought it about?

The kind of nonsense which the hon. Member has put before the Committee and the country this afternoon is absolute nonsense to any reasonable elector in my constituency working for a big engineering firm. The Labour Party may persist in their class hatred if they wish, but it will not get them anywhere. Hon. Members opposite must be governed by principle and must begin to talk on the basis of principle.

I turn to the question of percentages, raised by the hon. Member for Sowerby. He said in effect that one company had raised its profits from £100,000 to £120,000, and had therefore increased them by 20 per cent. It used to pay £20,000 gross in dividends, and now it pays £40,000. He said that that company, the profits of which had gone up by only 20 per cent., was putting up its dividends 100 per cent., and that was terrible. The hon. Member knows quite well that if, in his days in the Inland Revenue anyone under him had played about in that way with the growth of percentages, which is notoriously the most quicksandish of all forms of argument, he would have his work torn up and sent back to him and be told to do better.

Secondly, the hon. Members for Sowerby and Northfield were both arguing that the tax is not enough because its whole purpose ought to be to influence wage restraint. My noble Friend the Member for Dorset, South (Viscount Hinchingbrooke) is talking sense when he says that wage increases are demanded by trade unions not in the context of any of that nonsense but on the merits of the case.

Mr. Chapman

Can the hon. Gentleman then explain why in past history we have managed to do it in the context of a national spirit of restraint?

Mr. Pitman

The hon. Gentleman has only to consider the point to realise that it leads to the very opposite. Take the company about which the hon. Member for Sowerby spoke. Let us suppose that a big wage demand is made to it. The trade union negotiators know quite well that the company is hoping to put up its dividends, and they say, "The extra £20,000 of profit which you hope to make will be subject to Income Tax and Profits Tax at the higher rate if you distribute it. You will pay 70 per cent, of the extra £20,000 in taxation. We are asking for only a meagre £1 per week per head in your industry. Why not buy a happy and contented life? You have merely to take 70 per cent. of the wage increase out of the Chancellor's pocket, and then, for a beggarly 30 per cent. of your carry-forward, you can meet the whole of our demands." That is the opposite way to the direction in which hon. Members opposite say the tax works. The effect is the opposite of wage restraint. In so far as the tax works at all, it is used as a bargaining counter to get a larger amount out of the employer and to cause greater inflation.

I subscribe completely to what was said earlier by my hon. Friends the Members for Dover (Mr. Arbuthnot) and Basingstoke (Mr. Freeth), that the tax is, in essence, a bad one. It means taxing people who would very largely save what would come in as dividends, and transferring it to companies which have to find an outlet for it. It is also most iniquitous in its incidence between one kind of company and another and one kind of shareholder and another. I am afraid that that is based on a fallacy which is operative nowadays in the Treasury. This is, first, that profits are wrong; secondly, that dividends are, if anything, worse; and, thirdly, that profits are really the remuneration of capital.

In fact, the net profit of a company is nothing of the kind; it is the discriminatory element of the profit—not the profit, but a fraction of it—which is properly distributable, having regard to the interests of the creditors. The whole of the conception of profit of the Companies Act lies in the context of what is fair to the people who are supplying goods on credit. To base a taxation system on such a pure term of art rather than on the reality of what the income of the company is seems to me to be the foundation of all the trouble.

I hope that by the time of the next Finance Bill, the Chancellor, if he wishes to tax companies, will find some better way of doing it than by taxing them in such a way that of two companies making the same trading profits, one is taxed heavily because it has raised all its money in share capital, and the other is taxed extremely lightly because it does not own its property but pays part of its profit to the landlord, because it has charged some of its assets and is paying some of its profits to a debenture holder, because it has borrowed some of its capital on notes and is paying part of its profit to the note holder and paying only the rest of its profits to the shareholders.

That latter company seems to me to be the less desirable, socially, of the two but it is the one which escapes with the very smallest Profits Tax merely because the supposition is made that one can equate a profit in relation to a creditor with a profit in relation to the Inland Revenue in respect of ability to bear tax.

That is where the fundamental trouble lies. I hope that over the year the Chancellor will find some better method of company taxation than the present Profits Tax with its super-Profits Tax on distributed dividends, because to base taxation on net profit will only continue the existing inequalities and bad effects which have been pointed out this afternoon by my hon. Friends.

