Clause 7.—(CHARGE OF INCOME TAX FOR 1956–57.)

HC Deb 07 June 1956 vol 553 cc1287-365

The Chairman

The first Amendment selected is that in the name of the noble Lord the Member for Dorset, South (Viscount Hinchingbrooke), but all the other Amendments down to the Clause can be discussed with it, for they are all concerned with the same point.

3.55 p.m.

Viscount Hinchingbrooke (Dorset, South)

I beg to move, in page 8, line 5, to leave out "two" and to insert "three".

I think the Committee will be grateful to the Chancellor of the Exchequer for moving to report Progress comparatively early on Tuesday so that consideration of this Clause affecting Income Tax and Surtax should not be cut in two. I think there is a corresponding obligation on my hon. Friends and me to be as brief as we possibly can in initiating this debate on Surtax.

Surtax, or super tax as it was then called, was started by Mr. Lloyd George as long ago as 1909, and it is rather interesting to reflect that he introduced it in that most famous Budget speech by saying that the principle on which he based his proposals was that taxation

should be of such a character as not to inflict any injury on that trade or commerce which constitutes the sources of our national wealth."—[OFFICIAL. REPORT, 29th April, 1909; Vol. IV, c. 501.] The vast conglomeration of businesses under the leadership of the Federation of British Industries which annually presents proposals to the Chancellor of the Exchequer for the reduction of taxation, the equally large number of businesses which, no doubt, by devious means escape the consequences of taxation altogether, are, I believe, an apt commentary on the economic consequences of Mr. David Lloyd George.

It is interesting to look at the bed of Income Tax in which Mr. Lloyd George planted his original super tax. Income Tax then began at an income of £150 per annum or £3 a week, a figure which Mr. Lloyd George quaintly phrased as dividing

sufficiency from gentility.…"—[OFFICIAL REPORT, 29th April, 1909; Vol. IV, c. 505.] If one had £149 a year it was insufficient; if one had £150 it was sufficient; and over and above that gentility began. When one became gentle at £150 a year one paid at the rate of 9d. in the £1, and that figure ran quietly up to £2,000. At £2,000 there was a fierce and compelling increase up to £3,000 of 3d.

All this was the work not of Mr. Lloyd George, but of his many predecessors including the great uncle of my hon. and gallant Friend the Member for Cheltenham (Major Hicks Beach). Mr. Lloyd George's epoch making proposal on Income Tax was to increase it on incomes over £3,000 from 1s. to 1s. 2d. Thus Income Tax itself was progressive beyond the point at which super tax began—an interesting principle which, perhaps, we might work on in after years. Mr. Lloyd George proposed to levy his super tax on incomes of only £5,000 or over, but to apply it at the band of income exceeding £3,000—a very useful precedent for my hon. Friends today, and which, I hope, will perhaps attract the Liberal Party to our cause.

Mr. Victor Collins (Shoreditch and Finsbury)

All of it?

4.0 p.m.

Viscount Hinchingbrooke

These poor people—perhaps one should call them rich people—had to pay another 6d. in the £ on their income at £5,000, another 9d. at £6,000, 10d. at £9,000 and 11d. at £18,000. There were very complicated systems for abatement for children and earned income, but the net result is that it would appear that in the year when Surtax was invented, 1909, a professional man with family responsibilities, earning £5,000 a year, paid tax at an effective rate of 1s. 6d. The income equivalent today is £20,000 or even more and the effective tax not 1s. 6d. but 15s. Our island does not seem to me to be any better defended. Indeed, our status in the world has somewhat shrunk and sometimes one wonders if it is not really cause and effect.

The Royal Commission on the Taxation of Profits and Income in its Second Report, Cmd. 9105, recommended that the starting point for Surtax should vary with the taxpayer's family circumstances, becoming £1,500 for the single man, £2,000 for the married man without children, and increased by £160 for each child in respect of whom the taxpayer was entitled to receive child allowance.

I think that everybody in the Committee would want to pay very great respect to the opinion of those eminent gentlemen who served on the Royal Commission, but from our point of view on this side of the Committee there are two decided disabilities to their conclusions. The first is that they were tied by their terms of reference, originally proposed by the right hon. Member for Leeds, South (Mr. Gaitskell) and subsequently altered by the Chancellor of the Exchequer in the first Conservative Government of 1951. They were obliged to produce proposals which did not lower the general yield of taxation, and I am afraid that I have to say that however much one might want to congratulate them on their brilliant analysis of various sets of circumstances throughout their Report, as a precedent for Parliamentary discussion and reform their recommendations must fall somewhat short of what we on this side of the Committee had hoped for and expected.

The second disability of the members of the Commission is that their proposal in this respect was regressive from our point of view. To open up a new band of income below £2,000 on which Surtax would begin to be charged is not a concept which we on this side of the Committee should lightly entertain.

Mr. Roy Jenkins (Birmingham, Stechford)

Will the noble Lord explain in a little more detail the exact meaning of that very engaging phrase "regressive from our point of view"?

Viscount Hinchingbrooke

Hon. and right hon. Members opposite can obviously regard it as progressive to reduce the band of income at which Surtax is first charged, and it is very reasonable that we on this side of the Committee should regard it as regressive. I hope very much that one day we will go in the other direction and do away altogether with Surtax and its expensive special commissioners, put up the Income Tax to 10s. 0d., and so arrange allowances that all taxpayers derive benefit from the joint operation.

However, we make in the Amendment this limited attempt in the taxation field. I think that it is the first occasion for many years. I have not looked up each year since David Lloyd George's day, but I think that this is the first occasion on which a positive proposal to reduce Surtax has been made, although there have been many occasions when the Opposition has debated the proposals of a Chancellor of the Exchequer and sought to hold them back to what they were in the previous year.

On Second Reading of the Finance Bill I gave some parallels with German taxation. I will not repeat them, but it might interest the Committee to know how individuals in various classes fare in comparison with those in France. There is no reason why we should not take parallels from our neighbours and prosperous competitors. A man with an income of £2,000, single with no dependants, pays in this country £541 in tax and in France £490. A married man with no children pays £499 here and £360 in France. A married man with two children pays £414 here and only £191 in France. Indeed, we see throughout these tables—and I give only one more example—that the concessions made for children France are far superior to any made in this country at present.

I take as another example the man earning £5,000 a year. Here, the single man pays £2,326 in tax and in France £1,990. The married man with no children pays £2,284 here and in France £1,585. The married man with two children in this country pays £2,199 and in France only £1,071.

Hon. Members will want to know what the effect of the Amendment will be from the point of view of the reductions which it makes in tax liability. On an income of £2,000. for a married man with two children the tax now is £414. Under our proposals it will remain the same. On an income of £3,000 the tax now is £1,011 and under our proposals it will fall to £900. On an income of £5,000 the tax now is £2,200 and under our proposal it will drop to £1,973.

Hon. Members who think that this would have a large and consequentially undesirable social and political effect on the very-large-income groups can be reassured, because the tax now on an income of £20,000 is £15,000 and under our proposals it will be £14,500. I hope that the Chancellor will correct me if I am wrong, but I believe that the cost of the Amendment would be £25 million in a full year if the tax band above £3,000 remains as it is at present, and £41 million if the tax bands are all shifted up—a concept which is always difficult to have in one's mind unless one sees it on paper.

I know that my right hon. Friend has made the point, that this is a savings Budget and that he cannot afford to release any further purchasing power to people at present. But it seems to me that there is an argument which applies with force to those people who are the executives and perhaps the younger and more successful executives, the administrators of the country, who have not made a large pile of money so far, but who have the responsibilities of married life, of homes and families.

The same argument applies as I sought to apply in the debate last Autumn when the Purchase Tax was increased. If taxation remains high, or if it is put up, the individual concerned who is on an established way of life goes immediately to the source of his salary, his employers, and begs for a further increase. We all know in business and in the professions how even in the last two years substantial increases in salary have been given to executive staff simply because the cost of living remains so high and because taxation grades are so steep.

If it is a mistake to increase Purchase Tax because the worker will immediately go back to his trade union and demand that a new wage claim should be formulated, then there is an almost exact parallel in this class of person, in that they go to their employers and ask that their salaries shall be improved. Therefore the anti-inflationary argument for high taxation cannot really prevail in the case of this class any more than it does for the generality of the workers of this country.

I wish to be brief because many hon. Members on both sides of the Committee want to speak in this debate. I come, therefore, to the really anxious matter which this Amendment raises. I would define it as the undesirable social revolution that is going on within the middle and professional classes and which must be arrested. I am not talking about the social revolution which hon. Gentlemen opposite will say they took the lead bringing about, but which all parties engineered for the masses of our people during the war and since. That social revolution was established and consolidated and is respected by all, and nobody wants to undermine it.

However, during the war and since there has been a haphazard revolution of a nature which is not desired by either of the main political parties of the State. I have sensed many times in the speeches of hon. and right hon. Gentlemen opposite how disagreeable they find it. And when hon. and right hon. Gentlemen opposite desire, as a party, to raise the salaries of any administrative profession they are part of the revolution whilst expressing dissent from it. The revolution concerns the entrepreneur, the business man, on his own account or in association with others. By the expenses allowance which now prevails he is escaping the consequences of high taxation, where-as the professional men and the salariat are caught by high taxation and cannot escape from it.

I have heard the hon. Member for Sowerby (Mr. Houghton) in speech after speech in this House asking for a new administrative technique to be established to draw back from the successful business man the expenses which, in the view of the hon. Gentleman, he ought not to have been allowed. I think it is the view of hon. and right hon. Gentlemen opposite, therefore, that in some way equality must be achieved between the professional man, on the one hand, and the business man on the other who by these various devices escapes the consequences of high taxation.

We on this side of the Committee dissent on basic political and philosophic grounds from the view that we should indulge in more governmental devices, which involve the engagement of more civil servants, to pry into the fortunes of successful people. I am an unashamed capitalist. I think it is the only salvation for this country in the peculiar circumstances in which we find ourselves in the modern world. Therefore, we must work the devices of capitalism and let men foster the way of life that goes with it and not try to suppress their activities all the time.

4.15 p.m.

But I am also for allowing some sort of equal standard of living and equal wealth to be attained by the professional man who from earliest days has sweated it out in school and university and relies upon his brains. We can all think of such a man, the doctor, the teacher, or, if one likes, the priest. These are the salaried technicians and administrators, the scientists, the lawyers, active and retired. Those are all those with little capital and those who are denied the expense allowance.

There is no doubt that under the undesirable social revolution which is taking place their standard of life is falling by comparison with the successful entrepreneur, the man of business. They are being trampled down by commerce. The way to correct this situation is not to strain after doubtful expense charges, as hon. and right hon. Gentlemen so often desire, but to reduce the weight of Income Tax and Surtax on the middle class and on the professional class. That would provide a platform upon which everybody could advance under conditions of equality.

I do not believe that the Treasury will ever do this. I have advanced this theory before and I cannot conceive, except under Parliamentary pressure, that any Crown authority will voluntarily, and out of its own good conscience, see this brought about. Only Parliament can do it, and on profound historical and constitutional parallels I believe that back benchers of all parties in this House who believe in this, and who want to see equality prevail amongst the professional classes, must act, and act now. It will then be up to the Chancellor of the Exchequer to collect in other ways the revenue which he must have.

If Parliament will only say, "We will not have this weight of direct taxation any more," then the Executive is able enough to devise other forms of taxation. Indeed, many forms have already been bruited, such as, for example, an expenditure tax on everybody. That would fall equally on the classes about which I am speaking. It would hit most those who spend most, whether they are magistrates or film stars, bishops or captains of industry. I hope very much, therefore, that this moderate, reasonable and, on the figures on which we are working, inexpensive proposal will be the beginning of a Parliamentary campaign.

Mr. John Cronin (Loughborough)

It has been agreeable to hear the noble Lord the Member for Dorset, South (Viscount Hinchingbrooke) moving his Amendment. All of us will agree, I think, that the noble Lord has some interesting economic views. Although there might not be a general feeling that they contain very profound thought or high intellectual content, they are certainly original. I give him full credit for that.

Fortunately, the views of the noble Lord are not particularly nocuous. For instance, they are not in the same category as the rather unhappy economic views of the Lord Privy Seal, which have been followed by disasters, and they do not cause the same Pandora's Box of ills as that which is being let loose by the present Chancellor of the Exchequer. Nevertheless, they are agreeable and stimulating to hear. I think the noble Lord made one very useful point—the rather unhappy position of the full-time salaried person compared with that of the entrepreneur. That is a very fair point to make, and it would be agreeable if that situation could be changed.

The noble Lord's suggestion that Surtax payers as a class should have substantial relief, which is the purpose of his Amendment, does not carry strong conviction, certainly not on this side of the Committee. There is a general feeling which one hears at social gatherings of a certain type or reads in the newspapers that Surtax payers have rather a hard deal. This idea, of course, emanates from the Surtax payers themselves, so that it is not entirely surprising that it exists, bearing in mind that to a large extent they control the various organs for propagating information and news.

If we analyse a few rather elementary facts about Surtax payers we find that they do not have nearly such a hard time as is indicated in some sources and that they do not need the assistance of the noble Lord's Amendment. It is a truism, of course, that Surtax payers belong to a rather privileged class in that obviously their capabilities of consumption, by reason of their incomes, must be high. A person with more than £2,000 a year must do much better than a person with less than that. That is a truism, but it bears repetition.

There is another aspect of the Surtax payer's position—I am talking about Surtax payers in general—and it is that to a very large extent he is able to avoid the disagreeable effects of high taxation. It is well known that by virtue of their large incomes Surtax payers can take advantage of many forms of tax avoidance—and I say tax avoidance as opposed to tax evasion. The final Report of the Royal Commission on the Taxation of Profits and Income made some play of this point. For example, the Surtax payer can invest his money in some firm or some organisation which produces a considerable loss and yet at the same time can gain capital value, so that after a short time he can sell that capital asset and make a substantial tax-free profit.

That is the sort of avoidance which is obviously not open to people who have not large incomes. A typical and very common example is the purchase of farms. A man may buy a derelict farm, run it at a substantial loss for some years and then sell it at a substantial capital profit. That is a typical example of the Surtax payer's capacity to avoid taxation.

With the exception of the full-time salaried person—a proper exception which the noble Lord made—Surtax payers as a class can usually take full advantage of expenses. Practically the whole class of Surtax payers can obtain expenses for a wide variety of activities which in themselves are agreeable and add to their standard of living. A company director can entertain lavishly in a smart restaurant and recover a substantial tax rebate on his expenses, but there is no question of a coal miner obtaining any expenses which involve an agreeable sensation.

Mr. John Hall (Wycombe)

Can the hon. Member tell me whether the miner pays tax on his concessionary coal?

Mr. Cronin

That is a fair point to put, but concessionary coal is surely an old-established practice in the industry.

Mr. Percy Shurmer (Birmingham, Sparkbrook)

And the miner digs it himself.

Mr. Cronin

I do not know whether the hon. Member is suggesting that coal miners should be deprived of concessionary coal.

Mr. Hall

I was not suggesting anything. I was merely picking up the hon. Members own example and asking a question.

Mr. Cronin

The analogy seems some-what incomplete to me.

Mr. Geoffrey Stevens (Portsmouth, Langstone)

Would the hon. Member allow another question? Do trade union officials ever entertain at the expense of anyone except themselves?

Mr. Cronin

I am very glad that that question has been raised, because if there is one glaring scandal in this country it is how grossly underpaid are trade union officials. [HON. MEMBERS; "Answer the question."] The answer is, "No."

Hon. Members

Rubbish.

Mr. Donald Chapman (Birmingham, Northfield)

Let supporters of the Government produce some evidence.

Mr. G. Lindgren (Wellingborough)

When hon. Members opposite go to the Savoy, whom do they see there?

Hon. Members

Other hon. Members.

Mr. Cronin

I fully appreciate that Surtax brings forth very strong emotions in the breasts of hon. Members opposite, but I must beg leave to continue with my argument.

Another very simple way of avoiding tax, of course, is some form of alienation of income by making a convenant which involves an ultimate profit to the person who makes it. In addition, Surtax payers obtain untaxed financial considerations by receiving large sums as ex gratia payments for various purposes. All these things are not available to people who do not pay Surtax, or are available to only a very small proportion of them.

