Clause 10.—(CHARGE OF TAX FOR 1958–59.)

HC Deb 12 June 1958 vol 589 cc509-37

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

Mr. Diamond

May I preface the few remarks I wish to make on this Clause with an apology for a seeming discourtesy in having to leave the Chamber before the points I raise can possibly be given in a speech winding up the debate? Unfortunately, I have to leave for my constituency to deal early in the morning with a most important appointment with reference to unemployed airport workers in Gloucester.

You, Sir Charles, will understand, that matter affecting, as it does, 3,000 workers in one factory alone, it is right that an hon. Member should keep such an appointment, even though he shows apparent discourtesy by not waiting until the end of a particular debate. I offer that apology to the Chancellor and the Financial Secretary because, whatever we say about them, no one can deny that they are extremely courteous. I was going to say that the Chancellor is nothing if not courteous, but, in view of his answers to our requests earlier, I would say he is nothing but courtesy, for all we got out of him was courtesy.

This Clause is a short Clause, but it is the most important Clause in the whole Bill. The standard rate of Income Tax is the one thing everybody has his eye on from one Budget day to the next. The fact that it is a short Clause in a Bill which contains thirty-four Clauses and nine Schedules should not mislead us into believing that it is an unimportant Clause. We are in danger, as was noticed in earlier discussions on Business today, of giving the impression that the Finance Bill is not a matter of importance to be discussed in the Chamber, but one which should be sent upstairs.

There is a danger that one might not realise, because there are no Amendments put down to the Clause, that it is a Clause of such importance that it requires a little time to deal with it fully. I am only sorry that because of the usual expeditious way with which you, Sir Charles, have conducted the business of the Committee, I am compelled to address you before having a full opportunity to consider the remarks I wish to make and am still somewhat in the frame of mind of asking about Entertainments Duty in relation to the cinema industry.

This Clause, the dominant Clause of the Bill, is typical of the rest of the Budget, completely unimaginative and providing virtually everything as before. The standard rate is to be 8s. 6d. as before. No doubt because of the importance of this Clause the benches opposite are practically as full as the benches on this side of the Committee.

Mr. J. Grimond (Orkney and Shetland)

Not quite.

Mr. Diamond

For the whole of the past year there have been forecasts, estimates, and financial articles on the need for the new Chancellor and the Conservative Government to do something about the standard rate of Income Tax. Nothing could be more important and nothing, I should have thought, would have been more pressed by the hordes of back benchers who are supporting the Treasury Bench at present. I am not here to plead for an increase in the standard rate of Income Tax, far from it. It would not be in order for me to do so. I am here to do what the supporters of the Treasury Bench ought to be doing, criticising the Government for their lack of imagination and the fact that they have not got the ability by any of their policies to reduce the rate of tax and at the same time to raise the necessary revenue to provide the services the country needs.

That is a considerable criticism. It arises mainly from the economic policy of the Government, which is deliberately directed towards holding down production. As a result, production has stagnated over the last three years. That being the case, a standard rate of Income Tax produced less than otherwise it would produce. If one had increasing production, factory wheels turning and more efficiency as a result of full order books with great demand and purchasing power, and the consumer needing this, that and the other, there would, of course, be an increase in the production of individual firms and an increase in their profits.

As a result, the same standard rate would produce greater revenue. To put it the other way, a reduction in the standard rate would have produced the same amount of revenue. Had the economic policy of the Government been directed towards increased production, we could have afforded what many people and many hon. Members on both sides of the Committee would be most anxious to see achieved, some reduction—how much one could not say without going through the figures most carefully—in the standard rate, and still have enabled the Government to have the revenue it needs for the social services and all the other services to be supplied.

8.30 p.m.

The Government have not seen fit to do it. The Chancellor is still of the opinion that purchasing power, which would send the wheels of industry round faster and produce the increased profits which are so necessary for the revenue which the Chancellor needs, must come down. The right hon. Gentleman has gone so far as to intervene in private wage negotiations—an extraordinary attitude for any Chancellor to adopt—and to say that particular wage negotiations were inflationary. We do not normally accept such an attitude in this Chamber without asking for details, and if details are not given we are inclined to say that the allegation is, in fact, a smear. An allegation unsupported by details is a smear.

It is regrettable that the Chancellor has taken that point of view and has not told us with which particular wage negotiations he was concerned. The standard rate of tax referred to in the Clause could have been reduced if we had had the increased production which arises from increased purchasing power, which itself arises from the wage negotiations which have been so recently referred to.

We could have had a reduction in the standard rate for a variety of further reasons. One that occurs to me immediately is the additional revenue that would come to the Treasury if it had set its mind to cutting out tax avoidance. I am referring not to tax evasion, which Inland Revenue officials are doing everything they can to pursue, but to tax avoidance which the Treasury and the Chancellor know about and which the right hon. Gentleman smiles upon and accepts. Why does the Chancellor want people to assume that a taxpayer is better off supporting his mistress than supporting his wife? That is a question which the Chancellor, in his completely impartial and independent position, should be in a position to answer.

Notice taken that 40 Members were not present;

Committee counted and, 40 Members being present—

Mr. Diamond

My hon. Friend the Member for Nelson and Colne (Mr. S. Silverman) has produced, by calling a count, a much larger attendance in the Chamber to listen to my remarks on the subject of tax avoidance than I had before.

Mr. S. Silverman

It is now up to my hon. Friend to hold them.

Mr. Diamond

I was referring to the serious aspect of this matter, that disposable income should be regarded as a charge on one's income. This is a frequent method of tax avoidance, as the result of which revenue is lost, and makes it impossible for Chancellors of the Exchequer to reduce the standard rate of Income Tax, although otherwise they might desire to do so. This is a somewhat technical matter, so I will explain in a little more detail what I have in mind.

