HC Deb 26 October 1955 vol 545 cc223-7

I now come to something more important. In considering whether I need do anything further in the field of direct taxation, I am governed by the conclusion reached in the earlier part of my speech. I will repeat what I said. "The conclusion is inescapable that we must design our policies so that they face up to, and cope with, the danger to the economy—and especially to our competitive power—of a further expansion of incomes and of consumer demand." The Committee will also remember that I said that our policy, which all sections of the community must support, must combine incentive with restraint.

I do not propose to single out personal incomes, not even the highest personal incomes, for further taxation or for some reduction of the relief from taxation which I have already given them. Personal incentives, especially to those who give a lead on the shop floor or in the office, are hard enough to give, with taxation at its present level, and they should not lightly be withdrawn.

In the case of death duties also, the rates are already very high; nor, indeed, would any practicable change in these duties make any direct contribution to the solution of our problem, which, as I have said, requires an early reduction in the call which we are making on our resources.

There remain the taxes on profits. It is clear that the leaders of industry, large and small, as well as of organised labour, realise that what may be described as a "Demand Race" will price us out of overseas markets, unless we take care. This is true whether the demand derives from increased wages or from bigger incomes resulting from a considerable enlargement of the distribution of profits. It is true that there are reasons for some of the increased wage claims. It is true also that many of the increased dividends have been due to a pent-up restraint over a number of years. Provided that productivity per man increases at least in proportion, there are great advantages in higher wages and there is positive virtue in making profits.

Profits are an indication both of the efficiency of production and of the directions in which economic changes are needed. Unless the economy incorporates some index by which to evaluate the reward for efficiency, and to distinguish between the results of greater and smaller success in the business of risk-taking, it will soon lose the powers of adaptation and innovation which are essential to our survival. Nevertheless, at a time when our resources are overloaded and the demand for the products of industry exceeds the supply, the level of profits can contribute to this excess demand. It is, therefore, appropriate that profits should make some contribution to the effort of restraint which is required of all sections of the community.

I spend most of my time looking forward; but when I look back I feel thankful that on more than one occasion I have been able to reduce the general burden of industrial taxation, which we have only recently got below the high peaks of war-time necessity. The Committee should recall the favourable adjustments we have made in respect of industrial taxation. In my Budget of 1954, when I was criticised for being dull and unadventurous, I gave industry the advantage of the investment allowance. Certainly, few critics at that time raised their voices; in fact, I was pressed to encourage industrial investment more, as I was in my last Budget. We do not propose to withdraw the investment allowance. We propose to rely on the good sense of managements and on the credit squeeze to moderate the pace of investment.

I have, therefore, come to the conclusion that if we are to tackle excess demand as stimulated by the general level of profits I must deal with the difficulty by other means. In the United States, for example, they find it necessary, in the interest of the community, to check undue fortuitous increases in personal fortunes. I have studied the arguments of the minority of the Royal Commission in favour of a capital gains tax; I confess that I am far from convinced by them. In any case, I am sure that it would be premature for the Government to jump to conclusions about a capital gains tax. It would also be most unwise to revert to any conception of an Excess Profits Tax or a special contribution or levy. I have, therefore, turned my attention to the existing profits tax.

This tax is now charged at two rates—22½ per cent. on distributions and 2½ per cent, on amounts put to reserve. The whole question of its structure, and of the taxation of corporations generally, has recently been exhaustively reviewed by the Royal Commission. The majority Report recommends that the existing differential rates should be replaced by a single flat rate; the Minority propose a wholly new system of taxing companies.

I was attracted at first by the majority recommendation; but on examination I have found that it would be very variable in its incidence and have the most anomalous, and in some cases, most surprising results. For example, companies which distribute a high proportion of their profits would gain, while those which put a large proportion to reserve would lose—and the latter include a number of new and important industries. Therefore, I have decided, at any rate for the present, that such a change would not be directed to our present needs. Nor am I ready to make up my mind on the permanent alterations in the structure of the tax recommended by the Royal Commission, and so I must do my best within the existing framework of the tax.

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.

Here, our long-term interests diverge from our more immediate needs. I realise that the tax on distributions has to be paid by the company. Nevertheless, I consider that, in present circumstances, when increased dividends may imply increased consumption, there must be an increased tax on the profits which companies distribute.

I have, therefore, decided to increase the rate of Profits Tax on distributed profits from 22½ per cent. to 27½ per cent., as the measure which is most appropriate to our requirements. The increase will apply to accounting periods beginning on or after 1st November, and, in the case of accounting periods which overlap that date, to so much of the period as falls on or after that date. As on previous occasions when the rate has been increased, there will be provisions for splitting companies' accounts, and for ensuring that a company cannot avoid the increased rate of tax by declaring on or after today an increased dividend for a period before 1st November. The yield in the current financial year will be negligible—naturally; that is always the case with Profits Tax—but eventually, in a full year, it will approach £40 million.

I trust that the prospect of this additional charge on profits, combined with the effect on the whole economy of the sum of the measures which I am proposing, will exert a significant degree of restraint on the amounts actually distributed.

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