There is, I suggest, another quite different aspect—that Surtax payers as a class usually do rather agreeable work. There are certain exceptions to that; I should not think that it is entirely agreeable to be a Conservative Chancellor of the Exchequer. Speaking generally, however, Surtax payers have quite pleasant lives and occupations. It is much more agreeable to be a company director or a judge than to be hacking out coal in a 15-inch seam. That may be a wide example, but the analogy stands. If they had justice, Surtax payers ought to have their incomes decreased rather than increased on account of the agreeable nature of their work.

Another perhaps more fiscal argument which I beg to offer to the Committee is that if hon. Members consult this year's Financial Statement they will see that the Exchequer receipts from Surtax in 1955–56 were £138,600,000. On the opposite page—page 4—they will see that the interest and management of the National Debt cost this country roughly four or five times that—£637 million.

The Surtax payers' contribution, in Surtax, therefore comes to about only one-fourth or one-fifth of the money paid out to the National Debt. The importance of this lies in the question, who gets the money paid out for the operation of the National Debt? I suggest that a large proportion of the people who receive it are Surtax payers.

Mr. Angus Maude (Ealing, South)

The hon. Member must surely be aware that a very substantial part of that money goes to such institutions as insurance companies for the purpose of investing the life insurance premiums of quite small income earners. Trade unions invest their funds in precisely the same way, as do companies and all sorts of organisations and institutions. The hon. Member has no evidence at all for what he is saying.

Mr. Cronin

I am delighted to have that intervention from the hon. Member. I do not suggest that Surtax payers receive all the receipts of the National Debt. I suggest that they receive much more than they pay out in Surtax. I do not think that the hon. Member would suggest for a moment that Surtax payers receive less than one-quarter or one-fifth of the money paid on the National Debt.

4.30 p.m.

Mr. R. Gresham Cooke (Twickenham)

Does not the hon. Gentleman agree that Surtax payers are already paying their full share of Income Tax, which goes towards relieving the debt?

Mr. Cronin

I assure the hon. Member that most of us on this side of the Committee are aware of these elementary points on taxation, but I do not see how they affect this general argument.

There are economic reasons why Surtax payers should not receive this relief. The first is that it does not prevent them in any substantial way from continuing to earn income. No doubt we shall hear a good deal about incentives from hon. Members opposite later on. I think that the Committee will perhaps agree that much of the work done by Surtax payers is of a vocational nature and that salary is not their first consideration. If the average Surtax payer has to give up some of his considerations for his work, he will still go on doing that work. No one will cease being a judge or cease being an actor because he has to pay more tax.

There are some hon. Members who will agree with me that Surtax is often an actual incentive in itself to people to work harder. It all depends on how much one values one's income. In general, I think it will be agreed that a Surtax payer, if he has a marginal portion of his income taken from him, will probably work all the harder to make up for the loss of that marginal portion.

On the question of incentive, quite often a Surtax payer, who feels that he does not want to go on working because a large part of his income is being taxed too severely, will devote himself to some equally valuable but less remunerative form of occupation. He may become a Member of Parliament, for example, or start a farm. He may do many useful and valuable things. He may work on committees of voluntary organisations.

Another important economic argument for not relieving the Surtax payer is the mere fact that a wealthy man knows that his income is being severely taxed and that induces him to go in for more hazardous financial ventures. He will be more likely to advance risk capital because he knows that he will get a tax-free capital profit if he is fortunate, and the reverse if he is unfortunate. Risk capital, which hon. Members opposite take so much to heart as being of importance, is much more likely to be produced by the person who is well paid and who knows that he is being severely taxed on the marginal amount of his income.

I do not want to take up too much time, but I fear that much of my time has been spent in answering interruptions. I think that the most unhappy aspect of the noble Lord's Amendment is its relevance in the present economic situation. It seems to me to be most peculiarly maladroit. Here we have the Chancellor telling us that we must have a savings Budget. He stumps the country and produces speeches which, I think, are of considerable value, as they indicate what is happening, and that we are rapidly approaching disaster. I am astonished that he is prepared to avow it so freely, but that may well be because he feels that the shortness of his tenure of office may shift the responsibility in other directions. I would not press that point.

In the present situation, I would ask hon. Members to remember what happened yesterday, when we were pressing for a very small consideration to be given to old-age pensioners on tobacco. That was quite ruthlessly turned down, yet in spite of that, hon. Members opposite are here in strength; I have rarely seen such a solid phalanx of hon. Members on the other side of the Committee during a debate on a Finance Bill. The noble Lord may well review his troops. They are here in strength to obtain a large financial concession for wealthy, and certainly less deserving, people.

I am sure that the Chancellor will not accept this Amendment, although it may to some extent go against the grain not to do so. It follows a very long-standing Conservative principle, which is best expressed in the rather homely words that one hears north of the Trent, "If you do owt for nowt, do it for thy sen."

Mr. Maude

I think everyone will be delighted to find that the hon. Member for Loughborough (Mr. Cronin) is to continue that strain of engaging eccentricity which we found so appealing in his beloved predecessor.

We have listened to a speech which displayed not merely the haziest conception of economics but an idea of the life of Surtax payers which seemed to be based on a cross between Karl Marx and "Peg's Paper." The hon. Member, like so many of his hon. Friends and colleagues, is clearly of that school which believes that on reaching an income of £2,000 a year the average professional man enters that class of high society which launches its daughters immediately upon those parties whose principal feature is throwing champagne bottles at the river police. The truth, of course, is not so. An income of £2,000 a year to a family man in these days, a figure, which, if rumour is to be believed, is that which some hon. Members opposite deem appropriate to the salary of a Member of Parliament, is, to say the least of it, not quite what £2,000 a year was before the war.

I want to add only two points to those which my hon. Friend the Member for Dorset, South (Viscount Hinchingbrooke) so cogently made. They are two points which I hope hon. Members opposite will bear in mind and to which, I hope, the Economic Secretary will address himself when he comes to reply to the debate.

Let us look for a moment at what is happening to the man with an income of, let us say, from £2,000 to £5,000 a year. As the cost of living goes up, which it has done pretty steadily since 1939, his income and salary, it is true, do not rise as fast as those in certain other classes of the community; but in so far as it does rise in order to keep up with the cost of living, let us look at what happens to it. At every point above £2,000 a year his income, which in real terms remains the same, if not smaller, has a progressively higher rate of taxation levied on every £1 of it. That is clearly a matter of economic injustice which goes far beyond the simple progressive system of taxation which was envisaged when this figure of £2,000 was first made part of the Surtax law.

Furthermore, it goes far beyond the ordinary process of redistribution of wealth, which is a part of that social revolution to which my noble Friend referred. When wages increase alongside the cost of living, it is perfectly true that there comes a point at which a wage earner begins to pay tax at the standard rate of 8s. 6d. in the £, but after that he continues to pay at the same standard rate for every increment of wages as the cost of living rises. That is not so with a salary of more than £2,000. The tax is then imposed at a higher rate in the £ every time there is an increase in salary of £500 a year.

Mr. Chapman

That is a big enough band for the hon. Gentleman, is it not?

Mr. Maude

The hon. Member must consider the fact that these increases do not always take place in blocks of £500 a year. I wish to goodness that they did. There comes a point when a man goes from one £500 band into the next, and the impact of tax on his salary becomes far greater than it does in the case of a wage earner getting an increase in wages. What is in fact happening is that the impact of Surtax on the salary earner is all the time reducing the effect of an increase in salary designed to offset the increase in the cost of living.

It is perfectly plain that if a starting point of £2,000 a year was fair and right before the war, or immediately after the war, it is not fair and right now. We are asking that, as a simple act of justice, this matter should be put right. I was glad that the hon. Member for Loughborough did not produce the argument so often produced by his hon. Friends when, for example, a Conservative Chancellor of the Exchequer has lowered the standard rate of Income Tax by 6d., without increasing the upper level of Surtax, that this concession would be bitterly resented, as they always put it, by the workers.

I have always found it difficult to accept the singularly unattractive picture of those whom they purport to represent which hon. Members opposite are always so willing to present to us, the picture of people who arc unwilling to permit a simple act of justice to others unless some concession is also given to them. I do not believe for a moment that a concession of this kind would be bitterly resented, because the figure of £2,000 for the beginning of Surtax is clearly out of date and has no relation whatever to the cost of living, the salary level, or level of taxation with which we have to contend nowadays.

I hope that the sort of speech which we have heard from the hon. Member for Loughborouh will not set the key note of the speeches from the other side of the Committee in this debate. We remember very well the line which Members of the Labour Party used to take in the years between 1946 and 1951 when they were in power and when the redistribution of income was proceeding apace. Apparently it used to be a perpetual surprise to Members of the Labour Party to find that there were still people who had any substantial amount of money left to spend out of their salaries or income from investments.

4.45 p.m.

If they found that they could not get people of reasonable quality, for example, to serve on the boards of nationalised industries, they were prepared, rather unwillingly, to pay them substantial four-figure salaries. There was always the implication that if they had to pay that amount of money they jolly well saw that they got it all back. Even if, by some mischance, a substantial amount of money was left after tax, it seemed to be the aim of hon. Members opposite to ensure that there was nothing worth-while on which to spend the money.

We can remember that happening over and over again. There were always perfectly good reasons for it—they said there must be no holidays abroad, no independent schools, no private practice in the National Health Service and so on. There were always good reasons why these impositions should be made, but there was an air—I hesitate to say of sadism—at least of gusto in the enthusiasm with which these restrictions were always propounded.

Unless we realise on both sides of the Committee that, as long as we have an economy which is predominantly capitalist—not nowadays as predominantly capitalist as some of us would like —which at least purports to be based on the market, we must allow market incentives to operate. There is no more fantastic way of weakening them than by allowing salaries to be subject to a scale of Surtax starting at a level designed many years ago to cope with a totally different economic situation. I hope that my right hon. Friend the Chancellor will, as soon as he feels it economically possible in the circumstances of his Budgets to make this concession, give us some hope that he will do so.

Mr. Roy Jenkins

The hon. Member for Ealing, South (Mr. Maude) always addresses a close-knit argument to the Committee and his speech this afternoon was no exception. He and some of his hon. Friends, as occasionally in the past, do not act in the service of the cause of free enterprise, which is part of our economy, if they link its survival, as he did towards the end of his speech, with sweeping reductions in direct taxation which are completely impossible for any Chancellor of the Exchequer to carry out.

I rather preferred the more philosophical and wide-ranging approach of the noble Lord the Member for Dorset, South (Viscount Hinchingbrooke), though at one time his speech became almost strident. When he was addressing an argument to the Chancellor of the Exchequer he seemed to be making a bid for high office in a new organisation which the hon. Member for Lewisham, West (Mr. H. A. Price) is setting up. In the course of doing that the noble Lord addressed a number of very interesting arguments to the Committee.

I was surprised to hear him begin by offering an alliance to the Liberal Party, an offer which seemed to be received with dismay, because the Liberal Party has disappeared from the Committee. I see that the hon. Member for Huddersfield, West (Mr. Wade) has now entered the Chamber. The noble Lord began by making an offer of alliance to the Liberal Party on the basis of general support for Mr. Lloyd George's Budget of 1909. That is a somewhat belated conversion to the virtues of that Budget on the part of the noble Lord and his party and I am sorry that he did not tell us some of the remarks which his party made about that Budget when it was introduced and some of the treatment which it accorded it.

However, he went on to address a number of arguments slightly more pertinent to our present situation, but not many of them were arguments of very great force. One of his arguments was that high taxation on large salaries earned by up and coming people in the professional grades was inflationary, because inevitably salaries would be increased faster and faster. He instanced as an example the fact that in the last two years there had been very substantial increases in salaries in precisely this grade. But the last two years have been a period of reductions in direct taxation.

Surely the noble Lord will not take even that away from the Lord Privy Seal. Surely he will not suggest that the Lord Privy Seal has not done something to benefit people in this class. If he has, and if in the last two years there have been reductions in taxation—not precisely in the form advocated by the noble Lord, but with broadly the same effect and with, I will not say as a consequence, but as a corollary, very sharp increases in the gross salaries of these people—I do not follow how the noble Lord comes to the conclusion that, in order to prevent salaries rising faster, we must have further reductions in direct taxation.

The noble Lord also dealt with some rather wider topics. I do not deny for a moment that Surtax, in its lower ranges, may bear rather heavily upon the married man, especially the one with no property but with a family. I am sorry that, from this point of view, the noble Lord swept away as being completely undesirable the scheme of a self-balancing adjustment in the burden of Surtax put forward by the Royal Commission. There is a great deal to be said for reducing the burden of Surtax upon the man with heavy family responsibilities within the sort of income bracket with which the noble Lord was dealing, but I do not see why the position cannot be remedied as the Royal Commission suggested, namely, by such an adjustment that the concession could be paid for—as all taxation concessions have to be paid for—by other people in roughly the same income bracket, but with rather less heavy responsibilities.

Viscount Hinchingbrooke

My objection to the proposal of the Royal Commission's scheme for Surtax was not that it produced reductions in tax for salaried men with family responsibilities. It did that, but it compensated for it by putting a new Surtax burden upon the single man, upon the principle that practically the same amount of revenue was required from Surtax. In fact, the net effect of their reductions was £1 million only.

Mr. Jenkins

Of course, and that is precisely the point with which I was dealing. The noble Lord sometimes sets himself up as the guardian of constitutional liberties, and I was surprised to hear him suggest that the Royal Commission would have done its job better if it had dealt not merely with the type of taxation, but with the general level of taxation which I should have thought was pre-eminently a job for a Chancellor of the Exchequer or a Government and quite wrong to entrust to a body like a Royal Commission. The noble Lord is willing to accept concessions provided that he does not have to pay for them and that they are perfectly straightforward concessions that carry no disadvantages with them.

I thought that the same consideration applied to his concluding point, which was based upon the most powerful premise that he adduced in the course of his speech. He said that there is a big difference between Surtax payers who earn straightforward salaries and others who earn an income which, broadly speaking, is assessed under Schedule D. I agree. That is one of the things which is most worrying about our direct taxation structure at the moment. Rates of tax, although nominally the same, bear with nothing approaching the same degree of severity upon the taxpayer who happens to be assessed under Schedule D and the taxpayer who is assessed under Schedule E because of the entirely different system of dealing with expenses and, therefore, the entirely different relationship of taxable income to the spending power of the individual concerned.

The conclusion which the noble Lord drew from this was that it was impossible to produce a fair base of taxation, but nobody has been more consistent than he in previous years in resisting any attempts to make the base rather more fair—attempts which have been made in Amendments moved by my hon. Friend the Member for Sowerby (Mr. Houghton) and others. The reason which the noble Lord gave for being unable to consider an evening up of the position was that he is an unashamed believer in capitalism. He may be an unashamed believer in capitalism or anything else, but I do not see why that should prevent him from seeking to remedy a completely unfair taxation system as between two different classes of taxpayer.

I suggest that by the language he uses and the approach he makes to this problem the noble Lord does no service to those whose cause he is advocating. It is no good his suggesting that it is possible to make such sweeping reductions in direct taxation as to make the difference in the tax base a matter of comparative unimportance. His is a completely impracticable solution, as I think he recognised by saying at the end of his speech that this was something that no Chancellor of the Exchequer would accept. It is a totally impracticable suggestion.

Starting from the premise that there is great unfairness in the present tax base, I suggest that we should do very much better to look in the direction of making that tax base broader and fairer. If that were done, it might be possible to make certain direct reductions in the nominal rates of direct tax which would be of benefit to certain people in the category he defined who, I agree, suffer at the present time.

Mr. John Hall

I was glad to hear that the hon. Member for Stechford (Mr. Roy Jenkins) at least has sympathy for the professional classes and has offered his support to the recommendations of the Royal Commission. In that case, he may be prepared to support an Amendment in the name of some of my hon. Friends and myself designed to make the Surtax level flexible, so as to take account of varying responsibilities as between married and single men and earned and unearned income. I understand that it is in order to discuss that Amendment in the general debate upon the Amendment moved by my hon. Friend the Member for Dorset, South (Viscount Hinchingbrooke).