It is Income Tax law that, provided one enters into a binding covenant to dispose of part of one's income for a period of seven years, that is to say, at least six years and one day, that income is no longer regarded as one's income but as income of the recipient, to whom it is payable under whatever form of deed of covenant it may be. In very many cases the disposable income, which in all other circumstances is regarded as income remaining after taxation, is treated for these purposes as income before taxation. The amount of the covenant is regarded as a charge on one's income.

Why should this be so? One can understand it in the case of a normal charge, like a rate of interest, which is very much higher than it used to be in the days when I was previously a Member of Parliament. Mortgage interest which one has to pay is obviously a charge upon one's income, but why should this be the case with regard to disposable income? This is one of the major leaks by which taxation is lost to the Revenue and the standard rate of tax has to be kept at its present figure, in order to produce the necessary revenue, instead of being reduced to a much smaller figure. Why seven years? Why cannot it be a different number of years? Why is it, as I say, that a man maintaining his mistress and paying her under deed of covenant a large sum of money should be able to charge the whole of that against his Income Tax or certainly against his Surtax? Why is it that there should be loss of this revenue to the Government when a married man who is keeping his wife gets no such benefit?

Mr. John Hall (Wycombe)

Money under a seven years' covenant becomes the income of the recipient to whom it is paid. This system is also used very largely in connection with charities. It would be a great pity to stop that.

Mr. Diamond

I am most grateful to the hon. Gentleman for his intervention for more reasons than one His first point is perfectly true, and that is exactly what we are complaining about. We are complaining that the income of a donor is regarded as the income of the recipient when in normal common sense it is not. Income is not transferred. The donor makes a present. If I make a present to my child on Saturday of 6d. or 7d., because I am feeling in a generous frame of mind, that does not become the income of the child; it is a present made by one person to another. It does not cease to be a present because of the formality of entering into a seven years' covenant. Why is it a present if it is for six years and a charge on income if it is six years and a day?

Surely that is a pure technicality in order to enable income to be transferred from one person to another, for tax to be avoided, for income to be lost to the Revenue and for the Chancellor to be put in the position whereby he has to keep a higher standard rate of tax, with all the difficulties and great deterrent effect that a rate of tax like this has.

There are many other questions of avoidance to which I should like to refer, but I think that I have made the point that avoidance is one of the matters to which the Chancellor should turn his mind. Instead of accepting this state of affairs to which I have referred, he could very easily alter it and make Income Tax tally with common sense and a situation arise whereby one's own income remains one's income and if one pays it away as a present it is still a present, and not anyone else's income. That is one example and there are many others. It would be against the public interest for someone to display too great a knowledge of the methods of how tax is legally avoided. I will, therefore, turn to the next aspect of this matter.

Mr. John Hall

Do I understand the hon. Gentleman to be asking that all gifts should be made taxable in the hands of the donor? Would he apply that to all voluntary contributions, to contributions made to the church on Sunday or Easter offerings that are made to the incumbent of a parish?

Mr. Diamond

Those are very interesting questions, each one of which should be considered very fully before I attempted to give an answer. I do not think that it would be in order for me to go into them at great length. But one's own income is one's own income and one does not dispose of that income to anyone else merely by covenanting it by a formal document. No one can change the nature of his own income. I will answer the hon. Gentleman's question as to gifts to charities. There is no reason why the law cannot be so altered that the payment of income to a mistress and the payment of income to a charity are treated differently. There is no reason at all. In fact it is treated differently at the moment.

Why should there be an advantage to a man who keeps a mistress as opposed to a man who pays to a charity? The man who keeps a mistress has the expense deducted from his Surtax, which is a very considerable Surtax saving, whereas the man who, instead of paying hundreds of pounds to his mistress, pays the money to charity or a church or an educational institute of a different kind, gets no Surtax relief at all.

Mr. John Hall

I understand that the example which the hon. Member has quoted so often is that of the employment of a mistress. It is quite possible to take a mistress on a purely commercial employment basis, in which case one would pay a salary or a wage and presumably one would also be liable to pay National Insurance contributions. In those circumstances, it seems to me that anybody who wished to do such a thing could do it legally by taking an employee.

Mr. Diamond

I am afraid that the hon. Member is most anxious to take me away from this Clause and I am most anxious to stick to it.

The Temporary Chairman (Mr. F. Blackburn)

I do not think the hon. Member for Gloucester (Mr. Diamond) needs a great deal of encouragement to get away from the Clause. The Question is very narrow and refers only to 8s. 6d. in the £.

Mr. Diamond

I am grateful to you, Mr. Blackburn, for strengthening me when I was in need of strength. This Clause is indeed a short Clause. If I may repeat what I said before you occupied the Chair, although it is a short Clause it is, in effect, the most important Clause in the Finance Bill. It is the one Clause which the public understand and to which they look.

The public as a whole do not understand what we talk about in general terms and they do not understand all the details we have to consider. Many take the view that time is wasted on these matters. When I went home later last night I called at a garage for petrol. The garage proprietor, realising that I was late, said, "I suppose you have been talking about the bus strike." In a matter like the bus strike, ordinary people believe that the House would need many hours of debate. They do not realise that the Finance Bill of necessity takes a considerable time, if we are to consider it fully.

When we come to the most important Clause, not only in the Finance Bill but in terms of the philosophies of the two parties, we must spend some time on it. The one thing which every Conservative hon. Member, both inside the House and out, has been urging upon his Government is a reduction of taxation. When it comes to such a Clause, therefore, it is necessary that we should draw attention to the fact that the same unimaginative approach that was brought to bear on the whole Budget has been brought to bear on the Clause and that we are left with a Clause providing for the same standard rate of Income Tax as in previous years. There was not one word about it in the Budget—no word of explanation why we could not have the reduction to which we all looked forward.