Mr. Jay (Battersea, North)

Although the noble Lord the Member for Dorset, South (Viscount Hinchingbrooke) has not stayed for an answer, I note in passing his desire to return to the distribution of wealth in this country as it was before 1939, which I dare say is representative of many of his hon. Friends.

My hon. Friends and I approve the 5 per cent. increase in Profits Tax, so far as it goes. We approve it not just in theory, as one hon. Gentleman opposite said that he approves of capitalism; we also approve it in fact. Indeed we regard it as the only good part of this Budget.

5.30 p.m.

The hon. Member for Bath (Mr. Pitman) said we ought to have some principle in these matters. Therefore, let us look at the two sides of the Committee in order to see which has acted on the most consistent principles on profits taxation. In the autumn of 1949, the hon. Gentleman may remember, when the country was faced with balance of payments difficulties and an inflationary problem similar in many ways to the present ones, we made a precisely similar increase in the Profits Tax on distributed profits of 5 per cent. I think, therefore, that we are consistent in approving this precisely similar increase now.

Secondly, let us look at the attitude of the Chancellor in this matter. I take it that one purpose of this increase in taxation is to restrain inflation, and I assume from the silence of the Chancellor that he agrees. It is remarkable to read what he said in 1949, when we made a precisely similar increase in this tax, he then said: … this Measure, although it may appear small, and the 5 per cent. may not appear to Involve a great deal of money, perpetuates an act of economic injustice, which is of no value to the country, and which further perpetuates the Profits Tax on industry. This, as we have claimed, falls largely on the reserves, something which is not in the national interests at the present time. He went on to say, even more eloquently: We believe that to transfer a certain proportion of the reserves of companies to the Government to be spent perhaps in current expenditure—which will be the effect of this Measure—will, in fact, be an inflationary move. That was the view of the Chancellor in 1949 and he described it as … a short-sighted step in the financial policy which the Government have so disastrously pursued for so many years to the general detriment of the country."—[OFFICIAL REPORT, 11th November, 1949; Vol. 469, c. 1555–1556.] I claim that we have shown rather more principle than that in having carried out a similar step in 1949 and in approving this one today. So much for the record of the Chancellor for consistency and principle.

I do not think that we can judge fully the value of this rather small increase in profits taxation unless we compare it with the reductions in profits taxation which the Chancellor has made during his entire period of office. In this Clause he is increasing revenue by £38 million. But, of course, the only true way to judge this increase is to set it against the series of reductions in profits taxation which he has been making ever since 1952. I think the Committee should try to work out what that figure is before we agree to the Clause.

I admit that I find it difficult to get the calculation exactly right, and I invite the Chancellor to correct me when he replies and tell us the precise figure, because he has the benefit of advice from all the extremely learned gentlemen in Somerset House. The right hon. Gentleman makes the calculation rather more difficult because he never tells us clearly what he is doing. Indeed, it is one of my complaints about the Chancellor that he gives us so little information about the effects of his various policies and actions. The only respect in which I would call the right hon. Gentleman an "iron" Chancellor is that he tends to build up an iron curtain around the operations which he is carrying on. In spite of that, let us try to pierce it.

How much relief has the Chancellor given to profit earners in his series of Budgets? In the 1952 Budget, when incidentally he talked about equality of sacrifice for all, he put on a new Excess Profits Levy to raise £200 million, and at the same time made changes in the Profits Tax which, allowing for the repercussions on Income Tax, increased profits taxation net by £100 million—so far a net increase of £100 million. Then, in 1953, the right hon. Gentleman decided in his own words that We must get out of the slack water, lighten the ship and give her way."—[OFFICIAL REPORT, 14th April, 1953; Vol. 514, c. 50.] Incidentally, there was nothing said at that time about "broadening the basis of taxation." So he abolished the E.P.L. and refrained at the same time from restoring the Profits Tax. This means—I think this is correct—that, so far, profits taxation was down by £100 million net on the whole operation; and the figures in this year's Financial Statement appear to confirm that estimate.

Also, in 1953, the Chancellor restored the initial allowance, which gave another relief to profits taxation of £84 million in a full year. I give all the figures for a full year, although my hon. Friend the Member for Northfield (Mr. Chapman) is right in saying that the present change will not operate fully for several years. So far, total relief to profits amounts to £184 million, but the Chancellor also "lightened the ship," as he called it in 1953, by a cut of 6d. in the standard rate of Income Tax, which gave another £45 million to profit earners—a net gain so far of about £230 million in tax relief for profits. In 1954 he brought in the investment allowance. But I leave that out of account because it is not, in the ordinary sense, an unconditional relief of profits taxation. On the other hand, it gives actual relief and therefore, my total is, if anything, an under-estimate.