The Amendments which we are discussing are long overdue, and they have been made necessary because of the destructive effect upon the middle range of incomes of the twin evils of inflation and taxation. Inflation has always been with us. The value of money has fallen inexorably throughout the centuries. Although it has sometimes appeared to have risen, that has generally proved to be an illusion. Successive Chancellors of the Exchequer have been constantly occupied with ensuring that our rather elastic economy does not become merely a stretch of the imagination. In the eighteenth century, Boswell was able to live the life of a fashionable man-about-town on about £200 a year, and in the nineteenth century, as students of Mrs. Beeton will probably know, it was possible to have a reasonably comfortable establishment on £500 a year. When Surtax was imposed at its present level of £2,000 in 1907, any possessor of that income could be regarded as reasonably wealthy, and even in 1938, £2,000 a year was not a bad income.

What is the position today? In February of this year, I put down some Questions to my right hon. Friend in order to ascertain the difference between the value of £2,000 in 1938 and its present value, and I was informed that £2,000 a year today was the equivalent in purchasing power of £633 in 1938. Today, an income of £633 a year would not be regarded as that of a wealthy man. To have the same purchasing power today as a man earning £2,000 a year had in 1938, one would have to earn £12,200 a year, and if a man earned £3,000 a year in 1938 he would require to earn £34,600 today in order to have the same purchasing power. In the "500-dollar" Question, I asked my right hon. Friend the Chancellor what his salary would have to be today to give him the same purchasing power as his predecessor enjoyed, with the same salary, in 1938. and I was staggered to be told that he would need £75,000 a year. If the present Chancellor is not worth £75,000, I wonder at what rate we should pay his predecessors in office in the previous Government? Apart from the fall in the value of the £, the main contributory factor to the reduction in the value of income has been the savage incidence of Surtax.

5.0 p.m.

Mr. Harold Wilson (Huyton)

I hope the hon. Member will realise that, on hardship grounds, we on this side of the Committee are not proposing that the present Chancellor should be paid by results—at any rate, we want him to live. Nevertheless, will not the hon. Gentleman realise that the figures he has been quoting and which we have followed with the greatest interest—I am sure that they are genuine and could be supported—are figures which we hope will be reported to the Chancellor in the strongest possible terms when once again the right hon. Gentleman is considering the salaries of hon. Members of this House?

Mr. Hall

I share the hope of the right hon. Gentleman.

People earning up to £2,000 are in a better position to cushion themselves against inflation and the rising cost of living by demanding, and in most cases receiving, increases of wages and salaries which enable them to keep up with the rate of inflation; although when the salary rises it becomes more difficult to maintain those increases at the same rate as the inflationary trend from which we have suffered over the past 20 years or so. However, it is interesting to see that the average industrial wage, or I should say earnings, has been rising higher than the cost of living. The purchasing power of average industrial earnings rose by 16 per cent. between April, 1951, and April, 1955. There we have an example where at least wage and salary earnings have to some extent kept pace with and even exceeded the rising graph of inflation. But the higher the salary, the more a man receives over £2,000, the more difficult it becomes for him to keep pace with increasing inflation. The more that man tries to compensate himself for the fall in the value of his income, the greater is the impact of increased taxation.

I think it was Benjamin Franklin who said: Only two things in this life are certain—death and taxes. What the average Surtax payer complains about is that they do not come in that order. It is not always realised by those who do not pay Surtax that the earned income allowance and the personal and child allowances are not allowed for Surtax as they are for Income Tax. I do not think it is realised that the effective increase in the rate between £2,000 and £2,500 is not between 8s. 6d. and 10s. 6d., but is an increase from 6s. 7d. to 10s. 6d., a difference of 3s. 11d. For every £under £2,000 there is a relief of two-ninths on earned income, whereas over £2,000 that relief does not apply.

It used to be argued that there was no reason at all to help any man earning £2,000 a year or more; that, after all, many wage earners who receive far less would be delighted to be earning that amount, and therefore a man earning £2,000 a year who found life difficult should reduce his standard of living. I have heard that argument advanced many times, but I do not think that it is advanced any more. It is now realised that a labourer is worthy of his hire and that if we want to recruit able men we should be able to reward them adequately. But how are we to reward ability when increased taxation diminishes that reward?

Consider the position of the senior Service officers. Recently there have been generous increases in Service pay, but many senior officers have found themselves in a tax bracket which more than halves the additional benefit they thought they would receive. Consider the recommendations of the Herbert Report, which says that we must pay more to attract outstanding men to serve on the boards of nationalised industries. How do we propose to make the rewards worth while? What is to be the difference in the real net value to a man who is to get perhaps £6,000 or £7,000 a year against a present salary of £4,000 or £5,000 a year? If we take a range between £6,000 and £8,000, the average earner of that amount receives 5s. for every £ he earns. Is that how we shall attract oustanding men to the nationalised industries?

Mr. Chapman

If the hon. Gentleman looks at the Report of the Commissioners of Inland Revenue, he will find that a single man earning £6,000 after tax retains £3,100 and on £8,000 he retains £4,700.

Mr. Hall

Every £ he earns over £6,000 is diminished by 15s. in the £, and that is no incentive whatever.

One other interesting fact which has a relation is that the present level of £2,000 which, as the Royal Commission pointed out, is not supported by any valid principle, is producing an immobility in top class labour in this country. One of my jobs, for my sins, is to try to find able senior executives for some of the companies with which I am professionally connected, men who are employed at a salary which I personally have not the time to earn. A great difficulty is that when we try to encourage a man, already earning over £2,000, to move to another job in another area, we can offer him little to compensate for changing his home and moving from one neighbourhood to another, because the amount he gets in every £ is too little. He desires a definite net addition to his income, and we have to give him a salary out of line with the real value of the job, which upsets the whole salary structure and adds considerably to production costs.

Furthermore, anyone engaged in business and trying day by day to find men to fill jobs will know that so many of our really able younger men are going abroad to other countries where they think they can get an adequate reward for their work. One can see the reaction to the Surtax level going far beyond the confines of this country as in the reaction to Clause 9 of this Bill. It will be difficult for foreign companies to send top executives to this country if they are to suffer the savage and penal effect of Surtax that we ourselves are suffering. Despite the remarks of the hon. Member for Loughborough (Mr. Cronin)—I am sorry is not at present in the Chamber—I think it true to say that Surtax at present levels is destroying incentive and enthusiasm in a large section of the middle-classes, which includes the top-ranking professional and executive classes from which we draw our leaders. Do not let us forget also that these are the traditional savers in the country.

Mr. Arthur Moyle (Oldbury and Halesowen)

What about the workers? Are not they traditional savers?

Mr. Hall

If the hon. Member wants support for what I have said, I recommend him to read the Report of the Royal Commission, which refers to the fact that the greater part of private savings has come from those with the big incomes.

Mr. Moyle

Why does the hon. Gentleman confuse counsel by bringing in an irrelevant argument? When my hon. Friend the Member for Loughborough was speaking, he intervened and brought in the question of concessionary coal to miners. What has that to do with the case he is now advancing?

Mr. Hall

I am not sure that I introduced into my own speech any reference to miners, and my reference in an interjection in the speech of his hon. Friend was because his hon. Friend used the miners as an example when speaking of company directors and the question of tax-free expenses and emoluments.

May I now continue my speech? I wish to read this extract from The Times of 27th February of this year. It states:

What do the middle classes need for their rehabilitation and how can the Government help them? For the lower ranks the first need is an end of inflation. In the inflationary race they are nearly always left behind. For the higher ranks the urgent need is that the point at which Surtax begins and earned income relief ends should he pushed well beyond its present £2,000—£2,025 level. The idea"— and here The Times quotes a figure with which I do not agree, as it is different from the figure given me by the Chancellor— that the man earning £800 in pre-war terms and £2,000 now is really rich and taxable as such is something quite new in Britain's tax philosophy. It is about at this level, more-over, that the wider responsibilities of a professional position begin to be heavy enough to need some of the personal and family freedom which goes with a modicum of domestic service—a privilege often out of the question now. The Times leader goes on to say: Virtually nothing has been done for the upper ranges—the small and middling Surtax payers. That is the class with which I am mainly concerned— Their plight is a special case of its own. The passage of four normal Conservative Budgets with little relief for the middle class anywhere and practically none for its upper ranges has left a feeling of hopelessness. If relief is not given by a Conservative Government, will it ever be given? Yet the Government may be making a profound error of omission. A fairer deal for the middle class would be for the good of the nation. My Amendment, which we are discussing with that in the name of my noble Friend, is perhaps rather more modest than his, and perhaps also a little more flexible. By continuing the existing allowances—the earned income allowance, the marriage and personal allowances and the children's allowance—into the range of Surtax, we could make it possible for the Surtax level to vary with the responsibilities of the individual. For example, if we take the case of a single man whose income is wholly earned, his Surtax level would start at £2,590, and, if his income was unearned, £2,140. In the case of a married man with an earned income but no children, the Surtax level would start at £2,690, and, in the case of a married man with two children, which is the average family, it would start at £2,890. My Amendment would not preclude the raising of the Surtax level at any time.

It is argued, and it will be argued by my right hon. Friend, that the Amendment moved by my noble Friend is contrary to his present policy—that it is contrary to the policy of giving no tax reliefs at the present moment and of encouraging savings. I should like to stress that if we want savings we have to make it possible to save. If we want greater and more efficient output, we must give fair rewards to those who carry the main managerial and technical responsibilities. If we want to secure the lead in the technological race in which the major Powers of the world are now engaged, we have to be sure that our best scientists and engineers are not attracted to other countries where pay is higher and tax lower.

We have developed a system of taxation by taking money from the people so that giving part of it back again seems like a gift. The proposal in this Amendment is not a gift. It represents the very barest justice to a class of people which the nation cannot afford to discourage. I hope the Committee will forgive a slight incursion into Roman history. It is said from time to time that we are going the same way as the Roman Empire, though I myself have never believed it. There is, however, one point of parallel which is of interest.

Rome became an easy prey to the barbarians, partly because high taxation played its part in destroying its middle classes. There is no doubt at all that its government, its trade, its art and its spirit were decayed as a result long before the barbarian onslaught, and that made it impossible for the Romans to resist the attacks when they came. We are on the way to destroying our middle classes now, and, although this particular Amendment deals with only one section of the middle classes, the question is not whether we can afford to accept the Amendment, but whether we can afford to reject it.

5.15 p.m.

Mr. Douglas Jay (Battersea, North)

This is strictly a debate on Surtax rather than on the Roman Empire, on which subject I personally think the hon. Member for Wycombe (Mr. John Hall) is misinformed. Therefore, I think it might be better to leave general arguments about direct taxation in all its bearings to the discussion on the Question, That the Clause stand part of the Bill, and to stick strictly to the question of Surtax in the present debate.

It seemed to me that the noble Lord the hon. Member for Dorset, South (Viscount Hinchingbrooke) was suffering from a sort of nostalgia for the distribution of wealth in 1910. Indeed, he has suffered from that nostalgia before. I thought the main new element in his speech today was that he seemed to describe it as equality. I found rather the same nostalgia, plus certainly a larger number of figures than arguments, in the noble Lord's speech. I really was not very clear at the end of it why he thinks it is a good thing that the Surtax level should be increased beyond the figure of £2,000. Of course, the noble Lord may be saying—and this was certainly said by the hon. Member for Ealing, South (Mr. Maude) and by the hon. Member for Wycombe—that this ought to be done because money values have decreased in recent years. The value of the £ sterling, we are all agreed, has gone down, and therefore it may be said that the present level of £2,000 is entirely out of date.

If that is the main argument, then I do not think this is the first priority among the resulting changes that ought to be made in our direct taxation system. If we are to change the system because of the change in the value of money, the first priority should be to exempt altogether a number of the smallest Income Tax-payers. If we are to concede, or to give away, to use the Lord Privy Seal's words, £25 million, which is the extra cost of the noble Lord's concession, or, on some other basis, £41 million, the first priority is to use that figure for exemptions further down the scale.

Secondly, it may be argued that this should be done, not on the grounds of money value, but on grounds of greater equality between one taxpayer and another. If the noble Lord had proposed the alterations in Surtax which he described but did not endorse, but which the Royal Commission proposed, then in my opinion his argument would have been very much stronger. The Royal Commission, in that proposal, wanted to vary the minimum level of Surtax according to the number of dependants in the family and to give an increased child allowance at the same time, which on grounds of equity, has very much more to be said for it than the simple change which the noble Lord is proposing. It is quite true that in France the taxation system takes far more account of the number of persons and not just the single figure of earnings in the household, and it is obviously more equitable that it should be so. The question where what the late Mr. Lloyd-George, as he then was, called the "level of gentility" begins now depends just as much on the number of dependants as on the size of the gross income. If the noble Lord had made his proposal in that form, we should have been much more sympathetic to it.

Thirdly, this case could he argued on grounds of incentives and the alleged injurious effect on incentive and effort which Surtax is supposed to be producing. I noticed with some interest that the noble Lord did not put that case with much force or conviction; nor did any hon. Member opposite until we came to the hon. Member for Wycombe who, while he at any rate did state it, in my opinion grossly over-stated it.

Perhaps the reason why hon. Members opposite have become more cool about this argument is that it was decisively rejected by the Report of the Royal Commission, and, since the hon. Member for Wycombe put this argument so fiercely and also quoted the Royal Commission on other points, I should like to draw his attention to what the Royal Commission said. After all, this Commission included men like Lord Radcliffe, Sir Geoffrey Heyworth, Mr. Millard Tucker and others, who would not be particularly prejudiced in favour of the arguments which we normally put from this side of the House.

Viscount Hinchingbrooke

Obviously, they would have to reach over backwards in order to get the assent of some Members who support the policy of the party opposite.

Mr. Jay

I am quite sure that the noble Lord would not expect them to put in their Report anything they did not believe. I am sure the noble Lord did not mean that. Having said that it was generally alleged that taxation had a disincentive effect, the Commission, in paragraph 149, went on as follows: But if we are asked to infer from this that the heavy rates have any special disincentive effect upon the receivers of the higher levels of income, so as to justify a shifting of the existing weight of taxation from these ranges to lower levels of income, we are bound to reply that we see no evidence that the higher income-earners are specially affected by disincentive.

Mr. John Hall

Up till recently that has been fairly true, because, as the hon. Member for Loughborough (Mr. Cronin) pointed out, those in the higher grades seem to be conscientious and to have a sense of vocation. That still does not take away the tremendous injustice of imposing upon that sense of vocation and conscientiousness. Today, however, these two conditioning factors are not operating to the same extent as diminishing income, and economic pressure leads them to search for higher incomes.

Mr. Jay

If the hon. Gentleman shifts his argument from incentive to injustice, that is an altogether different matter. Since he has interrupted me and is arguing in that way, let me read a little further from paragraph 149 of this Second Report: In the meantime we should not conclude, either from our own observations or from such evidence as we could extract, that the high managerial post, for instance, is declined because its rewards are not thought worth obtaining or that the artist or the professional man abates his energies because tax has made it not worth while that he should exercise them to the full. We must all pay a great deal of attention to what the Royal Commission, an impartial and authoritative body, said on this important point.

On the question of incentive, I would like to know whether the Government take the view which we have heard from the hon. Member for Wycombe. We had a rather extraordinary speech from a member of the Government, the Minister of State for Colonial Affairs, in the North of England the other day. He said that it was the policy of the Government to increase incentives for those in the Surtax class but to support all action to arrest wage increases among the wage earners. I ask the Economic Secretary whether that is the policy of the Government and whether the Minister of State for Colonial Affairs was speaking out of tune on that occasion.

On this side of the Committee, we believe that the £2,000-a-year limit is not something to which we are eternally wedded regardless of the number of de-dendants in the family or whether the income is earned or unearned. The hon. Member for Wycombe was on much stronger ground when he was arguing in favour of the Amendment which has not been called and which would have made an increased differentiation between earned and unearned income in the Surtax class. That is important, because the Annual Report of the Inland Revenue shows that from £2,000 a year upwards very nearly half of the total income is still unearned to this day. That is a very much higher proportion than we find in the lower levels of income. It is therefore rather important, when we are discussing Surtax, to know whether it is a question of taxing earned or unearned income. The first priority is not to consider simply the raising of the £2,000-a-year limit.