I think it is right that I should explain from these benches that many of us, ordinary back bench Members, take the view that it would be in the interest of the nation to impose a lower rate of tax. It would be of benefit to many. There are those who feel that a heavy rate of tax is a deterrent. Whether it is a deterrent or not depends on whether the taxpayer feels that it is a deterrent. It is as simple as that. The argument is often produced that if you pay 8s. 6d. in the £ you have only 11 s. 6d. left and therefore you have to work harder to produce £1 to spend than if the tax were only 5s. and you had 15s. left. The greater the rate of tax, the harder you have to work for the same amount left to spend. That is one argument.

My argument is, what does the taxpayer feel? Does he feel that a rate of tax at 8s. 6d. in the £ is a deterrent and a discouragement to that greater effort which is so much needed at present? It is felt very largely on both sides of the Committee and outside that it is such a deterrent.

The standard rate of Income Tax could so easily be reduced. The apparent weight of the burden could be lifted from the shoulders of many taxpayers. It could be reduced if, in the first place, greater attention were given to tax avoidance and if the various and very obvious methods of tax avoidance, which cost the Revenue a great deal of money, were stopped. It could be reduced, of course, if the Government were prepared to broaden the base of taxation. It is of no benefit to us that tax should be at a very high rate merely because it takes the shape of a very tall burden based on a very narrow base. If it were much more broadly based, if instead of collecting Income Tax solely on the items on which it is collected now, it were collected on many other things, then we should have a much wider base on which to collect the tax to produce the same revenue.

I am not arguing for a reduction in the total revenue. That is a matter of supply and we need the revenue to get the services. I am arguing for a reduction in the standard rate of tax. I am arguing that if that tax were much more broadly based, with more categories of income, the rate could be reduced but the same revenue produced.

8.45 p.m.

I could give many examples. An obvious one is capital profits. Why should not Income Tax take a much wider view of income, and include capital profits? In this country we take a very Insular view of income, and think that it consists only of those things that the Finance Acts and the rulings of the court have decided are income. Why should we not take the more progressive view of our capitalist friends in America, and include capital profits?

A short time ago I was challenged with having made a capital profit. The hon. Member for Cheadle (Mr. Shepherd) suggested that when I sold my interests in some cinemas I had made some capital profit. I can only say that a managing director who does not leave a business better than he found it should not have the job. Nobody objects to making capital profits. They are being made all day long. In a progressive instead of a stagnant economy, capital profits are the order of the day. The objection is not to their being made but to their being made free of tax.

This Clause refers to the standard rate of tax, a rate that is narrowly based. It is true that it also refers to … such higher rates in respect of the excess as Parliament may hereafter determine, but that is more clearly defined in Clause 11, on which I am sure many more hon. Members will be anxious to speak.

I conclude by saying that it is to be regretted that the Chancellor has not come forward with even a token reduction in the standard rate, as though he thought it of so little importance as not to mention, so far as I recollect, in his Budget speech that he was anxious to achieve a reduction in it, but for this or that reason could not do so. It is to be regretted that the real cause of our being compelled to maintain such a high standard rate is the stagnation in our economy, the refusal to look to tax avoidance for tax revenue, and the refusal to take a broader view of the source of income.

Mr. J. Grimond (Orkney and Shetland)

I, too, would like to touch on some of the matters dealt with by the hon. Member for Gloucester (Mr. Diamond). It is certainly one of the country's high priorities to encourage production, so long as that production comes from greater efficiency and is of real service to the country.

I have long felt that wives were extremely unfairly treated. This subsidy, as it almost is, paid to immorality under the tax laws is entirely wrong, and I hope that now that we have a Chancellor who cannot be said to be biased in the matter he will look at it with an impartial eye and take some of the tax off those who provide the coming generation.

As to a capital gains tax or capital tax, I would only say that, at the moment, owing to the beneficence of the Conservative Government, I should have thought that most people were faced with capital losses, so I do not feel sure that, at the present time, this would be a very useful contribution to the revenue.

I should also like to emphasise, with the hon. Member for Gloucester, that this is a most important Clause. I believe that we should soon have a debate about the whole structure of taxation—quite apart from its rates and the Budget and so forth—because I think that it is becoming a most appalling cat's cradle. Not only do I think that the total of taxation is too high, but that it falls far too hardly on earnings.

In this country today, the one thing a man has to aim at is to make some sort of gain outside of earnings. If he wins something on the pools, or finds a rich aunt who will die and leave him money, or if he buys up a derelict company and produces a capital gain, it is, of course, not taxed, but if he is someone who is trained in a profession or in his job and works at it all his life, at the end of it all he may well find that, owing to the incidence of taxation on his earnings, he has been unable to save, and, compared with the man who has a lucky fluke on the Stock Exchange or on the pools, he is very badly placed.

I believe that a rate of 8s. 6d. in the £ of Income Tax is a deterrent and is unfair on probably the most worthy section of the community, those who earn by their work and skill. I personally believe that we could reduce taxation; I believe that we should cease to make our own nuclear bombs, but the particular point that I want to make tonight is not only that we ought to reduce taxation on earnings, but also that the House of Commons is losing control over Government expenditure to a great extent. This is another subject to which, sooner or later, we shall have to give attention. In my view, the sooner the better, because it is now a very urgent matter.

I would also agree that there is a case for broadening the base of taxation. I do not want at this time of night to go into great detail about that, but I have some sympathy with a proposal for which I readily give credit to the party which occupies most of this side of the House. I think that taxation on expenditure, if it could be worked out, might be desirable, as against this concentration of taxation on earnings.

I am not and never have been wholly against Income Tax, because I think it has a certain obvious justice about it. It is fairly plainly understood in this country, and it ensures that we can grade taxation so that those able to pay within reason pay the bulk of the Income Tax. But it is too high today. It is a deterrent on the people who by their own efforts contribute very greatly to the prosperity of the country. I feel myself, too, that this matter of the structure of taxation should be taken out of the general context of the Budget debates and be debated separately, together with the whole organisation of the revenue and expenditure of the tax system.