Then this year the Chancellor came along again with a further cut of 6d. in Income Tax, which he told us, in his own words, gave "rather more than £40 million to industry." I should have thought it would have given at least £45 million if the similar cut two years before gave £45 million. At any rate, if it is £45 million, so far,, up to this Budget, those figures, including the spring Budget of this year, give a grand total of reliefs for profits which appears to be about £275 million a year.

That is not the end of the story. It does not allow for the fact that profits are much larger today than they were in the years in which those earlier reliefs were given. So I would like to ask the right hon. Gentleman this question. It is a relevant one and so perhaps he can give us the figures this evening. What would be the additional Profits Tax and Income Tax revenue from profits this year if the tax rates of 1951 to 1952 were in force in the present year instead of those which now prevail? I would estimate—or rather guess, because it is impossible for us to do more than guess—that, even leaving the investment allowance out of account, it must be at least £350 million, with present profits, and perhaps nearer £400 million a year. But I should like the Chancellor to tell us.

Mr. J. Howard

The right hon. Gentleman has referred to initial allowances and has taken credit for £84 million. Would he not agree that initial allowances are merely an anticipation of allowances which will be given in any event and therefore do not amount to any reduction in tax?

Mr. Jay

We have argued that often, and the conclusion is that, since the entire process is continuous, at any given moment they amount to an outright reduction in taxation.

I ask the Chancellor to tell us the figure. But so far as I can see, the blunt truth is that this £38 million increase in tax in this Clause, even when we come to its operation in a full year, is only about 10 per cent. of the total reliefs in profits taxation alone given by the Chancellor since 1951, without allowing for any of the reliefs on the higher personal incomes.

So what the Chancellor is really doing throughout this operation is to give enormous reliefs to profits. At the same time, and I mention this only by way of illustration, I say that he is taking extra revenue from a much more regressive Purchase Tax—the revenue of which, incidentally, has gone up from £300 million to over £400 million since the time when the Labour Government were in office. The housewife, in fact, is paying for the largesse given over these years to the great companies. The remarkable fact is that the relief in profits taxation alone is very nearly equal, if not quite, to the present entire Purchase Tax revenue today.

I believe that this process of lightening profits taxation rather than taxation upon the lower and middle earned personal incomes is wrong and reactionary. Even the noble Lord the Member for Dorset, South might agree with me about that. From the point of view of incentive, as well as of social justice, there is some case for lower direct taxation upon the smaller and middle earned personal incomes rather than upon the profits of big companies.

To those hon. Members opposite who are so worried about the present level of taxation upon profits, I would point out the remarkable fact that, even after this increase, the present level of profits taxation in the United States is slightly higher that it is here. Practical experience shows that under this highest level of taxation upon profits which has ever been known in any country in peace-time, production, investment and employment in the United States today are more buoyant than they have ever been. That is some comment upon the theory that profits taxation does disastrous harm to our industrial processes.

Mr. Pitman

Is the right hon. Gentleman saying that taxation upon distributed profits in the United States is as high as 70 per cent.?

Mr. Jay

In the United States there is a 52 per cent. outright tax upon corporation profits, whether distributed or undistributed; and if we allow for personal Income Tax at an average level, the total is still greater than it is here. If the hon. Member will consult the experts, I think he will find that that is true.

We believe that this shift of taxation on to the ordinary consumer through higher indirect taxes—which are at a lower level in the United States than here—and away from profits taxation, is purely regressive and reactionary. We approve this latest increase in the tax upon profits, so far as it goes; but we utterly condemn the wholly reactionary shift of the tax burden away from profits and on to the ordinary family, which appears to have been the main purpose, and has certainly been the main effect, of the Chancellor's policy over the last few years.

5.45 p.m.

The Chancellor of the Exchequer (Mr. R. A. Butler)

I should like to answer the right hon. Member for Battersea, North (Mr. Jay), at any rate, now, and within a reasonably short time I hope that we may arrive at a decision upon the Clause, because we still have a considerable amount of work to do, much of which is detailed. The hon. Member for Stechford (Mr. Roy Jenkins) and the right hon. Member for Battersea, North adopted rather more agreeable language in reference to the Clause than has been the lot of the Government to receive during the last five days. The hon. Member for Stechford at one period actually used the word "acceptable," which seems to show a great revolution in thought in our financial debates, and the right hon. Gentleman has said that he approves the tax so far as it goes.