We believe that there is still a great deal of tax avoidance in these Surtax grades. A little earlier, one of my hon. Friends quoted evidence of the fact, which has always impressed me, that the yield of Surtax has not increased in the last 15 years by anything like what one would have expected, taking into account the increase in the national income over those years.

On the other hand, Mr. Kaldor, in his book about the Expenditure Tax, which the noble Lord the Member for Dorset, South seemed to be supporting, if I understood aright, said: Despite the extremely sharp increase in surtax rates, which amounted to 46 per cent. as compared with pre-war (a higher percentage increase than in the case of Income Tax) and an almost threefold rise in the national income, the total revenue from surtax only rose from £59 million in 1938 to £130 million in 1953. That suggests that there is very considerable avoidance. I know the Economic Secretary attempted to reply to that point that it was not due to avoidance but was evidence of the great redistribution of income that had cut down the size and the number of the incomes of £2,000 a year and upwards, but I would like to know what evidence there is for taking that view other than the figures of Surtax incomes themselves in the returns to the Inland Revenue.

If the hon. Gentleman were to say that most of the expensive hotels in the West End were closing down, or produce some other evidence of the shift of real incomes and purchasing power, it would be conclusive, but at present we have no evidence except that the incomes, as returned to the Inland Revenue, are not as high as we would expect them to be. Therefore, if we are to tackle this problem, the first priority should be to tackle evasion before we talk about reducing the rates of tax.

Mr. John Arbuthnot (Dover)

The right hon. Member for Battersea, North (Mr. Jay) said that he could not see any reason for increasing the level at which Surtax starts. I would suggest that there are two fundamental reasons. The first was accepted by my right hon. Friend the Lord Privy Seal when he was Chancellor and was supported by hon. Gentlemen on both sides of the Committee, since there was no Division against it.

Dealing with the question of Estate Duty, the Lord Privy Seal pointed out that it required at least £3,000 now to provide the equivalent value of £2,000 before the war. He therefore raised the level at which Estate Duty started from £2,000 to £3,000. What is reasonable and practicable for Estate Duty should also be followed for Surtax, and is the first fundamental reason why the Surtax level should be raised.

The second reason is that it is extremely difficult today to reward a higher executive sufficiently for taking greater responsibility or to reward him for moving from one place of residence to another. It is difficult to provide these rewards as many of us find in our business activities. As my hon. Friend the Member for Wycombe (Mr. John Hall) has said, the question we have to consider today is not whether we can make this concession, but whether we can afford not to do so.

5.30 p.m.

I think it is worth while considering now the best way in which the problem should be dealt with. I am astonished at the modesty of the proposals of my noble Friend the Member for Dorset, South (Viscount Hinchingbrooke). I do not think he goes nearly far enough. The proposals put forward by my hon. Friends and myself in the two Amendments to which we have signed go considerably further. I am glad to find that the hon. Member for Stechford (Mr. Roy Jenkins) and the right hon. Member for Battersea, South are in agreement in feeling that there is a stronger case for giving additional personal reliefs and earned income allowances than for the raising of the bottom level at which Surtax begins.

The amendments which I feel are most important are, first of all, that the personal reliefs should be taken into account for Surtax, including children's allowance, since the level at which Surtax begins bears most hardly on the married man and especially on the married man with children. If the proposals which my hon. Friends and I have put forward were brought into effect they would mean, taking the case of a married man with two children, that allowance would be made before Surtax was payable, first of £240 for the personal allowance for himself and his wife and then of £200 for the two children, followed by earned income relief at two-ninths, which would be £450, making a total of £890. Over and above that, if the level at which Surtax began was raised from £2,000 to £2,500, it would give a relief which would take into account the special responsibilities of the married man with children. We feel that would do a greater justice to those people who are in difficult circumstances today.

Mr. Chapman

I think one of the most interesting misapprehensions which have run through this short debate, particularly in the minds of hon. Members opposite, is that here we are dealing with the middle class. We have been taken back to Lloyd George by the noble Lord the Member for Dorset, South (Viscount Hinchingbrooke) and back to Ancient Rome by the hon. Member for Wycombe (Mr. John Hall) on the assumption that here we are dealing with a considerable number of taxpayers who form the middle and upper ranks in our society.

The most important fact we have to realise is that the total number of tax-payers who pay Surtax in our community is only a quarter of a million out of a total of 20 million income earners. Let us first debunk the idea that Surtax in some way hits what we broadly call the middle classes. if only a quarter of a million of them are paying it I cannot see how the definition of middle class can be so narrowly drawn as to include only them.

The second thing which is most interesting is that on this side of the Committee there is an understanding that there is some problem in the £2,000 to £3,000 per annum range. I say this in all friendliness to the noble Lord. I do not think he will get any hon. Member on this side of the Committee to be interested in what happens to those beyond the range of £3,000 gross income, but there is some interest in what happens to the family man who has educational and other family responsibilities and a gross income of between £2,000 and £3,000 a year.

Of the quarter of a million who pay Surtax, only 125,000 only half—come into that £2,000–£3,000 range. Here I might be tempted to say what a wonderful definition that is of the middle classes in our society if it amounts to only 125,000 of the community. We admit that there is a problem in that range of income for many people, but I want the Committee to look even further into that figure before it starts making concessions in the way the noble Lord has advocated. If of that 125,000 whom we want to help the noble Lord looks at the number who have two or three children—those are the only persons for whom we on this side have any sympathy—he will find that the number is only 30,000 or 40,000. It is totally ridiculous in the view of hon. Members on this side of the Committee to advocate, as the noble Lord has advocated, a tax concession totalling something like £25 million or £30 million to help that small number of people-30,000 or 40,000 in our community.

Sir Peter Roberts (Sheffield, Heeley)

One thing which encourages me to support the argument put from this side of the Committee is the question of incentive. A vast number of people are hoping to gain through their own efforts by getting into this range.

Mr. Chapman

I do not object to that and I will answer the point before going further. The simple answer is that if the hon. Member will look at the point at which they pay when they come into this range he will see that by the time they reach £2,500 they will be paying only £50 per year and by the time they reach £3,000 they will be paying only £112 a year, whereas the real disincentive has come, not with Surtax, but with a huge jump in Income Tax payments. Whilst they are paying £50 or £112 in Surtax, their Income Tax is going up from £520 to £750 and £975.

Hon. Members opposite cannot pathetically point a finger at Surtax and say that it is the cause of the worries of the family man in the £2,000 to £3,000 range. It is Income Tax which hits him most and, when it is narrowed down, we find that it hits a very small proportion of Surtax payers. It would be ridiculous to make this concession to help that very small number.

Viscount Hinchingbrooke

The hon. Member is, perhaps mistakenly, muddling my Amendment with the Amendment in the name of my hon. Friend the Member for Wycombe (Mr. John Hall). I gave the figures of £25 million and £4I million and my Amendment deals with the Surtax payer apart altogether from children. The Amendment in the name of my hon. Friend mentions children, but he did not mention those figures.

Mr. Chapman

The noble Lord could not have been listening when I said that if in his plea for all Surtax payers he wanted sympathy from this side of the Committee he would have to seek it for the family man in the £2,000 to £3,000 range.

If hon. Members opposite look up the Report of the Commissioners of Inland Revenue they will find that even in that £2,000 to £3,000 range there is something like at least 25 per cent. of Surtax payers who obtain a very substantial part of their income from unearned income. It is just not true that those are men in managerial positions in industry, totalling huge numbers, who are being penalised. A large number of them are very largely dependent on unearned income for getting into that income bracket. If hon. Members opposite will look at the number of people they are trying to help and to get sympathy for and will look at the proper way of helping them, they will find that it is ludicrous to take this huge amount of Surtax and relieve all the Surtax payers in order to help that small minority.

This is a most fantastic Budget in which to start to give this kind of concession. The other day I read in a national newspaper the budget of a married man bringing up a small child and trying to run a car and buy a house on £7 19s. a week. His total outlay on groceries for the three was £1 2s. 6d. a week. His outlay on meat was 6s. 6d. a week. Hon. Members opposite often spend more than that on themselves for one meal. [HON. MEMBERS: "Hon. Members opposite do so too."] We are all in the same boat in that respect. The Chancellor is appealing to that man not to start wage demands. That man is being told that in the interest of the whole community he has now reached a plateau. I should think it is a plateau of half-misery. He is told to wait a year before making a wage demand.

If a message went out from the House of Commons that we chose this year to make such a concession to a vast number of Surtax payers in order to help a very small minority of their number I should like to know what effect it would have on wage demands during the coming twelve months.

Viscount Hinchingbrooke

None at all.

Mr. Chapman

The noble Lord says, "None at all." He must think that the trade union leaders in charge of wage negotiations never keep their eye on what goes on in the House of Commons. I can tell him that if he sent out a message from the House of Commons to the effect that in this year, when everybody else is being penalised, Surtax payers are to get substantial concessions, it would be another one of those last straws which would let go another round of wage demands in the next twelve months.

It is not only silly and ludicrous to try to help a small number in this way; it is also very dangerous indeed to choose this year and this moment to attempt it.

The Economic Secretary to the Treasury (Sir Edward Boyle)

We have had an extremely interesting debate. I am sure the whole Committee is indebted to my noble Friend the Member for Dorset, South (Viscount Hinchingbrooke) both for tabling his Amendment and for his very thoughtful speech.

I was a shade surprised to hear at the conclusion of my noble Friend's speech what he had to say about Mr. Kaldor's proposals. If he reads again the last chapter of his very interesting book, he will see that Mr. Kaldor's proposals, as Mr. Kaldor himself admits, bear an implication which is very far from moderate though they certainly open up most interesting vistas.

My noble Friend's speech was followed by a most remarkable speech by the hon. Member for Loughborough (Mr. Cronin), who introduced us to a new economic term which so far very few of us have heard, "the elasticity of demand for income in terms of leisure." This slightly reminded me of Mr. Balogh's famous description of direction of labour as "an intelligent discriminatory influence on employers' hiring policy."

I would say to the hon. Member for Loughborough that I hope we shall not get into the habit of talking too much of Surtax payers as a class. That wise man, John Sedley, at the time of the Civil War in the seventeenth century, remarked, "There is this king and that king. There is no class of king." That is a very true remark. There are all kinds of Surtax payers with all sorts of positions and all sorts of personal problems.

I do not think we need apologise in any way this afternoon for having devoted particular attention to the problems of those in managerial positions who play such a big part in our society. My hon. Friend the Member for Ealing, South (Mr. Maude), who made a most thoughtful speech, made a point which is extremely valid, that it is very much harder for salary earners to maintain their position in real terms than it is for wage earners. My hon. Friend conclusively made his point upon that.

5.45 p.m.

The hon. Member for Stechford (Mr. Roy Jenkins) said that we must not link private enterprise to sweeping reductions in direct taxation. When the hon. Member was speaking, there were moments when I was a little reminded of a remark which my right hon. Friend the present Secretary of State for Air once made about the right hon. Member for Bishop Auckland (Mr. Dalton). My right hon. Friend said that the right hon. Member for Bishop Auckland seemed to think that the way to run the capitalist system was to roast half the chicken and then tell the other half that it must lay more eggs.

I should not have thought there was any great dispute about the fact that the very high level of taxation is a serious matter, not least for those in managerial positions. I was this afternoon again looking at a quotation, not from an hon. Member, but from a supporter of hon. Gentlemen opposite, Mr. A. F. Shumacher. Many years ago he contributed a very interesting essay on the subject of public finance to a book on full employment. I have quoted it previously. In the article he wrote: The more progressive the scales of taxation, the smaller at the same time is the reward obtainable by business men for extra effort and risk taking, and in a free society the limits of taxation deserve the closest study. That is certainly the view on this side of the Committee.

I think it fair to say that throughout the country at the moment, and by no means least on the Opposition benches, a great deal of attention is given to the importance of having a high rate of productive investment. It is no good going all out for a high rate of productive investment if one is to penalise all managers by an excessive rate of taxation. I would again mention Mr. Balogh, because he gives us the benefit of his views rather often in one forum or another. It strikes me as rather absurd to say, as he did in the New Statesmen recently, that on the one hand we should try to double our rate of prime productive investment and at the same time aim at a Budget surplus of £1,000 million. These two ideals do not tie up. If we are to go out for increasing wealth in this country we must pay very careful attention to the limits of direct taxation.

The right hon. Member for Battersea, North (Mr. Jay) referred to incentives and also spoke about Mr. Kaldor's calculations showing what the yield of Surtax should be. I thought that when speaking on the Second Reading of the Finance Bill I pointed out conclusively that neither the earned incomes nor the unearned incomes of Surtax payers had advanced between 1938 and 1952 anything like as fast as the national income. That was the basically false assumption on which Mr. Kaldor's model calculation was made.

Mr. Jay

Are not the figures of Surtax income quoted by the hon. Gentleman those returned by the taxpayers to the Inland Revenue? Is no evidence to be gained from that?

Sir E. Boyle

The right hon. Gentleman is wrong about this. Nearly half the Surtax paying incomes are from investment, whereas the national income has risen threefold. The national income figures show an increase of about 40 per cent. only in rents, dividends and interest going to personal income. That is a fact.

Secondly, apart from the use of Inland Revenue figures, the Priestley Commission, after studying incomes in industry, put the increase for the higher grades of the Civil Service at less than double pre-war. There is plenty of evidence here, and that of the Royal Commission on the Civil Service is fairly conclusive. There is evidence without using the returns of Surtax payers themselves.

Mr. Jay

As the Surtax figures have risen, surely incomes should have been increased to more than double.

Sir E. Boyle

I pointed out on Second Reading that, if one is to bring in these considerations, there are many on the other side. Do not let us forget the Special Investment Contribution of Sir Stafford Cripps, which is important when calculating this kind of figure.

My noble Friend pointed out that the Amendment would involve a good deal of money. It would cost £27 million in a full year if the income above £3,000 continued to bear the same rates of Surtax as at present, but if the current rates of Surtax above £2,000 were applied to the corresponding slices of income above the proposed new limit of £3,000—which I think was the idea in my noble Friend's mind—the cost would be greater still. It would be as much as £46 million. I am sure that my noble Friend will be the first to recognise that to grant so big a relief to Surtax payers this year would be inconsistent with my right hon. Friend's decision that in the circumstances of this year's Budget there cannot be any general tax reliefs. There have been, in fact, some increases in taxation.

Furthermore, when we are looking at this question it is important to take into account what has been said by the Royal Commission on the Taxation of Profits and Income. In its second Report, which dealt with personal taxation, the Royal Commission went at some length into the question of the Surtax starting point. It did not, of course, recommend any general increase in the Surtax exemption limit, but did most certainly think that the present graduation of tax tended to over-rate, in the middle and upper income ranges, the taxable capacity of the family man as compared with that of the taxpayer without dependants.

In that connection the Royal Commission made two recommendations. In the first place, referring to Income Tax—which does not strictly arise on this Amendment—it suggested that the Income Tax child allowance should be graduated. Secondly, as was referred to, I think, by the hon. Member for Stechford, it made the suggestion that instead of a uniform starting point of £2,000 for Surtax there should be variable starting points for Surtax liability, by which single persons would start paying it at £1,500, childless people at £2,000, as at present, and that those reliefs should be increased to £160, the suggested figure for child allowance. I mention that here as being among the considerations which my right hon. Friend would clearly like to think over very carefully.

I have a certain degree of sympathy with the hon. Member for Stechford. I think it is arguable that there is room in some part of our tax system for, as it were, redistribution within groups of people of the same income. At any rate, we would not rule that out dogmatically, although my right hon. Friend will pay careful attention to what my noble Friend had to say. A more important point, perhaps, is the argument that an increase in the starting point of Surtax would give an increased incentive to the managerial and professional class.

I think that I have already said enough to show the Government's sympathy with my noble Friend's objective here. At the same time, one has to consider what is the best way to achieve this objective. As I think a number of hon. Members have pointed out, an increase in the Surtax starting point would give relief to all Surtax payers, no matter whether their income was derived from earnings or from investments or from a mixture of both. Therefore, the Surtax payer living on earned income and the Surtax payer living on investment income would, assuming that their incomes were equal, both derive equal benefit from my noble Friend's proposal.