Finally, I would reiterate my belief that there are certain economies which could be made in Government expenditure, and that this is urgent, if we are to run the economy in its present form, in which we rely a great deal on private enterprise and upon rewards for taking risks and for doing hard work, and in which, quite rightly, the working people are making great demands on the standards of living. The total amount taken out of earnings by the Government is too high, and I would point out that it is higher, I suspect, than appears to be the case. More and more people are moving up into the higher tax brackets, and although from time to time a Conservative Government has reduced the rate of tax, the real total of the tax reductions is not so great as would appear at first sight.

Mr. Douglas Houghton (Sowerby)

I think the Leader of the Liberal Party was speaking with even more confidence than usual. It seemed to me that we were being reassured that the Liberal Party has a policy, perhaps not a policy for a Liberal Government, but a policy for a Labour Government, or for a Conservative Government if the Liberal Party held the balance of power.

Of course, foremost in the classical Liberal dogma is the idea that taxation is too high. "Peace, Retrenchment and Reform" were the slogans of the Liberal Party which I remember in my early days when my father first introduced me to political life. A lot of people say that taxation is too high. Some say that Income Tax is too high, while others say that taxation generally is too high, and yet the present level of taxation is the expressed will of Parliament. Supposedly, and I think truly, in very large measure it reflects the will of the people.

Surely when we criticise the level of taxation we have to bear in mind that we are attempting to maintain a high level of social expenditure, a huge defence programme and at the same time provide a surplus over current demand for investment, for increased industrial capacity and production, not to mention the need for still more investment in the Commonwealth and in the Colonies.

That is a very tall order for a country like ours living by trade and commerce, a converter of raw materials into manufactured goods for export. Yet we are tolerably successful. We have our difficulties. We have our problems of balance of payments, confidence in sterling and so forth with which we are very familiar, and we have to be on our guard the whole time because we live a very precarious economic existence.

I think, however, that the general denunciation of the level of taxation is irresponsible. All who condemn the present level of taxation should say what they propose to do about it, either in reductions in expenditure or in the strengthening of the administration of the various systems of taxation, or what other remedy they may have in mind for this evil which they wish to see reduced or eliminated. I think it was Ivor Brown who said, "When you hear a man in the train going to business in the morning say to his neighbour 'I see we have increased our Income Tax by 6d. in the £' then you may be sure that you have a true democracy." But, of course, we never do increase our Income Tax by 6d. in the £. It is always "they" who have increased our Income Tax.

Yet, as I said a moment ago, if this Parliament means anything in our democracy, we are speaking on behalf of the people and what we do is in their name and they should share the responsibility with us in so doing. I believe that the attitude of many people to taxation is not only a sign of weakness in our democratic system but is also a sign of moral decadence. [Interruption.] I am saying that those who are criticising the level of taxation are presumably doing so because they dissent from what has been done in their name, and, as I shall show in a minute, many of them who do criticise it indulge in malpractices which should be condemned by this House.

I do not agree with the Leader of the Liberal Party that taxation is anything like the disincentive that it is frequenly made out to be. I know that one can argue for a long time about this. It depends on one's point of view and social attitudes and so on. But my firm belief is that most people are not deterred by the level of taxation in endeavours which they believe to be worthy or satisfying or in many cases for the good of the community.

9.0 p.m.

I believe that if one has an interesting vocation, it scarcely matters what the Chancellor of the Exchequer does with one's pay; one cannot stop doing it. One gains a great deal more out of it than monetary reward. I believe that the services rendered in this country voluntarily are without parallel anywhere in the world. Enormous effort, zeal and endurance go into tasks which are often either not remunerated at all or for which the financial rewards are nominal only. There are some people, no doubt, who find that their zeal or desire for further effort is slackened by the prospect of higher taxation, but I think that they are a minority.

There are two ways of reducing this high rate of taxation of which many complain. One is to reduce expenditure. The other is to increase the yield of taxation within the framework of the existing tax, which I believe could be done. My hon. Friend the Member for Gloucester (Mr. Diamond) has been saying something on this theme. I consider that the Chancellor should regard with concern the growing practice of making payments in kind. I believe that we shall shortly need a new Truck Act to stop more and more payments for services rendered being made in kind. Luncheon vouchers are one example. There is a luncheon voucher industry. There are luncheon voucher agencies and clearing houses, and there is a whole paraphernalia now connected with this new currency of the luncheon voucher which carries a value in goods, if not in services, in very many ways. There are concessions given to workers in particular vocations, from which the public service is remarkably free.

Mr. E. Partridge (Battersea, South)

Would the hon. Gentleman care to relate that to industrial canteens also, or does he put them in an entirely different category?

Mr. Houghton

I will mention industrial canteens. Up to a point, they are welfare services.

Mr. Partridge

So are luncheon vouchers.

Mr. Houghton

Beyond that point, the industrial canteen ceases to be a welfare service and makes what is really an addition to pay.

There are concessionary fares and concessionary coal. I know that this is of long standing. It is nothing new. One finds in the Report of the Commissioners of Inland Revenue that, where the National Coal Board gives money in lieu of concessionary coal, the Revenue exempts it from tax as an extra-statutory concession. All right. That may be one way, for all I know, of keeping industrial peace in the coal industry. There are subsidised holidays. There is the use of motor cars. There are rent-free houses or houses let to employees at nominal rents. All these are features of the growing practice of making payments in kind.

When Sir Stafford Cripps introduced his Finance Bill in 1948, he introduced some very stringent provisions to check payments in kind to directors and others engaged in business receiving more than £2,000 a year. The terms of the Act are very tightly drawn. These concessions I am speaking about are being granted to those receiving less than £2,000 a year who are not directors of companies. It would be undesirable if this kind of thing were to become a widespread form of tax avoidance.

Recently a man complained to me that a young traveller whom he had taken on in his business had let him down. He told me some of the things that he had given in addition to remuneration. They were quite startling. Among them was the use of a car. When the depreciation allowance had wiped out its capital value the man could then dispose of it and keep the money. Within limits no questions would be asked about whether he used petrol for personal or business reasons. He was given luncheon credits of a substantial amount, which were doubled, if not trebled, if he took anyone out to lunch with him.