One or two speeches criticising the tax have been made by my hon. Friends, and I shall make reference to them later. I foresaw this in one of my statements last night, so I can tell my hon. Friends that they have in no way surprised me; indeed, like Clive, I stand astonished—but at their moderation. I will, however, deal with their arguments as best I can—and also with the arguments raised by hon. and right hon. Gentlemen opposite.

First, I want to take up one of the right hon. Gentleman's points, because I was going to address myself to the question whether this 5 per cent. increase is big enough. That leads me to reply as best I can to the right hon. Gentleman's question relating to a comparison between the effects of profits taxation now and in 1951. Before I give the best summary I can of the position, I want to say that in my opinion the rise in tax on distributed profits is big enough. It was not designed—as the hon. Member for Sowerby (Mr. Houghton) suggests—as a foghorn, or purely as a psychological attack, or as some appeasement to the unions. It was designed quite simply as a method of checking the pressure upon the economy of income rises, due in part to increased dividend distribution, in the same way as the Purchase Tax portion of the Bill was designed to deal with the increase in consumer demand as exhibited in the ordinary wage-earning home.

Those provisions form part of one simple economic whole, and the fact that there has been universal criticism gives me great confidence that, for perhaps the first time, somebody may be on the right economic path.

Mr. Jay

In that case, can the Chancellor say why he totally disapproved of the same action being taken in 1949?

Mr. Butler

I see that a great economist has now come into the Chamber, so he will not take my words amiss. It is so satisfactory to walk so calmly down the middle of the road, rejecting and neglecting missiles from either side, and to feel that one is really achieving something both from the point of view of consumer demand and the effect of the rise in incomes.

The right hon. Gentleman wanted to know what was the total effect of the reductions which I have made in demands upon companies by way of Profits Tax over the years. I do not accept his figures. They are very complicated, and I believe that they neglect certain factors. One such factor is the effect of the incidence of the Excess Profits Levy. That was not mentioned by the right hon. Gentleman. I do not accept that the rises which he has indicated produce the exact result which he has mentioned.

Mr. Jay

I do not want to interrupt the Chancellor too often, but I gave his own figure for the increase when it was imposed, and his own figure for the net increase when it was reduced. Surely he must agree that the figure is at least £275 million—because that is the simple sum of the figures which he gave in his own Budget speeches.

Mr. Butler

I am unable to accept those figures at this moment. But I will certainly examine them, and at a later date we may be able to clarify them. All I can do now is give the percentages of the relationship of Profits Tax upon distributed and undistributed profits as proposed in the Clause, as compared with the situation in 1951. I am referring to the maximum combined effective rates of Income Tax and Profits Tax and comparing the results of the proposals in the Bill with the situation in 1951.

First, we have to take distributed profits. If we take the maximum combined effects of Income Tax at 8s. 6d. in the £, which is the result of the last Budget, that would come to 42½ per cent. and, adding that to the proposed new Profits Tax of 27½ per cent., we arrive at a figure of 70 per cent. In 1951, the Income Tax figure was 47½ per cent. and the Profits Tax figure 26¼ per cent. making a total of 73¾ per cent. In relation to undistributed profits there is a more marked difference, about which I shall say something shortly. Taking Income Tax again at 8s. 6d. in the £ we get 42½ per cent., with 2½ per cent. for Profits Tax on undistributed profits, making a total of 45 per cent. In 1951, the figure was 47½ per cent. for Income Tax and 5¼ per cent. for undistributed Profits Tax, giving a total of 52¾ per cent.

That indicates that we are somewhat below the 1951 level, but it does not give the impression, given by the right hon. Gentleman, of a staggering difference that will be caused when the Bill becomes law. There is, of course, a very distinct difference in the level of undistributed profits if we compare the position as it will be after the Bill becomes law with that which existed in 1951. That is the best answer I can give the right hon. Gentleman in the short time available. I will examine his figures with a very clear and careful eye when I have the opportunity of studying them in print.