Obviously one would have to think over very carefully what is the best thing to do. It is very arguable. It might be better, as a possible means of giving special help to the managerial and professional classes, to do what was suggested by the Royal Commission. The Royal Commission thought that the two-ninths earned income relief in respect of Income Tax should be extended higher up the scale Here, again, there are many great possibilities.

While, therefore, my right hon. Friend has the greatest sympathy with my noble Friend's general line that we should aim to give increased incentive to the managerial and professional classes, we will obviously want to think very carefully about the best means of doing this when economic circumstances allow. It is very nice indeed to think this afternoon about possibilities of tax reliefs, and we certainly want to consider very carefully the burden of taxation on individuals in our society at the present time. Obviously, there is no greater service we can do for the middle classes than to halt the rise in the cost of living. No greater service can be done for those on fixed incomes than to stabilise the real value of the money they already get. That is the great object of my right hon. Friend's Budget, and it is on that that his Budget and his policy will be judged.

Mr. Moyle

The advocacy by the noble Lord the hon. Member for Dorset, South (Viscount Hinchingbrooke) and other hon. Members of this Amendment appears to make some peculiar claim that those whom they say are covered by its provisions are suffering greater hardships as the result of our existing levels of taxation than are other sections of the community. From the Front Bench this afternoon we have gathered that the tax concession proposed would cost about £25 million a year. Not a single speech made in support of the Amendment has told the Chancellor who is going to pay for this tax concession, although hon. Members opposite must know that such a concession cannot be made without other sections of the community having to foot the bill.

It is very significant that while this Amendment has been discussed we have had, relatively speaking, a full House, notwithstanding the fact that the noble Lord and his hon. Friends have had the temerity to ask the Chancellor of the Exchequer, despite the adversities in which this nation is involved, to relieve one section of the population of about £25 million of taxation. I recall that on Tuesday, when we discussed the proposal to retain the tobacco concession for the old-age pensioners—the cost of which, I understand, was estimated at about £2¼ million a year—there was not at all the same enthusiasm displayed as has been shown on this occasion today from the benches opposite.

Why is that? I think I know. If I may say so quite frankly, they are actuated by—and I am not complaining about it—the thought that in this advocacy on behalf of what they call the middle classes they have a sound party political advantage. I say at once that I am delighted at this belated enthusiasm of the Tory Party for the middle classes. It certainly is belated enthusiasm. I have spent part of my lifetime trying to get the middle classes to identify themselves with the workers, because I have always held the view, and still hold it, that had they had the good sense to identify themselves with the working classes they would have had a far better deal than they have ever had as a result of allying themselves with the class of people whom the noble Lord represents, if I may say so, very ably indeed.

Viscount Hinchingbrooke

Whom does the hon. Member mean?

Mr. Moyle

If I may say so, this Amendment applies to those in receipt of incomes of £2,000 a year and upwards, and I doubt whether the total number of people in his constituency who would be affected by this would be more than 2 or 3 per cent.

Viscount Hinchingbrooke

Two per cent.

Mr. Moyle

I give the noble Lord the benefit of 2 per cent.

I listened with great interest to the speech made by the hon. Member for Wycombe (Mr. John Hall). I did not agree, of course, with a word that he said but, if I may say so, it was a very able speech. Where I quarrel with hon. Members opposite is that they always prejudice their own advocacy on these issues, because as soon as they get up to ask the Chancellor for a particular concession they always attack the miner. It is a kind of disease of the sub-conscious mind which affects some Members of the party opposite, and comes into their consciousness during such debates as these.

I thought that my hon. Friend the Member for Loughborough (Mr. Cronin) was making a first-class speech, and then what happened? Up jumped the hon. Member for Wycombe and said "What about the concessionary coal that the miners receive?" That just shows the class consciousness of hon. Members opposite. They may not be aware of it, but it is there. In any event, that intervention had nothing to do with the case, because concessionary coal for the miner is part of the conditions of his employment. Relief from taxation is not a condition of the employment of people whom we are discussing. If the hon. Gentleman wants concessions for the people whom he represents, those people should do the same as the workers and join an appropriate trade union and cease to join "top hat" organisations.

6.0 p.m.

With regard to the point that was made about the morals of this class of person, what is there in that regard that distinguishes these quarter of a million taxpayers from any other section of the community? What different standard of ethics can they say they possess which is not enjoyed by every section of the community? The hon. Member for Wycombe spoke about a sense of vocation. I have mixed with the middle class, and I find that they have a sense of vocation. I have mixed with the working classes, and, indeed, I find that they have a very strong sense of vocation. I have mixed very occasionally with the members of the aristocracy, and I must say at once that the secret of the charm of the aristocracy whom I have met is that they have no sense of vocation at all.

Therefore, when it is claimed as a reason for granting this tax concession as sought by the noble Lord that these people have a special standard of morality, and that they are more patriotic, I must say that there is no substance in the case at all. These people who are conscientious, those who have a sense of vocation, who are prepared to put their country first and are prepared to live and die for it, have no special claim at all. It is a common condition of every Britisher in this land. It is wrong to try to hive off these people as if they were some special type of citizen of unique ethical standards suffering excessively from some grievous taxation which is not shared equally by everybody according to their particular income.

Therefore, I hope that the Chancellor will in no way look favourably at this Amendment. I hope that he will look once again at the national balance sheet, where he will discover, as I have discovered, that since 1951, when the Tories came into power, the distribution of the national income has gone gradually more and more in favour of those people who receive incomes of £2,000 a year and more, and less to the advantage of the working classes. I say to the noble Lord that since 1951 the Chancellor has been working in his direction. I sincerely hope that when we get into power we shall reverse this trend of distribution and reestablish the former trend, so that the workers get more and the people for whom he has spoken this afternoon do not get tax concessions at the expense of other sections of the community.

Amendment negatived.

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

Mr. Roy Jenkins

I am sorry to trouble the Committee a second time this after-noon, but this is our only opportunity, in dealing with this Bill, to consider the level of taxation and the balance between direct and indirect taxation as a whole. The matter, therefore, is clearly one which should be considered before the Committee passes from it.

I am bound to say that it is a pity that the Chancellor is not here for this debate on Clause 7. I should not be inclined to take the view that the Chancellor should sit on the Treasury Bench throughout the whole of our debate on the Finance Bill, but the provisions of this Clause raise £2,000 million worth of revenue, and I feel that it is verging on the discourteous to the Committee if the whole of this Clause is to be discussed without the Chancellor's presence, and without a few words from him.

In many respects, the present Chancellor will find it easy to improve on the record of his predecessor, but in this one respect it looks as though he may do rather worse, because the right hon. Gentleman who is now Lord Privy Seal was fairly assiduous in his attendance during Finance Bill debates, and I do not think we have ever had an occasion when the present Lord Privy Seal allowed the main revenue Clause to go through without being present or saying a word or two.

Sir E. Boyle

My right hon. Friend the Chancellor of the Exchequer had to attend, at 5 o'clock, a meeting which is still going on. He asked me to make his apologies if this point should be raised.

Mr. Jenkins

Ministers always have meetings during the Finance Bill. However, I naturally take note of what the Economic Secretary has said.

This Clause raises nearly half the total revenue in the Budget. To some extent, it is surprising that although we have just had this debate on Surtax, hon. Members opposite have made no attempt to secure a reduction in the standard rate. It has been a continuing cry from the opposite benches that constant reductions in the standard rate are a necessary part of the improvement in the health of the economy. Certainly the noble Lord who used to represent the constituency of Blackburn proclaimed, as a goal to be reached before the end of the last Parliament, that there should be a standard rate of 7s. 6d. I am surprised, in view of what he and many hon. Members opposite have said in the past, that they should have left the Order Paper so blank in that respect this year.

Last year hon. Members opposite were unanimous in claiming a reduction in the standard rate of Income Tax. Although there are many statistics which are not in a particularly healthy state at the present time, they are certainly no worse than they were a year ago. The main gold figures may not be so encouraging, but they are better than they were in May last year. The trade balance for April and May may not be very encouraging, but it is rather better than the trade balance for the equivalent period last year.

Mr. H. Wilson

If my hon. Friend will forgive me for intervening, may I recall to him that we have not yet had the trade balance figures for May, and we shall not get them until next week, so that it is perhaps premature to say whether they are better or worse. When he refers to May being better than last year in regard to reserves, may I remind him that it was a purely negative result, in that reserves went neither up nor down, compared with May of the previous year, when our gold and dollar reserves rose by 164 million dollars?

Mr. Jenkins

I entirely accept what my right hon. Friend has said. He is quite right in saying that we have not yet had the trade figures for May. There is nothing in the figures to make last year a particularly appropriate year compared with this year, in that respect. After all, only last October, the Lord Privy Seal, speaking on behalf of the whole Cabinet presumably, was vigorously defending what he did last year by saying that he thought the economy needed a fillip such as he was able to give it.

Surely if the view is taken, on the other side of the Committee, that this is the only major sort of fillip to which the economy responds, a fillip is still more necessary this year than it was last year. So far as production is concerned, we have now reached the stage where the index has been almost completely flat for a year. Even though the plateau, which the Chancellor has reached as regards prices, may be a rather peculiar sort of plateau, he does at least appear to have brought us on to a plateau, in the more usual sense of the word, in the matter of production, and we have been on it now for a year.

I see that the hon. Member for Louth (Mr. Osborne) is eager to intervene, as he so often is. I would suggest to him, and to his hon. Friends, that the absence of any Amendments from their side of the Committee indicates that he and many of his hon. Friends have lost a good deal of their confidence in their traditional remedy for the evils of our economy and the difficulties in which we find ourselves.

Sir Alexander Spearman (Scarborough and Whitby)

There is one big difference between now and this time last year—perhaps the result of the confidence given by the result of the General Election—that there has been an enormous increase in investment projects, which, however admirable in the long run, have immensely increased inflationary pressure, and therefore made it much less desirable to reduce taxation.

Mr. Jenkins

There are many other differences between this year and last year, including the destruction of the previous Chancellor's reputation by his being over-generous in this matter of direct taxation. The present Chancellor, who is absent this afternoon, has learnt caution, even if he does not attend our debates a great deal.

What is our view about direct taxation in general? Despite what hon. Gentle- men opposite may say, we do not like taxation, certainly not heavy rates of taxation, for their own sake, and we do not desire to see them maintained as a sort of hair shirt to be worn by the community. We are, none the less, very sceptical about proposals for special reductions in taxation which take no real account of the burdens which the country has to carry, and which include no acceptable proposals as to how economies can be brought about, or suggestions of alternative means for raising the necessary revenue.

6.15 p.m.

Broadly speaking, given the fact that certain sums of revenue must be raised, we prefer direct taxation, with its progressive basis, to many other forms of revenue raising. This year, we would very strongly take the view that the balance has been tilted, if anything, rather too much towards indirect taxation and away from direct taxation. That was certainly the effect of the Budgets of 1955; we had an important direct taxation concession in the first Budget, and important, and unwelcome, additions to indirect taxation in the second Budget. This year, of course, we have had the further addition in indirect taxation of the Tobacco Duty. Surely, having regard to the recent history of price levels in this country, we ought to be very hesitant indeed about doing anything further to increase the level of indirect taxation, and we ought, if anything, to tip the balance in the other direction.

I notice that the Lord Privy Seal, speaking on this question in October, 1955, said: Of course the Budget has been attacked for being unpopular and unfair. Nothing could be more unpopular or more unfair to the working people than allowing inflation to continue unchecked."—[OFFICIAL REPORT, 31st October, 1955; Vol. 545, c. 703.] That was a very remarkable thing to say, particularly as it was echoed, with a slight change, by the Economic Secretary earlier this afternoon. He said that nothing could do more harm to the middle classes than to allow inflation to continue unchecked. We hear these pious expressions of view at every Budget, and all that happens in between is that the price level rises still more quickly than ever.

I would draw the conclusion that the balance is tipped rather too far at the present time towards indirect taxation, and we should take the view that there ought to be no further movement in that direction at the present time. I am sorry that we are not able to have the Chancellor with us this afternoon; I hope that the Economic Secretary or the Financial Secretary, whoever is to reply on this particular point, will give us the Government's view about this balance. It is always one of the most important and difficult tasks of Treasury Ministers to strike the correct balance between direct and indirect taxation, and in my opinion it is important that we should know what their view is.

When discussing the level of direct taxation, there is a further important point which must be borne in mind, that is to say, the base on which the taxation is imposed. In the course of his reply on the Amendment, the Economic Secretary was kind enough to say that he had some sympathy for my view that there could be redistribution within, broadly speaking, the same income groups. I am glad to know he goes so far with me.

One of the very worrying features of our tax structure, as he knows, and as I have said before in this Committee, is that the base of taxation, because of tax avoidance in its widest sense, has been whittled away, so that our taxation rates are really not so heavy as they would appear to be. The effective level of taxation, not upon the mass of the people as a whole but upon those in, broadly speaking, the upper income brackets, is not as high as it would appear from the simple statement which the right hon. Gentleman has made. It does fall very unfairly upon certain people.

I should like the Economic Secretary to apply his mind to this problem, without any commitment, and give us an indication whether he does not agree that there are some problems related to the tax base, and the associated matter of tax avoidance, in its widest sense, on which the mind of the Government is in no way closed.

Mr. Cyril Osborne (Louth)

I would ask the Committee to look at Clause 7 and the heavy taxation which it imposes from the point of view of production. I realise that if any claim is to be made for a reduction in direct taxation, it can only be justified in so far as it produces a larger national cake. If it would produce a smaller national cake, there is no justification for it at all; just as, if we had egalitarianism run mad, and it produced a much smaller national cake, that again in itself could not be justified.

I hold that Clause 7 imposes such a penal rate of taxation that it is causing our economic system to work less efficiently than it would otherwise do. May I say this to the Committee, and state my own faith? The present capitalist system is motivated by the profit motive. High taxation—Income Tax and Surtax—is, in my opinion, dangerously weakening that mainspring of our economy. So far, no alternative mainspring, no other motive power to make our economic system work, has been found, either on this side of the Committee or by hon. and right hon. Gentlemen opposite. They have found nothing, as an alternative to the profit motive, which will cause men to work, or which could take its place.

I put it to hon. Gentlemen opposite that until something is put in place of the profit motive as the basis or mainspring of our economy, that that mainspring should be allowed to function to its fullest efficiency, for, by so doing, it will produce rewards not only for those who are in charge of our economic system, but also for those who benefit through wages, salaries, or the social benefits which they derive from it.

I should like to make this one other preliminary remark. I believe that the 8s. 6d. Income Tax rate, to which the hon. Member for Stechford (Mr. Roy Jenkins) referred, is far too high. I should like to see it down to 5s. and I will say why. I believe that the troubles which we see arising in the motor trade foreshadow considerable unemployment throughout the country, and that it is likely to spread to other trades. What we require to save us from competition that will be more severe than anything we have seen since the 'twenties and, possibly, a crisis as great as anything we have seen since 1931, is the ablest and finest brains at the top. There is no other way of doing it.

If we are to get that, we must do exactly what the Socialist Party did when in office in 1947: we have to pay the rate for the job. When they were appointing the new chairmen of the nationalised boards, the Socialist Government argued that if we were to have the finest brains, we had to pay for them.

The rate of 8s. 6d. is far too high. It is a relic of war-time taxation. Between 1922 and 1938, Income Tax moved only from 4s. to 5s. 6d. in the £. I should like to see it come down progressively to 5s. The Surtax rate of 10s., starting at the £2,000 level, is savagely high. Instead of calling it Surtax, I should like to see it called the penal tax, for this reason, with which I think hon. Members will agree. It makes private saving almost impossible, and it makes impossible the three things which the middle class want above all else. Middle-class people are unable to educate their children as they would like, they are unable to save for their widows and are unable to save for their old age and retirement. Hon. Members opposite know these facts to be true.

Therefore, I should like to see the Surtax rate reduced to 5s. so that ultimately—[HON. MEMBERS: "Surtax?"] I am stating my own case. I should like to see Income Tax and Surtax jointly reduced gradually until they are not more than 10s. in the £, for beyond that rate the law of diminishing returns must operate and ultimately will produce economic stagnation.