These are things which do not in the ordinary way come to the notice of the Inland Revenue and, therefore, are perhaps not widely known among those who are considering the levels of remuneration. But they certainly come into any examination of comparable rewards for work done in one vocation or another. The Royal Commission on the Civil Service which dealt with Civil Service pay had something to say about that matter.

Then there is the perennial problem of expenses allowed under Schedule E. Four hundred and forty million pounds of expenses a year are set off from tax liability under Schedule E. My estimate is that the tax on expenses wholly, exclusively and necessarily incurred in the performance of the office amounts to £150 million a year. That is more than the cost of all the Income Tax concessions given in the 1955 Budget, which included a reduction in the standard rate of tax of 6d., a reduction in the differential rates of 3d. and certain increased personal allowances as well. I mention that to show what £150 million means when it is applied to the reduction in the standard rate of taxation and to larger reliefs. I do not say that all the expenses which are allowed against Schedule E assessments are not wholly, exclusively and necessarily incurred in the performance of the office. I draw attention to the magnitude of this matter and to the importance of any marginal leakage or slackness in administration.

The trading expenses on profits and gains under Schedule D are much less well known. They are not identifiable. These are all included in the trading expenses of the business, and it is often difficult for the Inland Revenue to find out what is the true measure. I think we must acknowledge that it is very extensive.

I know that I may be thought to be biased in this matter or too much of a puritan, but I believe there will be no real health in our Income Tax system until entertainment ceases to be an admissible deduction from taxable profits or emoluments under Schedule E.

Then we come to the under-assessment of profits. In a speech I made in the Budget debate, I drew attention to what I thought were some remarkable figures of the relative smallness of the assessable profits, or a large proportion of profits and gains, assessed under Schedule D.

The Temporary Chairman

The hon. Member is going in great detail into all these matters and is not relating his argument to the question of the 8s. 6d. standard rate. He is entitled to mention these matters, but scarcely to discuss them in the detail which he is at present doing.

Mr. Houghton

Thank you, Mr. Blackburn. Probably I am going into a little too much detail on what is an assortment or collection of items which are respects in which the administration of the tax can be strengthened. If that were done, we could get the standard rate down. I have illustrated that if we can fortify the revenue by £150 million we can begin to do something about the standard rate. I will not go unduly into detail, I shall certainly not go into these figures again, but I remind the Committee that that is something that should be looked into.

Then there is tax due and unpaid, £70 or £80 million of it at the end of a financial year. Some £200 million eventually will be due to the Revenue which has not been collected. Look what some of our music hall stars do. I have had more questions put to me by people about why the Inland Revenue cannot pin these people down than on any other subject recently; but I will not go into details on that. These are features of the administration which need attention.

Concerning unpaid tax, what is the good of the credit squeeze if taxpayers use the money which they should be paying to the Revenue in lieu of a loan from the bank? After all, a person can use Income Tax money for a few months before anything happens to him. He can use it for three months before interest is charged on it, and then only at 3 per cent. For somebody who owes a large sum, the economics of not paying tax are worth close examination. The results are quite startling. All these things relate to the level of taxation. If people paid more of their proper dues and paid more promptly, it would be possible to reduce the standard rate of tax.

I hope I do not do the Government an injustice, still less do I want to do any injustice to the Chancellor of the Exchequer, for whom I have a high personal regard, but there is a feeling that the Government are showing tenderness for tax avoiders and tax fiddlers. That is something which the Chancellor should do his best to remove.

There are recommendations in the Royal Commission's Report. In parenthesis, I remind the Leader of the Liberal Party that discussions on the structure of the tax have been undertaken at some length in the Report of the Radcliffe Commission. There are recommendations in the Report which would help to strengthen the administration of the tax. They are small matters, but important. There are a number of new Clauses on the Order Paper which would implement the recommendations of the Royal Commission. I am sorry that the Chancellor has not adopted more of them before now. Some of them, important ones, his predecessors did adopt and it was timely that they should.

I can only throw out the suggestion which I have made on previous occasions. All that happens when I throw out suggestions, however, is that the Financial Secretary says that he has carefully considered them but they are not practicable, although he does not explain why. On Second Reading, he made a speech which seemed to me to be ample evidence of the need for a memorandum.

I have suggested a Tax Administration Act, where many of these problems of administration could be dealt with separately from the Finance Bill. I throw out that suggestion once more. It would enable us to debate some of these matters unhurried by the time-table on the Finance Bill and without getting them mixed up with many other matters which, at the Finance Bill stage, are obviously of great importance.

I conclude by saying that on the issue of a reduction in the standard rate of tax there are many respects in which the administration of tax could be strengthened so as to lead to that desirable end.

9.15 p.m.

Mr. Shepherd

I merely want to comment upon one aspect of what the hon. Member for Sowerby (Mr. Houghton) has told the Committee. There is a good deal of substance in the view that in the ensuing year it would be desirable for my right hon. Friend to see how far he could reduce the standard rate of Income Tax by a more rigorous pursuit of those who exploit the expenses racket. I know that it is customary for those who use these expenses, and even the Institute of Directors—of which I am a member—to say that there is no such exploitation, or racket, but that is entirely untrue; there is a very serious racket in expenses, and to my mind it is dangerous to the social structure of the nation.

It is dangerous because there is quite a large body of intelligent and responsible people in our community who, being in a position where they cannot exploit this expenses racket, and have to face the rigours of high taxation and a high cost of living, look with some concern upon those who, in many respects, are less worthy of merit than they but who manage to live very luxurious lives with a minimum of effort. It cannot be good for a society to have one part of its responsible membership aggrieved because another section is exploiting certain aspects of taxation.

The Temporary Chairman

The hon. Member is going into very great detail. He should relate his argument to the question of the standard rate of tax.

