§ I turn now to the last of my proposals in the field of personal taxation. Our objective is opportunity and expansion. A tax system which offers the minimum inducement to those with the maximum responsibility is inconsistent with this aim. This criticism has particular force round about the £2,000 level of income. Yet this figure of £2,000 and upward represents the income range of the very men whose activities and decisions do most to determine our rate of economic expansion. In their hands rest, for good or ill, much of the future of the national economy. In penalising them, the nation penalises itself.
§ In few countries in the world is there less incentive to increased effort after the £2,000 figure has been passed. The fact that the earned income relief stops at £2,025 while Surtax at 2s. in the £ starts at £2,000 means that on every extra £ of earned income at, say, £1,900, 6s. 7d. is paid in tax, while on every extra £ of earned income at £2,025, 10s. 6d. goes in tax. And after that point the graduation continues to be very steep indeed.
§ Undoubtedly, the right way to tackle this is to apply to incomes above £2,000 the same kind of relief as that applied to incomes below £2,000. The Royal Commission proposed that the present earned income relief at two-ninths of the income should continue from £2,025 to £2,500, and that a smaller relief at one-ninth should be given for the band of income from £2,500 to £3,000.
§ I agree with the idea underlying the Royal Commission's proposal, but I am disposed to carry it a good deal further. There are salaries well above the £3,000 maximum suggested by the Royal Commission which, without any doubt, are wholly the reward, and the well deserved reward, of some of the work most vital to our country. If our theme is to be opportunity and incentive, I think that it is right that such income should be treated for tax purposes differently from investment incomes of the same amount.
§ I have accordingly decided to extend the two-ninths earned income allowance 1000 from the present limit of £2,000 up to £4,000 and thereafter at one-ninth up to £10,000. The precise figures will, for technical reasons, vary a few pounds on either side of these levels. Even after these changes the effective rate of tax on total earned income for a single man will range from about a quarter at £2,000 to over a half at £10,000.
§ These proposals will at least ensure that of every extra £9 earned £2 will go into the pocket of the earner free of the ordinary incidence of Income Tax— though not of Surtax—up to £4,000 and £1 after that until £10,000 is reached. These changes will cost £17 million this year and £24½ million in a full year. A reform of this kind has been long overdue. We are determined that in the society which we seek to create there should always be room at the top. There must be rewards there, too.
§ The tax reliefs which I have proposed amount in total to £98 million in 1957–58 and to about £130 million in a full year. About a quarter of this total relief will take the form of assistance to our important trading operations overseas; about a quarter will take the form of additional incentives to those whose efforts are of particular importance to the expansion of the economy; about another quarter will give some measure of relief from the burden of indirect taxation and will thus help those outside the range of direct taxation. The remainder is designed to give some general easement of the tax burden, including something for the old but concentrating on those who are seeking to educate their children for the opportunities which lie ahead.
§ Having made these remissions of taxation, I am left with a surplus above the line of £462 million and an overall deficit of £125 million. On these figures, I think it will be agreed that the Budget is making a striking contribution towards the strengthening of our balance of payments and the stability of the economy. Even after the tax remissions which I have proposed, and allowing for the windfall from the interest on the dollar loans, the surplus above the line is nearly a third bigger than the actual surplus last year.
§ At the same time, the overall deficit is reduced to little more than half that of last year. I am satisfied that such a deficit will be amply covered by small 1001 savings and other non-inflationary methods of finance. We have cut spending and reduced taxes. We must carve out even greater opportunities for the years which lie ahead.