On the question of the £2,000 starting level, I remind hon. Members that in the last twenty years the value of money has been reduced to about one-third. If there-fore. we were to start Surtax at the same level of purchasing power as twenty years ago, it would start at £6,000 a year. To put it another way, if the purchasing power of money has dropped to one-third in terms of purchasing power in 1936, Surtax, starting at a correspondingly reduced level, would have begun at £700 a year. Twenty years ago, that would have been regarded as next door to communistic confiscation. Whilst I realise that my right hon. Friend cannot do what I want him to do at once, I hope that he will keep it in view as a goal to be aimed at.

Mr. Chapman

We all have sympathy with this idea of getting Income Tax down to 5s. in the £—

Mr. John Rankin (Glasgow, Govan)

Four shillings and elevenpence.

Mr. Chapman

—but since some £600 million to £1,000 million of revenue is involved by such a reduction, what does the hon. Member propose should be done? Would he scale down Government expenditure by that extent?

Mr. Rankin

Do what Moses did.

Mr. Osborne

Obviously, it cannot be done all at once, or now.

My whole point is that if the relatively small proportion of top men who run industry were adequately paid for so doing, and if as a result they produced greater economic efficiency and a greater national cake, we should justify, even from the point of view of old-age pensioners, paying them very much more than they are getting now. I would pay them out of their results, which is the finest way to run an economic system.

I contend that under the provisions contained in the Clause, our taxation is far too high and is reducing our economic efficiency. How are the executives of our two greatest competitors treated in comparison? Experience in the last few years has shown that we are losing too many of our top executives to America, Canada and such places because they get higher wages and pay much less taxation than in this country.

Mr. Austin Albu (Edmonton)

Names?

Mr. Osborne

I will give the figures presently, if the hon. Member waits.

There are two directions in which we must compete, and in which our economic efficiency will decide whether we survive. Our two greatest competitors, of course, are the United States and the people who now live behind the Iron Curtain, under the guidance of Russia. The great need of the age in achieving greater efficiency is the scientists and technicians who will help us with our atomic problem. We are already producing proportionately fewer of these men than are our two great rivals, but the tragedy of our position is that, of the smaller number of scientists and technicians we are producing, we are losing many of them to the United States and to Canada.

The hon. Member for Edmonton (Mr. Albu) asked me for names. The Times, on 20th April this year, contained an article from a special correspondent in California, who said that in the last four years the Lockheed Corporation had recruited a large number of foreign scientists, 30 per cent, of whom came from the United Kingdom. It is my contention that the main reason for their going from this country is the provisions of Clause 7.

If the Committee will allow me, I will give a piece of first-rate evidence. A month ago I went round the biggest scientific factory with the best-known name in the world, some thirty miles from London. I will not identify it more closely than that. I asked the managing director whether it was true that he was losing his scientists because they were being over-taxed. His reply was interesting. In the first place, he said, the scientists as such were not money grabbers. They were not worried so much about mere money but were interested in their jobs. Although they got lower salaries and paid higher taxes here than was the case overseas, many of them were content to remain and work in this country. But he added this: "The trouble is with their wives. It is their wives who have to do the shopping and who spend the net income, and it is their wives who speak to their husbands and cause us to lose many of our most promising and best young men".

Mr. F. A. Burden (Gillingham)

Did the husbands go to America to get out of the way of their wives?

Mr. Osborne

I was trying to advance a serious argument.

I know that the hon. Member for Edmonton is keenly interested in this topic, and I refer him to an article in The Times of 11th May, dealing with comparable taxation in the United States and in this country—the taxation that is imposed under the provisions of the Clause. According to the report, one of the American business executives said: The Britisher can go to the United States, suffer the tax burden and smile; here, we should suffer it and groan. 6.30 p.m.

This is terribly important to us as a nation. I believe that we are losing some of our finest men because we are taxing them too much. In The Times last Saturday the Zenith Radio Corporation of Chicago was advertising for highly qualified electronic engineers, and offering to pay their expenses to go to America, and the expenses of their wives and families, and to pay them much higher salaries, on which the tax would be much less.

Last year the Westinghouse Company had a man in London seeking the same type of highly qualified engineers and offering them from between £3,500 to £4,500 a year, plus houses, plus travel expenses, plus everything, and with taxation at about 40 per cent. below that which we impose on them by this Clause. My friends in the chemical world tell me that Du Ponts have a man in this country at this time seeking the best of our young men to induce them to go to America.

It may be asked what the difference is between taxation under this Clause and taxation which the Americans have to pay. I have three good sets of figures here which, I think, hon. Members should bear in mind. The single man with earned income only, and earning £2,000 a year in this country, pays £541 in tax, or 27.05 per cent. of his earnings. A similar type of man earning 5,000 dollars in the States pays 944 dollars in tax, or 18.88 per cent. The £3,000 a year man here pays £1,076 in tax under this Clause, which represents 35.86 per cent. His counterpart earning 8,000 dollars in America pays 1,780 dollars in tax, or 22.84 per cent. The £9,000 a year man in this country pays £5,326, or 59.17 per cent., in tax, while the 25,000 dollar a year man, the most comparable to our £9,000 a year man, pays 9,796 dollars, or 3918 per cent., in tax.

Right hon. and hon. Members opposite may ask, why bother about the £9,000 a year man? He is the type of man, if he is earning his income in this competitive world, that this country wants more than anybody else, and without whom our economic outlook is bleak indeed. I remind hon. and right hon. Members opposite again that when they national. iced the industries they did, they said at the time that the chairmen of the boards should receive £8,000 or £9,000 a year. "Pay the rate for the job," they said Those sums which they themselves thought necessary then would represent about £12,000 now.

The problem before the Government is whether to have more taxation or more production. It seems to me that they have sufficient taxation. They have a surplus in view of between £400 million and £500 million. What we want above all things is more production. We may tax ourselves as much as we will, but that will not save us. What we must have is much greater production.

I offer a further piece of evidence in support of my thesis. Hon. Members opposite for many years, certainly for all the years that I have been a Member of Parliament, have been holding up to us the economic system in Russia as one we should in some degree follow.

Mr. Chapman

Nonsense.

Mr. Osborne

In Russia today are the people who are going to be our competitors, and they will sell not merely at the market price in the world's markets, but, if necessary, at the political price. There, wage earners and salary earners pay only 13 per cent. of their earnings, no matter how much they earn; it is about 2s. 7½d. in the £. Therefore, a man in Russia who really can produce can keep what he earns, whereas in this country there is no inducement to a man to do his utmost. Even artists and writers in Russia, the least privileged people—

Mr. H. Wilson

The most privileged.

Mr. Osborne

Even they pay only 55 per cent. as against the 85 per cent. tax which we imposed by this Clause.

Mr. Wilson

Surely the hon. Member is not suggesting that we in this country should have the same degree of class distinction that they have in the Soviet Union?

Mr. Osborne

It is so nice that hon. and right hon. Members opposite have at last begun to learn how foolish they were when they used to say, "The Left can talk to Left. Let us be like the Russians."

Mr. Wilson

We have not.

Mr. Osborne

The reason why the Russians are our great competitors in economic affairs is that they are not imposing the same penal direct taxation we have in this country. They impose a greater degree of indirect taxation. I quote from the U.S.A. "National Tax Journal," Vol. 6. 1953, which, of Soviet taxation, says: Commodity taxation normally accounts for from 50 per cent. to 70 per cent. of the total revenue "— that is a matter to ponder— whereas the revenue from direct taxation represents only 8 per cent. That is, as against from 50 per cent. to 70 per cent.

Mr. Chapman

Of what?

Mr. Osborne

Of the total budget. The Russians have adopted indirect taxation rather than direct, and about this choice, the writer says: The fact that the Soviets rely on commodity taxation in spite of their ideological bias against It attests its superiority for their purposes in comparison with the more direct forms of taxation. The most important consideration may be the belief that because of the so-called money illusion personal income tax has a more harmful effect on labouring incentive than taxes which raise the prices of commodities. I hope that the Committee will agree that I am trying to look at this problem entirely from the production point of view. The Americans are not taxing their people nearly so much as we tax ours, and the Russians do not tax theirs as much, either, and so I put to my right hon. Friend the point that we should tax earnings a great deal less and tax spending a great deal more, because a lower tax on earnings would increase production, while increasing taxes on spending would discourage spending and might encourage saving. That is what we require.

I have been told to be brief. I do not want to speak for too long, although this is exempted business. I would remind hon. and right hon. Members that it was over a Finance Bill and the principles involved in this Clause that we had a civil war in the seventeenth century. This is one of the rare occasions when the back benchers have the right to state what they believe to be ills to be remedied. I was going to deal with the proposal of the right hon. Gentleman the Member for Huyton (Mr. H. Wilson) for greater egalitarianism under this Clause and our taxation, and I have some figures which will interest him very much, but as I want to conclude I will save those figures for him until his pamphlet is issued, when we can produce the evidence against his proposals.

I believe that the Chancellor should take the risk of cutting direct taxation, because I think that it would increase production. If we do not cut direct taxation, the economic blizzard which I think will come in the next twelve months, unless we are lucky, will not only hit the Surtax payers but will cause suffering to everybody in the country, including those who are the recipients of the benefits of the Welfare State. I know that my right hon. Friend cannot do anything this year, but I beg him to bear in mind that what we want is a great deal less taxation in order to secure more production.

Mr. Austen Albu (Edmonton)

I hope that the hon. Member for Louth (Mr. Osborne) will accept that we on this side of the Committee prefer a social policy in accordance with our own traditions rather than with those of the Soviet Union. I realise that he has pleaded for this country to follow the Soviet Union. He said that we should have a division of our national income and the sort of incentives that operate in the Soviet Union, but we happen to have built up different habits and a tradition of class differences and income differences, a tradition in which I hope and believe we shall continue to move towards greater equality.

Perhaps one of the most engaging features of the hon. Member is his extraordinary lack of confidence in his own Government, particularly in the conduct of economic affairs. He has some quite good ideas, but it is extraordinary how, when he gets an idea between his teeth, he lets it worry him.

Mr. Osborne

That is better than having no ideas at all.

Mr. Albu

Goodness knows, I have not much confidence in the way in which the present Government conduct our economic affairs and in what will happen to our economy in a year or eighteen months unless some substantial changes are made, but I think that the hon. Member for Louth and some of his hon. Friends cannot be living in this world at all. They are talking as though no one was doing anything, as though nothing was happening in industry, no advances were being made, no more people were being employed, nothing was being done in scientific research and development, and as though there had been no increase in investments or in exports since the war.

One would think that the country was down quite flat, with hardly a breath in it at all. The hon. Member is doing almost as much harm as did some of his hon. Friends abroad when we, on this side of the Committee, were in office. He is selling Britain down the river. He is implying that nobody is working, that nobody is doing anything, that there is no initiative and nothing can be done at all.

The Deputy-Chairman(Sir Rhys Hopkin Morris)

I think the hon. Member is going a little wide of the Motion, unless he connects his remarks with the Clause.

Mr. Albu

I will, Sir Rhys, bring my remarks to the point, which was the point of the speech of the hon. Member for Louth. He was dealing with incentives and with the level of direct taxation as the main disincentive in preventing the country from making advances. Goodness knows that a great deal needs to be done and that the appalling lack of any real economic policy on the part of the Government is likely to lead us into trouble, but it cannot be said that there is not a great deal of initiative shown by industry, both by managers who are subject to Surtax, by technicians who are largely not, and by workers as a whole. It is no good grossly exaggerating the situation. The problem of the relation of direct taxation to incentives is very difficult.

The hon. Member for Louth quoted figures of American taxation, but they did not tell the whole story. I have no other figures in my possession at the moment, but I doubt whether the hon. Member's figures included State taxation and local taxation, which is sometimes very high in the United States, as well as the Federal taxation. I think that he quoted only the Federal taxation, because I understand that the levels of direct taxation on the sort of incomes which he mentioned are not very different in the United States from what they are in this country.

It is the fact that the level of incomes, wages and salaries is very much higher in the United States, but that country is very much richer than ours. I do not know how we shall deal with this problem unless we do as the Russians do, and as, apparently, the hon. Member for Louth wishes us to do, which is to prevent our people leaving our shores at all.

Mr. Osborne

indicated dissent.

6.45 p.m.

Mr. Albu

I do not know how otherwise we can prevent people leaving our shores for higher incomes elsewhere. Actually, only a small proportion of our people do so, and I think that when they reach the United States many of them soon come back. At any rate, that is my experience. Whilst we see the advertisements which the hon. Member mentioned and we hear stories about people leaving, the numbers are not substantial and not of a nature which should make us change the whole basis of our taxation system. The hon. Member for Louth asked for such a substantial reduction in taxation that it would mean a complete redistribution of our national income.

Mr. Osborne

No.

Mr. Albu

If we were to reduce Income Tax to 5s. and reduce Surtax as well, the resultant effect on the distribution of the national income would be substantial indeed, because it would mean that we should have to make substantial reductions in the social services which, as my hon. Friend the Member for Uxbridge (Mr. Beswick) pointed out when the hon. Member for Louth was speaking, are considerable additions to the middle ranges of incomes to which the hon. Member was referring. There is no doubt that a young technician in the United States would be ruined if he or his family became seriously ill. That does not apply in this country.

Mr. Gerald Nabarro (Kidderminster)

A sweeping statement of that kind is surely quite wrong. The average man in the United States avails himself of every kind of insurance against that kind of thing happening, and that is a direct counterpart of the social services in this country.

Mr. Albu

I cannot pursue that point very far without getting out of order, but it costs a lot of money to the young man in the United States to do that, and even then he has not covered everything when he has finished. The doctors put up their fees to make sure that he pays out more than he gets back from insurance benefits.

It is no good hon. Members opposite continuing to demand really sweeping reductions in direct taxation, because it would mean such an enormous change in the distribution of the national income that we should have a terrific upheaval. I should like to support my hon. Friend the Member for Stechford (Mr. Roy Jenkins) on the possibilities of changes within the present level of direct taxation, which I was glad to hear the Economic Secretary appear to support when we were discussing the Amendment dealing with Surtax.

There is no doubt that we must watch very carefully the proportions of direct and indirect taxation. As my hon. Friend the Member for Stechford said, there has been a substantial move on the part of the Government to relieve direct taxation and increase the proportion of indirect taxation, but it is also important that we should look further at the relation between earned and unearned income. There is no doubt that at present—and this applies especially to the sort of levels which the Committee has been considering today—there is a substantial injustice here.

I think that there would be support even on this side of the Committee for a reduction of taxation of the kind referred to, where there are large families, particularly in cases of earned income, but in view of the distribution of capital in this country which continues at about the same level as it has been for many years past, we certainly could not support further reductions in taxation on unearned income.

It is said frequently that wage and salary earners have gained enormously since before the war at the expense of the professional and self-employed people, and particularly at the expense of those who are in receipt of rent, interest and dividends. This is not true. Between 1938 and 1954 wages and salaries went up, after taxation, from 60 per cent. to 70 per cent. of the national product, but the number of employees actually went up during that period by 36 per cent. So, per head of employed persons, it is not true that the proportion of national income going to wage and salary earners has gone up. Therefore, any move to reverse the present distribution of income, especially by reductions in direct taxation which cover both earned and unearned incomes, could only have the effect of worsening the situation of the wage and salary earners in regard to the proportion of the national income and the increments of the national income as it arises which they receive.

Hon. Gentlemen opposite, irrespective of their hidden thoughts and feelings, must always in this place express themselves as in favour of reductions of taxation for incentive purposes. One or two—for instance, the noble Lord the Member for Dorset, South (Viscount Hinchingbrooke)—are more frank about their interest in the reduction of taxation. I do not mean that they have a personal interest, but the interest they have on behalf of those for whom they speak. On the whole, however, hon. Gentlemen opposite will generally put forward this argument on the ground that the increase of incentives to effort has an effect upon production.

Now on this matter we know very little, and there is small evidence that the present levels of taxation have serious effects on the managerial and technical classes. As I said earlier, to some extent we have become accustomed to the present level of income and the social distinctions to which it leads. One thing is certain, however, and that is that the obvious gross expenditure which cannot possibly be paid for out of taxed income causes a great deal of dissatisfaction throughout all classes of the working community, and there is no doubt that the Government will have to pay attention to it.