Mr. Shepherd

The whole purpose of my remarks is to say that if, in the ensuing year, my right hon. Friend the Chancellor could look at these abuses we might be able to reduce the standard rate and do something about Surtax. I should certainly prefer to see a rigorous drive against the person who exploits the expenses racket and an improvement in the Surtax position. In deference to your wishes, however, Mr. Blackburn, I will not go into further detail upon the matter. I have said enough to indicate that I consider the present state of affairs in respect of expenses to be entirely unsatisfactory, and a danger to our community. My right hon. Friend would do well if he made an easement in the standard rate and in Surtax and, in return, applied a more rigorous test to expenses.

Mr. Arthur Holt (Bolton, West)

I had not intended to intervene, but after some of the remarks of the hon. Member for Sowerby (Mr. Houghton), particularly about the Liberal Party, I felt that I ought to say a few words. At the beginning of his speech the hon. Member left the impression—at any rate, with me—that he thought it almost immoral to reduce the standard rate of Income Tax. He quoted the case of many people who did much excellent service with very little reward. This seemed to him to indicate that it was a fallacy to say that a high rate of Income Tax was a disincentive. This implied that he would have no hesitation in raising Income Tax by another 1s. in the £. We cannot have it both ways, but it seemed to be an argument for continuing to flog a willing horse. The fact that some people will provide the whole of their services free does not seem to be something which should be introduced into an argument about the level of the standard rate of Income Tax.

The hon. Gentleman also seemed to imply that it was immoral for people to suggest that the tax should be cut, or that if they did make that suggestion, there should also be a suggestion for an equivalent saving in Government expenditure. The Leader of the Liberal Party drew attention to the fact that he was in favour of Britain ceasing to manufacture the H-bomb. The cost of making the H-bomb alone is esimated at £150 million. He mentioned the burden being carried by the Treasury of the huge defence budget and the cost of the Welfare State and the large surplus for investment. He suggested that we should see whether we can cut some of this expenditure or move it into another sphere.

The Liberal Party has suggested that we make cuts in defence and that a serious attempt should be made to provide the capital necessary for the nationalised industries from sources outside the Budget. Were that done, a considerable saving in Government expenditure could be made which might result in a substantial cut in the standard rate of Income Tax—perhaps about 1s. in the £.

Mr. Jay

On a point of order, Mr. Blackburn. Although it did seem to me that it might be in order to discuss Income Tax, the hon. Member for Cheadle (Mr. Shepherd) was not allowed to do so. Therefore, is it in order to discuss defence expenditure?

The Temporary Chairman

The hon. Member for Cheadle (Mr. Shepherd) was allowed to discuss Income Tax and was going into great detail about one aspect of it. When I stopped him he was not relating his argument to the question of the 8s. 6d. in the £ Income Tax. I take it that the hon. Member for Bolton, West (Mr. Holt) is speaking about defence expenditure to show that there could be a reduction in the 8s. 6d. standard rate of Income Tax.

Mr. Holt

I have no intention of developing the Liberal Party's case for the cessation of the manufacture of the H-bomb. I am merely saying that it would save £150 million, and perhaps as much as £200 million. That would save some Government expenditure and allow a cut in the standard rate of Income Tax.

The hon. Member for Sowerby suggested that it was immoral to talk about cutting the standard rate of taxation unless we said where a saving could be made in Government expenditure. I wanted to make clear that the Liberal Party is not immoral and has made suggestions about where cuts could be made, so that an amount could be cut from the standard rate of tax.

The Temporary Chairman

Order. The morals of the Liberal Party are not in question. The Question is—

Mr. Roy Jenkins (Birmingham, Stechford)

But, Mr. Blackburn, are we not to have a reply from the Government on this important matter? I thought that we should hear from the Chancellor.

Mr. Amory

I was waiting to see whether any other right hon. or hon. Gentleman wished to speak.

I should like to make a few remarks about this Clause, which is in common form for a Finance Bill. Its purpose is to fix the standard rate of Income Tax for the coming year. It also provides for Surtax rates for the coming year to be determined by Parliament in next year's Finance Bill; that is, Surtax to be payable on 1st January, 1960. I thought it strange to hear hon. Gentlemen opposite appealing for a lower rate of Income Tax, because it will be within the memory of the Committee that in their last year of office they put up the rate of Income Tax to 9s. 6d. and the present rate is a 1s. in the £ lower than when they left office.

I should, of course, have been delighted if in my judgment I had found it possible to reduce the standard rate this year. There can have been few Chancellors who would not have liked to make a start in their first Budget by reducing the standard rate, but, as I said in my Budget speech, I concluded that if I were to have remitted a substantial amount in taxation for this year the result would have been to jeopardise the consolidation of our economic position, which still must be our main task. So the purposes of the changes I made were to strengthen the economy, to improve the tax system at a number of points, and to deal with several cases of special need. I am afraid that the amount of revenue I judged would be available made it impossible for me this time to make a reduction in the standard rate of tax.

I suppose that it is always tempting to look on a Budget in isolation and then to complain of the things which have not been done in it, but I should like to ask the Committee to look at this Budget against the background of previous Budgets. Since 1951 the standard rate of Income Tax has been reduced by 1s. The single allowance, the married allowance and the child allowance have all been increased.

A married couple with two children between the ages of 11 and 16 and earning £600 would have paid £35 in tax in 1951–52: today, they pay nothing. If they had been earning £1,000 a year they would have paid £167 in 1951–52: they now pay £69. If they were earning £2,000 a year in 1951–52 they would have paid £547: now they pay £393. Substantial help has also been given to those on very small incomes and to the elderly.

Mr. Jay

Apropos of these calculations, can the right hon. Gentleman say whether the income now left after taxation represents as much in purchasing power as it did in 1951?