I should say that the conclusion to be drawn is that the figures I have indicated, namely, 70 per cent. on distributed profits taking account of Income Tax, and 45 per cent, on undistributed profits, are quite a heavy enough tax on industry at the present time. In so far as it is an improvement on 1951, it shows that the Government have made an improvement in the tax to be levied on industry. So far as there is this marked difference between undistributed and distributed profits in the years ahead of us as in 1951, it shows a distinct improvement.

I came to the conclusion, therefore, that the imposition of an extra 5 per cent. was as much as was reasonable for industry, and that the slice suggested in the Budget is big enough to meet our needs. It will and should have the effect—indeed, it already has had the effect—not only on the boom conditions which I thought were unsatisfactory in the present economic climate, but on the general outlook.

The hon. Member for Sowerby must not underestimate the effects which the other measures, of which I cannot speak because to do so would be out of order, such as the credit measures, will have upon the economy and it will help the moderate and reasonable view which the trade unions will take of their responsibility. In this respect I do not want to add to what was said by the hon. Member for Leeds, South (Mr. Gaitskell) yesterday, that the unions will make up their own minds. Looking at the words of the Clause, as only one small section of our proposals, I think that is the effect which they will have on the economy.

I now come to the series of arguments used by hon. Members. I am taking the argument raised by the hon. Member for Bath (Mr. Pitman), who is a considerable expert in these matters. To put it mildly, he did not like this tax at all. He said it was in some respects immoral and wrong. If it is any comfort to him I will tell him that I approached the preparation of this Budget by reading very carefully the Report of the Royal Commission. I have been very disappointed that I have not been able to accept, at any rate in this Budget, its recommendations for what may be described as a "corporations" tax. I tell the Committee frankly that I think it would have been a very good idea to introduce such a tax. Corresponding to the levels of distributed and undistributed profits before the Bill was introduced, the level of such a tax would have been about 8 per cent., equivalent to 22½ per cent. on distributed and 2½ per cent. on undistributed profits. It would have been very simple to have raised the proportion slightly to bring in a sum equivalent to, or perhaps higher or smaller than, that which the Bill envisages and to do the whole operation as a general reform which, at the same time as it brought in a corporations tax, would deal with the rise in income which is a feature of the inflation at present.

I would comfort my hon. Friend the Member for Bath by telling him frankly that I could not accept in a hurry, and without a great deal more thought, the conclusions of the Royal Commission on this matter. That is not in any way a derogation from the dignity or the efficiency with which the Royal Commission, either the minority or the majority, performed its work. I should like here to pay a tribute, perhaps on behalf of this Committee, to the way in which the Royal Commission did its work and to say that its conclusions are not prejudged by this Budget, which is an emergency Budget.

I cannot give any pledge on behalf of the Leader of the House, but I quite understand the desire of hon. Members on both sides of the Committee, my hon. Friend the Member for Basingstoke (Mr. Freeth) as well as the hon. Member for Stechford, for more time in which to discuss the conclusions of the Royal Commission's Report. It is a perfectly reasonable request. Hon. Members must not regard me as having pledged the Leader of the House as to time, but it is a right request that the conclusions of the Royal Commission, both majority and minority, should be considered in much more detail and not in an emergency atmosphere.

Why could I not accept the Royal Commission's recommendations straight off? I give only one main reason. I discovered that if I introduced a corporations tax, which I should have liked to do because it would have been accepting the Commission's Report and dealing with the inflationary atmosphere, as has been suggested, it would, in the opinion of myself and my advisers, have resulted in favouring companies which distribute the higher proportion of their profits. In these matters my advisers are more important than myself. Having discovered that, I found that these are not particularly suitable recommendations to accept and would not suit the inflationary situation with which we are dealing.

I also found out certain other things, on most careful examination of the Royal Commission's Report, about what type of company and institution a corporations tax would benefit. Without being invidious and going into them by name, let me say that they were not the types of company which I wanted to encourage, particularly at present. For these reasons I decided that it would not be suitable to adopt this proposal. I hope that members of the Royal Commission will realise that the future is in no way prejudiced. We must now give our attention to this whole matter, and if we are to adopt any of the proposals we must only do so after more thought.