If I may say so to the hon. Gentleman the Member for Langstone (Mr. Stevens), it is no good chartered accountants trying to say that there is no tax avoidance—

Mr. Stevens

Would the hon. Gentleman be good enough to say when any responsible chartered accountant said any such thing?

Mr. Albu

I am glad that the hon. Gentleman agrees with me that there is a lot of tax avoidance, because I have heard chartered accountants strongly support the view that there is no real tax avoidance.

Mr. Stevens

In that case will the hon. Gentleman be good enough to say how he orders his tax affairs? Does he so order them as to avoid paying as much tax as he legally can?

Mr. Albu

Unfortunately, as a Member of Parliament, and practically nothing else, I do riot have much opportunity of doing what I know the hon. Gentleman will agree is done in a large number of business circles. I have not that opportunity, if only because I have not got the income to do it. It is clear, as everybody knows, that there is a great deal of tax avoidance through the use of expense accounts, and also in all the other ways referred to in the Minority Report of the Royal Commission on the Taxation of Profits and Income. Until these matters are cleared up, I do not think that we can expect the community, and the mass of the people who earn their living, to accept any great reduction in the levels of taxation of those who receive the higher incomes.

These matters must all be considered together. What we are really considering is the standard of living which people can obtain from their incomes. Until this has been made to appear much more just and much more equal than it is at present, I do not think we can expect ordinary workers, at any rate, to accept great reductions in the levels of taxation imposed on the managerial classes.

This is an important matter. It is an argument between the two sides of the Committee. Hon. Gentlemen opposite say that if we greatly stretch the class, the social, the economic, the expenditure differences, we shall get a rise in effort, a rise in production, a rise in activity. We say exactly the opposite. We say that what is holding back a real jump forward in productivity in this country are the great class differences that still exist, in education, in expenditure, in behaviour, in all sorts of things. The funny thing is—I give the point to the hon. Member for Louth—that although perhaps in the United States and in Russia, where there are not these social differences—leaving out the economic differences—there may be a greater feeling of effort and energy, it is to the social differences, which have to be reduced, that attention must be paid if we want to release the latent energies of our people. Therefore, anything done to increase the social differences in this country will only have the effect, under our conditions and under our traditions, of preventing the rise in production which the hon. Gentleman so particularly wants.

Sir Henry d'Avigdor-Goldsmid (Walsall, South)

Having tried in vain to catch your eye on the Second Reading of this Bill. Sir Rhys, and having sat here since half-past three o'clock, I am now proud to nail my colours to the same mast as that of my hon. Friend the Member for Louth (Mr. Osborne), and perhaps we shall pitch our tent in Hyde Park and get an audience there. [HON. MEMBERS: "Moscow."]

Having said that, I am rather surprised that we on this side of the Committee, who have been suggesting reductions in direct taxation, should have met with such a cool response from hon. Gentlemen opposite. Just as in Napoleon's armies the private soldier carried a field marshal's baton in his knapsack, it is reasonable to say that any young man or woman who goes to a technical school carries with him or her, in the appropriate part of his accoutrement, a Surtax demand note. I say that because at present there is no doubt that anybody who does well in a technical school will be a Surtax payer, if he takes advantage of his opportunities.

I shall continue on this point because there has been a good deal of discussion of it. My hon. Friend the Member for Wycombe (Mr. John Hall) gave a great deal of detailed information to the Committee about American firms who are recruiting here, and the hon. Member for Louth emphasised that point. It was pooh-poohed, but I want to point out the real facts.

There is one enormous company in the world, Unilever Ltd., perhaps more familiar to hon. Gentlemen opposite as Lever Brothers. At a company meeting, permission was asked of its shareholders to abolish the director's stock holding qualification, which is £1,000 of stock. This may be preference stock, which would cost only about £1,000 in the market. It was asked that this qualification should be abolished because it was a direct embarrassment to the company in the choice of people to go on to the directorial board.

Now Unilever Ltd. is one of the great progressive companies of this country, indeed of the world. It is recruiting people widely from schools of management which are specially developed. In those circumstances it might be thought that the company was getting the cream of the managerial classes. Yet the investment of £1,000 is an embarrassment to such people, in spite of the attraction of the great rewards about which we have heard, and therefore the company wishes to abolish the qualification. I ask hon. Gentlemen opposite to think over that point.

The right hon. Member for Battersea, North (Mr. Jay) mentioned the fact that because luxury hotels were full of people, therefore the economy of this country was in a satisfactory state, and there was no suffering as a result of taxation. I would point out two things. First, what goes on in luxury hotels is no evidence of what goes on in the rest of the country. Secondly, one or two activities are ceasing as a result of the level of taxation, and, indeed, one has entirely ceased. Here I shall probably have the support of the hon. Member for Stechford (Mr. Roy Jenkins). I refer to the publishing of poetry.

The monthly literary magazine practically does not exist in this country today. I can think of only one—in which I recently saw contributions not only from the hon. Member for Stechford but also from a colleague of his on the Opposition Front Bench which is financed by American money and is called Encounter. The reason for this lack of monthly literary magazines in this country is that there are no men with money to throw away on them. Such magazines do not make a profit, but they make a very valuable contribution to our life. None of us wants a life which is devoid of poetry, but I should like to know where poets will find a means of getting into print.

7.0 p.m.

Now I turn to a subject which may appeal to other hon. Members. Yesterday the Derby, the most important horse race in our calendar, took place at Epsom Downs, and the first three horses were owned and trained outside England. Why is that? It is because horse racing in England is suffering from the same cause. It may be said that the fact that the breeding of good horses in this country is dying does not create hardship. Certainly it does not inflict great hardship, but it reduces a great industry to a very low level.

This country has had a reputation for breeding the best horses. We have lost that reputation, and shall have lost it for ever if taxation continues at its present rate. The reason is simple. If a good horse is produced here, it is quickly sold abroad, and the result is that we do not get the benefit of its services at stud. That does not represent a loss to everybody, but I cite it as an example of something which is collapsing under taxation. Some hon. Members may rejoice at it, but some will not.

Earlier today a good deal of indignation was expressed about the possible sale of the nation's interests in the Trinidad Oil Company. Hon. Members on both sides of the House, and particularly hon. Members opposite, expressed great concern lest this great Commonwealth asset should disappear from our control. There are means, perhaps through the Capital Issues Committee or other Treasury control—the Chancellor did not explain exactly what—by which we can prevent the control of the company passing out of this country.

However, we cannot control the steady flow of young technicians leaving this country. The reason why we cannot is that they seek a higher reward for their abilities in the United States. We are embarking upon an immense technical training programme, and are spending £97 million—I am certain that it will soon be over £100 million—to produce the people who will make our industry work. What are we doing to keep them here? [An HON. MEMBER: "Taxing them to death."] Poetry is the weakest of the arts, and it dies first. Horse racing is not important, and it is dying also.

So long as we live under a system organised as it is at present, we shall find that taxation will drive out the people who bring poetry or sport into our lives. We shall eventually drive out the type of people who made this country great. It will end by the industry of the workers becoming useless because it will not have the technical help that it needs, help which we ought to be doing our best to keep in this country.

Mr. Chapman

We appreciate the great sincerity of the hon. Member for Wallsall, South (Sir H. d'Avigdor-Goldsmid) in what he has said, especially when he talked about the lack of poetry magazines, but I think he fails to realise that our society is very unlikely to return to the days when things of that sort could depend upon rich private patrons. We ought rather to be turning our minds to the adaptation of our society to keep such things going without rich patrons. In wishing those days back again, the hon. Member is chasing a mirage, just as the hon. Member for Louth (Mr. Osborne) has been chasing the mirage of the 5s. Income Tax level, something which cannot be brought back. at any rate within the foreseeable future.

What we have to do is to think about the incentives that we can give to the arts and the other things in a new society which has a greater level of equality and in which we are unlikely to return to the inequality for which hon. Members opposite are all the time hankering. We must keep those things going despite the new demands of our more equal society.

I should not have risen had I not been afraid that some of the opening remarks by my hon. Friend the Member for Stechford (Mr. Roy Jenkins) might be misinterpreted. He spoke about the balance between the levels of direct and indirect taxation in our society. I thought that his criticisms of the level of present indirect taxation might run the risk of being misinterpreted.

I should like to put forward a case with which my hon. Friend may not wholly agree, although I think he will. I believe that there is far too much loose talk about the undesirably high level of indirect taxation. Today the level of indirect taxation roughly equals that of direct taxation. I always think of our revenue falling into two halves, beer, tobacco and Purchase Tax bringing in £2,000 million and the Inland Revenue bringing in the other £2,000 million.

Within the broad limits of our society, that is inevitable. Indeed, I think it is desirable. I believe it to be right that the standard rate of Income Tax should be 8s. 6d. or 9s., or whatever other figure we may choose, and that there should be heavy rates, perhaps even penal rates, of Purchase Tax and substantial rates on beer and tobacco. Having established a level of Income Tax in the range of 8s. 6d.-10s. in the £, we should raise the rest of the money needed by the Exchequer by taxing goods which people need not buy if they do not wish to do so. I believe we should have a strong luxury tax.

The Temporary Chairman (Mr. Frank Bowles)

The Committee is concerned at the moment simply with Income Tax. The hon. Member is going slightly wide of the debate.

Mr. Chapman

I will quickly bring my remarks on that point to a close, Mr. Bowles. I do not agree with harsh impositions on household necessities and so on. I have in mind half of the taxation being raised by tax upon luxuries and other goods the purchase of which is a matter of choice, the other half of the revenue being raised, as it is now, by direct taxation. I was rather afraid from the way in which my hon. Friend the Member for Stechford spoke that he was to some extent supporting a considerable reduction in Purchase Tax on luxuries in favour of a rise in the Income Tax rates. I do not think that, on reflection, he would want to do that.

Turning to the question of the level of direct tax, I think that there is this to be said. I am disappointed that this Clause is really continuing the disincentive effects of direct taxation. I do not believe, as hon. Members opposite do, that there is a real disincentive on the higher income earners from direct taxation. I believe that, by and large, when one gets to managerial grades in society today, the incentive to work hard is not the income at the end of it but the service given, the power that there is, both for good and evil, and the command of leadership in society. All these things are incentives to the higher range of incomes in our society today, and Income Tax is not a great disincentive.

I would say that the trouble with the present rate of direct taxation is the failure to relieve people at the bottom ends of the bands of Income Tax. It happens in many industries today that the wife does not go out to work for more than 30 or 35 hours a week because, beyond that point, she immediately runs into Income Tax payments. I believe that it is much more important to give relief at that end of the scale than to talk about the disincentives, which is the fear which the hon. Member for Louth has, at the other end of the scale.

Mr. Osborne

At both ends.

Mr. Chapman

The hon. Member will admit that his speech was mainly devoted to the top end, and that the Royal Commission forcibly pointed out that his arguments have very little weight at all from the researches that it was able to make, and that often the disincentive effects of high taxation were not very strong on high incomes. I do not know why the hon. Member goes on peddling this every year in view of the evidence which is all the time mounting up against him and his hon. Friends.

I repeat what I said to the hon. Member for Walsall, South, that it is much more important for the Committee and the House to be thinking today how to adapt the inevitable levels of taxation to the preservation of all the things which he has in mind, and we have in mind, and not chasing this mirage of lower direct taxation and the return of rich patrons. These things have gone for ever, and we on this side of the Committee are glad that this is so. We want the hon. Member to join with us in seeking to keep the worth-while things going, nevertheless.

7.15 p.m.

Mr. F. P. Crowder (Ruislip North wood)

I intervene for literally only a few minutes, and I would like to say particularly on behalf of my constituency, where there are large numbers of black-coated workers and members of the professional and middle classes, that they, like other sections of the community, are bearing heavy hardships at this moment. We have heard a lot from hon. Members on this side of the Committee and on the other side about incentives. I do not propose to concern myself with that this evening. What I have been interested to learn from the speeches of hon. Gentlemen opposite is that there does seem to be a very real understanding of this hardship and of the fact that this particular section of the community is not getting the fair deal that it should have. I believe that the labourer is worthy of his hire. As a member of the Bar, I say that if people are prepared to pay someone in my profession £3,000 or £4,000 a year for the work that he is doing—and it is quite hard work and entails long hours; there is no question of a 48 hour week—he should not be penalised to the extent he is at the moment.

Take the case of the ordinary artisan. Suppose that he was earning £4 or £5 before the war. Today his earnings have gone up, and very often he will be taking home between £12, £14 and £16 a week. It is very different with the professional man, because although his wages have gone up slightly, not very much, his taxation has been very much increased. That is where the unfairness comes about. The labourer is probably living in a house which is rent restricted and paying 7s. 6d. a week.

Mrs. Harriet Slater (Stoke-on-Trent, North)

There are not many of them.

Mr. Crowder

Certainly there are cottages in this country let at only 5s. a week and even lower, and very often something like £40 a week in wages may be going into that household. If the hon. Lady disagrees, I will put it a little higher and make it 15s. At any rate, he does not have to pay very much because he is subsidised by the Rent Restriction Acts in respect of his house. He is not responsible, as I know the other man need not be, for having to educate his children privately, and, of course, his food is subsidised and he does not have to dress in perhaps quite the same way as the professional man.

The position of the professional man is very different. It is probably absolutely necessary for him to have a car of his own—certainly it is for most members of the Bar, to give an example. He is probably in the position of paying for his own house, as, indeed, the man at the other end of the scale may be. He has probably to educate his children at his own expense, and hon. Members know how school fees have gone up during the past few years. I know that he need not do that. Do not let it be thought that I do not accept that for one moment, but it is worth bearing in mind that if everyone today educating his children at his own expense ceased to do so, and sent them to the local council schools, we should be in a very different position.

Mr. Albu

Does the hon. Member not realise that the number of pupils per teacher in these schools for which people pay is very much less than in the other schools, and that if these teachers were released the council schools would be much better off?

Mr. Crowder

I do not agree on that point. I do not think the council school would be better off. The National Health Service is much relieved by a large number of people who pay for their own drugs and doctors. The professional man who is acting in these circumstances is giving the country a certain relief.

The other case which I have in mind and which I would point out as a particularly harsh one is that of the widow who is living on the income of a trust, because not only has taxation and Surtax gone up on that income, but she is hit by the fact that the cost of living has gone up to such an extent since 1939. It is inequitable that people at the other end of the scale should have had the rises which they have had in the past while the middle classes are gradually, because of this high taxation, being squeezed out.

I believe that the middle and professional classes represent a very important section of the community, and I am sure that hon. Members opposite want to see them maintained, just as much as I do. All that I say now is that they should get a fair deal vis-à-vis other sections of the community. They are not getting a fair deal, and it is time that the Government took some action on this matter. I know that possibly now is not the time to do it because of the present economic situation, but I think that it is fair to say on their behalf that they are a responsible section of the community and that if their tax burdens were relieved it is quite possible that a large proportion of the extra money made available would be put into savings, which is exactly what the country needs.

Mr. Nigel Fisher (Surbiton)

I fully agree with what my hon. Friend the Member for Ruislip—Northwood (Mr. F. P. Crowder) said, as indeed any hon. Member on this side of the Committee must. And also with the sincere and eloquent speeches of the hon. Baronet the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) and my hon. Friend the Member for Louth (Mr. Osborne). Anybody on this side of the Committee must take that line about direct taxation in principle and also in support of my noble Friend's Amendment on the Surtax starting level. No one on this side of the Committee could, in principle, take any other line, but I must say that I do not really quite see what my hon. Friends can have expected this year, at this time, by way of tax concessions and reductions.

I thought that the points made by the Economic Secretary in reply to the debate on the Amendment were absolutely fair and perfectly reasonable. My right hon. Friend did not introduce a Budget of reliefs or incentives. It was not his intention to do so. There were perfectly good reasons for his decision. The whole theme and purpose of the Budget has been anti-inflation and pro-saving. In that context, however desirable, from the point of view of hon. Members on this side of the Committee, may be the sort of measures of relief suggested by my hon. Friend the Member for Wycombe (Mr. John Hall), in a most eloquent speech, my right hon. Friend could not have conceded them. I do not think that we could really expect them this year.