Mr. Amory

No, but we have to set against that the average income per head of the population in money terms, which has gone up very considerably. The reductions that have been made also caused a number of taxpayers to become exempt from tax altogether. It is significant that if the 1951 rates of tax were in force today a further 2¾ million of the population would be liable to Income Tax.

I wish to refer to one or two remarks made by the hon. Member for Gloucester (Mr. Diamond). He apologised that he would have to leave the Committee, and I quite understand why he is not able to be here to hear my answers. The hon. Member said that owing to the economic policies of the present Government we appeared to be unable to raise sufficient revenue to reduce taxation. Under our present policies we are succeeding in raising more revenue in the aggregate at considerably lower rates. That is an important point. The contribution that this Finance Bill will make this year will be a reduction in taxation of £108 million a year.

The hon. Member gave us a short eulogy on capital profits and said they resulted from an expanding economy. They do to some extent, but I should say they result far more and are far more likely to result from an inflationary economy. If we can once get inflation behind us I do not think we need worry too much about capital gains. The hon. Member raised some doubts about the desirability, as I understood him, of covenants. The treatment of payments under conversant was dealt with in Chapter 6 of the Final Report of the Royal Commission. The conclusion of the Commission was that these instruments should be recognised as legitimate and sound, and the Commission did not criticise the seven-year period.

9.30 p.m.

The hon. Member for Sowerby (Mr. Houghton) gave us the benefit of his remarks. I always listen with interest and great respect to whatever he has to say on these subjects. I had the pleasure of accompanying the hon. Gentleman to India just before Christmas, and I was not surprised to find that our hosts quickly recognised the wide experience the hon. Gentleman had had in these subjects. They listened, too, with interest to any advice he had to give them.

I thought he answered to some extent some of the lucubrations of the hon. Member for Gloucester about the present level of taxation. I agree with him that a job means to most people more than the money they get out of it. I am always sorry for people who are doing a job when that is not the situation. A happy man should get more out of his work than merely the money return.

The hon. Member mentioned payments in kind. I agree with him that they confront us with a very real problem. That applies also to expenses. He referred to the remarks made by my hon. Friend the Member for Cheadle (Mr. Shepherd). I do not deny that expenses are also a problem. I think the hon. Member for Sowerby will agree that it is extremely difficult to devise rules that deal with either or both of these things and that are strict enough to control expenses and payments in kind and yet are fair and reasonable and do not involve too detailed interference with the activities concerned.

I have only been in my present position for a short time, but those are two of the problems which I shall try to keep under review. Any improvements that can be legitimately and fairly made I shall try to bring forward.

The hon. Member for Sowerby said that he felt there were signs of too great tenderness in the present Government to tax avoidance. I should be very sorry if I thought that were so. I will put it on record that my aim is to support the Inland Revenue in all fair and reasonable measures for securing payment of tax due.

References were made to the aggregation of income between husband and wife, and one hon. Member mentioned that I am a bachelor. That does not stop me from holding very strong views on the proper treatment of wives. I shall always do my utmost to see that justice prevails there. Again I propose to quote views which have even more relevance than my own views, those of the Royal Commission, in Chapter 6 of its second Report. The Royal Commission approved the principle of aggregation of income and thought in fact that the treatment at present given to the earnings of married women was in some ways too favourable.

It is a broad matter on which we have to weigh up the gains and losses, the pros and cons. By and large, I think that the principle of aggregation is extremely difficult to criticise, compared with the alternative. I am not sure whether we have the balance just right in every way, but if we have not we must, from time to time, try to make improvements.

While this year I have not found it possible to reduce the standard rate, I certainly hope that in future, and particularly if we can get inflation well behind us, further reductions in the standard rate of Income Tax will become possible. Striking reductions in taxation call for substantial reductions in expenditure. That is by no means easy, because there is no question about it that reductions in expenditure are by no means as popular as reductions in taxation.

Since 1951, as I said in my Budget speech, the percentage of the national product taken by Government expenditure has fallen from 29 per cent. to 25 per cent. It is our aim that that trend should continue, and if that happens it will pave the way in due course for a further lightening of the burden of taxation. I believe that most hon. Members will understand that this year it would have been a mistake to have made a reduction in the standard rate, and I hope, therefore, that the Committee will find the Clause as it is drafted acceptable to it.

Mr. Roy Jenkins

This is a most important Clause. It raises over £2,000 million of revenue, which is more than 40 per cent. of the total Budget, and I am glad that this year, as has not always been the case in the past, we have the Chancellor of the Exchequer himself replying to the debate on a Clause of this importance.

The Chancellor spoke to us in his normally conciliatory manner. I think, none the less, that he made one or two points which should certainly not be allowed to pass without comment. First, there was his view that apparently the Labour Party had permanently disqualified itself from believing in a reduction of the standard rate of Income Tax in almost all circumstances because the Leader of the Opposition in his 1951 Budget put the standard rate up to 9s. 6d.

This seems to me a very extraordinary proposition. That was in a period of war—minor war, but war—and a period of very heavy rearmament. In any case, my right hon. Friend did not put up the standard rate nearly as fast as did Sir Kingsley Wood and other Chancellors during the war. Unless one argued that on that basis the Conservative Party was disqualified for ever from believing in a reduction in the standard rate, the argument cannot be applied against this side of the Committee.

The Chancellor made an even more surprising statement about capital gains because he implied that if we got inflation out of our system we need not worry from a taxation point of view about capital gains which my hon. Friend the Member for Gloucester (Mr. Diamond) had implied were a natural result—I agree with him—of a buoyant expanding system. But are we to believe, as I would certainly hope not, that the Chancellor has given up all hope of having a buoyant expanding system again?

Mr. Amory

No.

Mr. Jenkins

I am glad that that is not so. Therefore, presumably if we get inflation right out of our system there is no question of having purely inflationary capital gains. We should have capital gains because companies would be growing in their real value and earning power. If we get gains of that sort which have no element of inflation in them, it is all the more desirable that they should be taxed than if they were purely inflationary capital gains. One could argue that if a capital gain accrues and argue the individual who gets it no better off in real terms than he would otherwise have been, that is not a real capital gain and he ought perhaps not to be so liable for tax as he otherwise would be.