That brings me back to the conclusion that the only quick and clean thing to do was to raise the tax on distributed profits. It has been suggested by the hon. Member for Northfield (Mr. Chapman) and other hon. Members that this increase will not operate at once. It was well known that the Profits Tax, even when it was introduced and when I used the language which the right hon. Member opposite has referred to, had to operate a year later. It has a considerable lag. But, as the Financial Secretary said in one of our recent discussions, the prospects of this Profits Tax would have exactly the same effect on companies as the actual collection of the money. He used these words: From now on, the board of directors of every company which is deciding what dividend to declare will have to allow for it. In this way it begins to exercise its influence, in line with the needs of the economy, more swiftly even than does Purchase Tax."—[OFFICIAL REPORT, 8th November, 1955; Vol. 545. c. 1666.] I believe that the effect of this distributed Profits Tax will be felt at once, although the hon. Member for Northfield attempted to make out that because it was not operating it would not have any effect. Our conclusion is that the Profits Tax is the best weapon to use in dealing with this position of the increased pressure of incomes, and that its imminence being known to boards of directors will make it as effective a weapon as we are likely to find in looking round the subject at the present time.

Now I come to the argument of my hon. Friend the Member for Basingstoke. He asked whether the distributed and undistributed profits tax was not more or less inflationary. Let me say, in passing, that while I do not agree with the conclusions to which the hon. Member came, the spirit in which he made his speech was one which the Committee appreciated, namely, that he stated views which he holds. That is the simplest thing to do and the most straightforward way to conduct our affairs. On that part of the Budget I used these words: I have considered whether I should increase the rates of Profits Tax both on distributed and on undistributed profits. I am reluctant to increase the rates specifically charged on amounts put to reserve since to do so would tend to impede the necessary replacement of capital assets and to discourage future investment rather than current consumption."—[OFFICIAL REPORT 26th October, 1955; Vol. 545, c. 226.] That was my view, upon which I have acted.

There is a certain sense in some of the arguments of the hon. Member for Basingstoke. It may be said that investment itself is inflationary because it makes a call on labour and materials. My answer is that too much investment, I mean too large a call on labour and materials, is one of the causes of our inflationary trouble. Therefore, I had to take a difficult decision. I had to consider not only whether to listen to the hon. Member for Stechford and put more taxation on undistributed profits but whether to deal with investment allowances and remove them. I decided against both courses, after mature reflection, and because I am thinking of the future.

6.0 p.m.

While I agree that there has been more of a boom in investment than any of us, even right hon. and hon. Members opposite, expected—for example, an increase of about 60 per cent. in factory building over last year, which is far more than any of us in this Committee expected eighteen months ago—it has to be remembered that the "credit squeeze" is designed to be a measure to deal with over investment. I am satisfied that we should, at any rate, give more opportunity for the credit policy to work on investment before we start cutting it back in the ways suggested. That is my answer to hon. Members who have raised these arguments—which are genuine arguments—and I hope that they will accept the arguments I have used as indicating that it is wiser, on the whole, to think of the future, and to deal with the momentary inflationary features by an increase in distributed Profits Tax.

I am left with the speech of my noble Friend the hon. Member for Dorset, South (Viscount Hinchingbrooke). I thought that he spoke, not only very shortly—which increases his nobility—but also very moderately. I do not use the word "moderately" in a pejorative sense, but in the sense of his restraining the emotions which he felt on the subject. With him, I feel that we have to have a capitalist system which works, and a free economy which works, and the fact is that over the years we have done a great deal of liberation. One of the results of our liberation has been a greatly increased prosperity for the country, an opening up of markets, freedom of choice and things we had almost forgotten about.

Hon. and right hon. Members opposite brought us through what has been described as the Crippsian era, a period of austerity, which may have been right or wrong, however one looks at it. At the time it may have been necessary for the evolution of the British economy, but it had to be followed, at some stage, by a liberation of human effort and human wishes. That is what we have done. The fact is, however, that in doing that we have now found that there is, as I have said, a pressure of home demand and of incomes due to increased distribution of dividends.

I believe that this measure which we are introducing today, combined with all the other measures—including the "credit squeeze"—will do something to deal with the income side of the problem. Therefore, I have introduced it, although I did not expect it to be popular. I hope that the Committee will now realise the motives which have prompted me to take this step; why I did not accept the Royal Commission's Report, and why I thought it wise to deal with this as an anti-inflationary move which I and my advisers think will have the effect desired. It is not purely psychological; it is not a foghorn, it is not a stunt. It is intended as an anti-inflationary move which, I believe, will have the effect we desire. It is in that spirit that I ask the Committee to pass the Clause, and enable us to get on to the more complicated business that follows.

Question put, and agreed to.

Clause ordered to stand part of the Bill.