It is perhaps an answer to the hon. Member for Stetchford (Mr. Roy Jenkins), who inquired why we had put down no Amendments to reduce the standard rate of income tax, that we are a responsible party. We realise that, had any concessions been made by my right hon. Friend this year, they would have opened the whole field of competing claims for relief. Cases would have been argued from both sides of the Committee for other sections of the community for which hon. Members thought it right to press claims. The whole field would have been opened up, and the whole purpose and theme of the Budget would have been vitiated and nullified.

Mr. Chapman

By the hon. Member's standards, was the Amendment on Surtax responsible?

Mr. Fisher

The hon. Gentleman has not followed what I have said. I fully agree with the argument, 100 per cent., but I think that the timing was unrealistic. I am very glad that these matters were brought forward for discussion. It was absolutely right to bring them forward. These matters should be discussed.

Mr. John Hall

Does not my hon. Friend agree that the timing for any tax reduction is nearly always wrong?

Mr. Fisher

That is a fairly easy generalisation to make, and of course it is always true, but it would have been quite out of context in the Budget this year to grant this sort of concession. My hon. Friend knows that. It is perfectly obvious from the whole trend of the debate.

I am very glad that these matters were discussed. They are well worth discussion, and they are too seldom discussed in this Committee. The point made about the £630 a year and the £2,000 a year was most interesting. It was said that £630 a year was the prewar equivalent after tax of £2,000 a year after tax now. That is a horrifying thought. No one can say that a £630 a year man before the war was a rich man, or that a £2,000 man today is a rich man. My hon. Friends the junior Ministers are in receipt of incomes of £2,000 a year, and I am sure that they do not feel frightfully rich.

Mr. Norman Dodds (Erith and Crayford)

What does the hon. Gentleman propose to do about it?

Mr. Fisher

I think that on this the Government have been disgracefully mean. I cannot understand the reason. It is an absolute disgrace, and I feel very strongly about it.

The Temporary Chairman

To attack the Government on that is out of order on this Motion.

Mr. Fisher

I agree. I was quoting it merely as an example. I am sure that hon. Members on both sides who have been junior Ministers will sympathise and will feel that they are not in the category of very rich men today.

I hope that my right hon. Friend will pay sympathetic attention to the whole tenor of the debate, because when the time comes for reliefs of this sort—and I hope it will be next year—he should know our views. The sort of people about whom we have been talking are, like other sections of the community, entitled to some consideration for relief at the proper time. Many of them, as my hon. Friends have said, are the very people we ought to encourage most, because they are the wealth producers, the prosperity-producers in our economy. I hope that their claims, which have at last been discussed this year, will be granted next year.

Sir E. Boyle

I should like to thank the hon. Member for Surbiton (Mr. Fisher) for his kind reference to myself. I am glad that he found my arguments on this Budget more acceptable than he found some of my arguments at the end of last year. Listening to my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) I was a little reminded of a professor of history, Professor F. C. Montague, who said that there were two subjects on which his knowledge was entirely derived from books, namely, love and war. I find myself in the same position, and I would add to that list poetry and horse racing, to which my hon. Friend referred.

I do not want to speak for long. We have had a very full airing of this subject of direct taxation, but there are one or two specific questions which I should like to answer. Three hon. Members opposite asked about the question of the relation between direct and indirect taxation. I must say that on this point I found myself in the minority, as it were, among hon. Members opposite, and very much in agreement with the hon. Member for Northfield (Mr. Chapman). I hope that the Committee will take due note of the significance of the very considerable increase in sales of consumer durables during the last few years.

Perhaps I might read a sentence or two from a speech which I made to the E.C.E. at Geneva only a short time ago. I said: There is one point here which has struck me with special force when I have been studying what one might term the outturn for the British economy in 1955. The standard of living in the United Kingdom has now reached a point where a considerable section of the population who have gained from the growth in the national income during the last 15 years are now able to buy consumer durables such as cars, television sets, washing machines and so on. All these goods compete for the same kinds of labour and materials as are also needed both for export and for home investment. That is a point of real economic significance. When we get something competing for the same resources as we need for home investment and export, it is only natural that the balance of indirect and direct taxation should be shifted to some extent.

A number of hon. Members also raised the question of production. I think the real point is that we have in this country today capacity for increased production. What happens this year will depend on how smoothly the process of redeployment goes on. I do not think there is much dispute that some redeployment of our resources was needed. The hon. Member for. Edmonton (Mr. Albu) made, as he always does, a most thoughtful and interesting speech. I should like, again very briefly, to answer one point he made.

I think he is a little unfair when he accuses this Government of a lack of purpose in economic policy. Can I put it in one sentence? We are finding this year that investment is going up pretty sharply, exports are rising, but consumption is pretty stationary. I do not think that by any standards that is a particularly unsatisfactory state to be in. I think the present economic indicators, as it were, show something like the improvements that we hoped they would show as a result of our policy last year.

7.30 p.m.

The hon. Member for Northfield said that we should do more to relieve taxation at the bottom end; that we do too much at the top end and not enough at the bottom. We have done something about that since we became the Government. After all, about 16 million people have had their Income Tax assessments reduced by the present Government, and at least 2 million have gone out of Income Tax altogether. Whatever else can be said about the Budgets of my right hon. Friend the Lord Privy Seal, nobody can possibly deny that he did a very great deal to relieve Income Tax payers at the bottom end of the scale.

Some Members have pointed out the importance of doing justice by all members of the community. That is certainly our view. I think it is recognised that the kernel of our Budget policy this year has been this very big Budget surplus above the line, running into the sum of £460 million—which is £63 million more than the actual out-turn above the line achieved last year. We believe that this Budget and this big surplus will lay the foundation for a more stable economy in the years ahead.

Having made those points, I hope that the Committee may feel able to come to a decision fairly soon upon the Clause, as we have had a full discussion on it.

Mr. Jay

I am provoked into speaking not so much by the speech of the Economic Secretary as by that of the hon. Member for Louth (Mr. Osborne). I was shocked to hear that the hon. Member's speech had been prematurely cut short. Even allowing for the growing liaison between the British Tory Party and certain totalitarian regimes abroad, it seems strange that the hon. Member should be thus gagged. The hon. Member for Louth and other hon. Members opposite voiced the usual lament of the Tory Party about direct taxation in this country. They described it as penal, and argued that great damage was being done to our economy by the weight of Income Tax, that injustice was being inflicted upon the middle classes, and so on. Hon. Members opposite are getting all this out of perspective; indeed, it is in some ways precisely this attitude of theirs in wanting to cut direct taxation at all costs, which has been responsible for some of our country's difficulties in the last few years.

We in the Labour Party are far from thinking that Income Tax is perfect as it stands at the moment. First, it is less fair as between family and family than it is between one individual earner and another. Secondly, the tax is based much too narrowly upon the present legal definition of income, rather than the actual spending power of the individuals concerned. If any hon. Members opposite question that, I shall be tempted to quote from an important public statement made by Lady Docker since the last meeting of the Committee. Unless I am provoked, I shall desist from quoting it at any great length.

Hon. Members

Let us have it.

Mr. Jay

If hon. Members want to hear it I can quote it. It is here in a newspaper, accompanied by a photograph of Lady Docker and her husband, and a third individual whom I find it difficult to describe. Perhaps he is an Inland Revenue official in heavy disguise. Lady Docker said: In … those six years…Our joint income"— that is, of herself and her husband— from the companies was £12,000 a year. I assume that to be before taxation. Then she tells us, elsewhere: Of course I got myself talked about. Presumably, therefore, she will not mind being discussed here. It cost me every penny of £20,000 a year of my own money. I can only say that a married couple would have to have a remarkably large income if, after taxation had properly been paid, one member was able to spend £20,000 a year. Nevertheless, despite these defects in our Income Tax system, we believe that the principle of progressive direct taxation is right, and is fundamental in any democratic society. I will give only two reasons for that. First—in view of the hon. Member's reference to Russia and other countries abroad—I would remind the Committee that many countries today who are uncommitted, and are wavering between Communism and the democratic system, are tempted by the physical success of the Russian economy. I believe that we have achieved far greater real equality than has the Soviet Union. I think that the Russian system of taxation is a most reactionary one. My information, based upon researches in Moscow a year ago, is that the highest rate of Income Tax in the Soviet Union is 25 per cent. It is difficult to obtain the facts correctly, but I believe that that is roughly the correct figure.

If we have achieved a greater degree of equality here, we have done it by means of progressive direct taxation; and if we are to convince these wavering countries that reasonable equality can be achieved by free and democratic methods, we have to show that progressive taxation works here, where Income Tax itself was invented—almost in a fit of absence of mind. No other way has been discovered anywhere in the world of achieving a reasonable economic equality, on which political democracy depends, except by progressive direct taxation something on the lines of the British model.

Secondly, the history of the past two years, and the mistakes of the Lord Privy Seal a year ago, have proved again that progressive Income Tax is an essential instrument for regulating the economy, checking inflation, and solving our balance of payments difficulties. We all know that the economy got out of hand a year ago because the Lord Privy Seal, spurred on by very much the sort of arguments which we have heard from hon. Members opposite today, made an unjustifiable reduction in Income Tax which pushed up our spending beyond what it was possible for the economy to afford.

We are still feeling the effects of those mistakes today, with the renewed weakness of sterling and with alternate panicky speeches, and reassuring speeches a few days afterwards from the Chancellor. I have some sympathy with the Chancellor in his attempt to scare the trade unions without scaring the foreign exchange speculators. It might be better if he made fewer speeches altogether.

I did not quite agree with the very pessimistic language used by the hon. Member for Louth, who predicted an economic blizzard in the next twelve months, and spoke of our facing the worst crisis since 1931. Nevertheless, it is quite clear that this passion for reducing direct taxation at all costs has got us into great difficulties, from which we have not yet emerged. In the Budget debate the Chancellor thought it clever to defend the Lord Privy Seal by asking, in his mock heroic fashion, whether we thought it was such a wicked thing to reduce Income Tax. If the Chancellor could abandon these mock heroics and rise upwards, or drop downwards, to the level of serious economic argument, I would ask him two questions.

First, does he think that it is always right to reduce the standard rate of Income Tax, regardless of the circumstances in which it is done? Secondly, if he does not, does he think that April, 1955, was a good and wise moment to choose for a cut in the standard rate? If he cares to answer now I shall be glad to give way to him.

Mr. Osborne

Would the right hon. Gentleman put the Income Tax rate up now?

Mr. Jay

I am quite willing to answer that question. I think that the Lord Privy Seal would have been much wiser if he had reduced the allowances but left the standard rate where it was. If he had done that, I do not think that we should have had to make further changes now.

The kernel of the matter is this. If we are not going to slide into the economic disaster about which the Chancellor himself spoke a week ago—and that was his word—some restraint must be placed upon overspending. That restraint will not be accepted by the wage earners, in conditions of full employment, unless it is manifestly fair all round; and it can be made manifestly fair only by an effective system of progressive taxation. Therefore if a Tory Government, this year or any other year, tries to get out: of that dilemma by making unjustified cuts in Income Tax on the higher incomes, the wage earners will press for higher wages, and we shall get back into precisely the situation in which we are now. That is the root of the situation.

Against that, what have hon. Members to say in support of their proposals for reductions? First, they say that the rate of Income Tax is too high and is crushing, and all the rest of it. I wonder how many hon. Members opposite realise that this rate of 8s. 6d. is far from being the actual effective rate which falls on the ordinary income. The actual rate given in the Inland Revenue Report—and this was before the reduction made last year—is 2s. 10d. per £ of actual income all over the community, which is a very different matter.

Again it is argued that there are these crushing effects on incentive, and we have discussed that a great deal this afternoon. I gave a quotation from the Royal Commission on its view about executives with higher incomes. It also carried out an inquiry, not just a theoretical argument, but an inquiry into the effect of direct taxation on incentives throughout the mass of earnings. The conclusion of that inquiry, which appears in an Appendix to the Report was this: There was no evidence from this inquiry of productive effort being inhibited by the income tax structure within its present limits. Then we were told by the hon. Member for Wycombe (Mr. John Hall) that there was some peculiarly devastating effect on what he called the middle classes, those with professional incomes and so on. We fully agree that there should be more help in that direction, particularly for those with earned incomes who have a large number of dependants. But I feel that when hon. Members opposite talk about the troubles of that very important section of the community, they entirely omit to mention the National Health Service. I believe that the National Health Service has done just as much to improve the standard of living of those in the middle income groups as higher Income Tax has done to depress it.

Much of the higher rate of Income Tax which we are discussing is really a payment for the National Health Service. It is health insurance, if hon. Members care to regard it in that way. I would far rather have the National Health Service, and the existing rates of Income Tax, than go back to the pre-war rates of tax without the National Health Service. Not only does the Service get rid of doctor's bills, but the worry about them also.

The hon. Member for Louth argued—and this was an interesting part of his case—that the weight of taxation in this country is very much greater than in the United States. Though I am sure the hon. Gentleman honestly believes that, as do many other people, in fact it is by no means a fair and balanced statement of the truth. It is true that our system of direct taxation is more progressive than is the American system. I would not dispute that. But I do not think it true to say that direct taxation is higher here than in America.

To begin with, taxation on profits—I am now coming to the figures—is definitely still slightly higher in the United States than in this country. If we look at direct taxation on personal incomes in the two countries, I think that the figures given by the hon. Member for Louth do not reveal the whole picture; first, because he omitted the local taxes, and, secondly, for a reason which I will try to explain in a moment. I am giving these figures only because the hon. Gentleman gave some figures in his speech.

According to figures given to me by statisticians in Washington—I consider them well qualified to work out these things—if we take central and local taxes both here and in the United States, and counting in the American capital gains tax and our own Surtax, the proportion of personal incomes taken in direct taxation—I think this is the true comparison—works out at about 10 per cent, in the United States and 9 per cent. in this country. I have checked those figures against British official sources and American official sources in Washington, and they were not challenged.

7.45 p.m.

I think that the hon. Member for Louth was under an illusion, although he gave the right figures, in making his comparison of tax on actual incomes as between the two countries. Of course as the income per head in the United States is three times as high as in this country, if one gives the precise comparison of income translated at the existing rate of exchange, the effect is misleading. We have to take the income at the same point in the scale in the two countries, what I would call the corresponding income. If that is done, we get a very different result.

I give the hon. Gentleman these figures, which are for central taxes only, as a comment on his figures. I take incomes at the same point in the scale. The lowest one which I would call corresponding is £500 in the United Kingdom for a married couple with two children—all these figures relate to such a family—and 5,000 dollars in the United States. At that level the British family pay no direct tax at all and the United States family pay 10 per cent. At the next level, £1,000 in this country and 10,000 dollars in the United States, the tax is 8½ per cent. here and 16 per cent. in America. To go up to the next level in the scale—I agree it is less progressive in the United States—at £5,000 here and 50,000 dollars in America it is 44 per cent. in the United Kingdom and 38 per cent. in the United States.

I think the hon. Gentleman will understand that an entirely misleading effect is obtained if we make a comparison between what is a low income in the United States and what is a very much higher one here. It is perfectly true, of course, that people go to the United States because there is a greater reward. But what I think the hon. Gentleman does not understand is that the greater reward is due to the fact that the whole scale of incomes is higher in the United States, and not because taxation is lower. Therefore, I ask hon. Members to keep some sense of proportion about this question of Income Tax.

As the hon. Gentleman gave us his views about what should be done in the future to amend the present situation, I will, very briefly, do the same. We think the following are the directions in which the system could be improved. First, there ought to be some adjustment to allow for income per head in the household rather than the income for each single earner—that is to say, more allowances for dependants. Secondly, there should be some exemption at the lower end of the scale where, so far as I can see, about 5 million people are paying tiny amounts which are hardly worth collecting.

Thirdly, the tax ought to be based more on the individual's real spending power and less on the present rather narrow legal definition of income. Fourthly, we believe—and we agree here with hon. Gentlemen opposite—that there ought to be more encouragement for saving and discouragement for spending all the way up the scale. Fifthly, it seems to us that, gradually, over the years, the weight of direct taxation ought to be made to fall less heavily on personal incomes and more heavily on business profits. With those improvements, I believe that the British Income Tax, which, after all, is the main support of all our Welfare Services, could be made an extremely powerful instrument for further social progress.

Question put and agreed to.

Clause ordered to stand part of the Bill.