It is not a straightforward argument because, associated with it, is the question of whether someone getting capital gain should be allowed to contract out of the inflation more than someone not making the gain. There is a mixed argument for something to be said on both sides so far as inflationary capital gains are concerned. If we have capital gains which are not inflationary and which to the whole extent make the taxpayer receiving better off in real terms, then surely the argument, not for saying that he should not make them but for excluding them entirely from the range of taxation and for putting the man getting them in an entirely different position from someone depending on earned income, is very much weaker indeed. I certainly hope that the Chancellor will take the view that in considering a capital gains tax, which I hope he has not put entirely out of his mind, the case for it would in no way be weakened, but would in fact be strengthened if we moved entirely away from an inflationary position and from an inflationary capital gain.

We have had a wide-ranging debate with no fewer than two contributions from the Liberal Party. At one time, in a Committee which was not in general excessively full, we had almost a 100 per cent. presence of Liberal Members. It seems to me that it is 50 per cent. now.

Mr. Grimond

It is 33⅓ per cent. The mathematics of the hon. Member who is officially winding up for the Opposition do not give us complete confidence in him.

Mr. Jenkins

It is not that I am unable to work out the figures, but that I cannot remember the total Liberal membership.

It is natural and important that we should have Liberal contributions on this subject. After all, we should remember that Mr. Gladstone fought an election on the abolition of the Income Tax. We should perhaps also remember that he lost the election very heavily. I understand that the hon. Member for Orkney and Shetland (Mr. Grimond) did not advocate the abolition of Income Tax or anything approaching it. He and his hon. Friends ranged fairly widely over such questions as the hydrogen bomb and defence expenditure, and perhaps it would be fair to say that these speeches were occasioned by the Clause rather than about the Clause. None the less, we greatly welcome those two contributions.

What is more surprising is that this year we have not had, either to this Clause, or to the immediately following Clause dealing with Surtax, which is closely associated with it, any back bench Conservative amendments. In previous years we have generally had at any rate that token Conservative back bench attack on the level of direct taxation, taking the form either of Amendments to this Clause or of Amendments to the Surtax Clause. Last year it took the form of an Amendment to the Surtax Clause moved by the noble Lord the Member for Dorset, South (Viscount Hinchingbrooke) in very strong terms, but this evening he is not even present.

It is, of course, on this Clause that we must consider arguments about the effect on our economy generally of the present burden of high taxation, if we are to consider them in the course of the Finance Bill. It is still readily assumed, I think, by hon. Members opposite that Income Tax at the rate of 8s. 6d, in the must still have a very depressing effect and that the lower the rate of tax the more buoyant the economy must be and the more incentives one would expect to be at work.

There may well be some force in this argument, but it is hardly to be supported by the recent historical facts in this field, and as I have always understood that the Conservative Party wish to pass as an empirical party, as opposed to us on this side of the Committee, whom they like to see as a doctrinaire party, I am sure that they wish to be greatly influenced in considering this matter not by what they think ought to happen but by what has in fact happened.

The sorry history is that while our production did fairly well under a standard rate of 9s. 6d. and of 9s. in the £, as soon as the rate went down to 8s. 6d. our production immediately ceased to expand. I do not wish to go as far as to suggest that there was any necessary connection between these two events. I do not wish to suggest that the reduction in the standard rate to 8s. 6d. in itself made it impossible for us to have any further expansion in production.

Mr. Amory

I am sure that the hon. Gentleman will agree that the present level of production, even if it is stationary for the time, is an all-time record.

Mr. Jenkins

That is rather like saying, "A Chancellor of my age is an all-time record at the present moment." It is not very significant. There are very few years in our history, other than those of the major slumps, in which that proposition would not have been true. That, in itself, is really not the significant fact. It is the rate of growth that is important. Nevertheless, the fact remains that since we had this reduction to 8s. 6d. we have not had any expansion in this field.

9.45 p.m.

What is our attitude on this side to the rate of direct taxation? I certainly would not take the view that heavy taxation, whether direct or indirect, was in any way desirable in itself. On the contrary, I think that it is desirable to reduce taxation as quickly as we reasonably can, but we certainly should not reduce direct taxation at the expense of slashing and undesirable reductions in necessary expenditure or of putting further burdens on indirect taxation. In so far as we can, we should get the rate of direct taxation down. It bears very heavily on many people, and particularly on those living wholly on earned incomes and unable to take advantage of tax avoidance in one form or another, or to get heavy expenses.

I am sure that the correct approach to get direct taxation down is, first of all, to get rid of the gross inequity there is at present as a result of the different treatment of expenses as between those who happen to be on Schedule D and those who happen to be on Schedule E. Secondly, we should mount a big offensive to broaden the basis of taxation. The key to reducing the rates is to broaden the base on which they are levied. I think that there is an extreme unhealthiness in our present system. It is an inverted code of extremely high rates erected on a relatively narrow basis of income. There is so much income that is outside the tax net, and that leads to an addition of the spending power of the individual receiving it. I am sure that we would have a more realistic and much fairer system of taxation if we were to provide a broader basis with rather lower nominal rates.

The third approach is to return, as quickly as possible, to a policy of expansion; not resting on what is, I think, the meaningless proposition that, in absolute terms, we are at record levels now, but being concerned with our relative rate of growth as compared with our competitors, and realising that a rapidly-growing economy offers, amongst other advantages—not a major one, perhaps, but among the minor advantages—a much greater possibility of reducing the rates of direct and indirect taxation than does a stagnant economy.

Question put and agreed to.

Clause ordered to stand part of the Bill.

Clause 11 ordered to stand part of the Bill.

To report Progress and ask leave to sit again.—[Mr. Amory.]

Committee report Progress; to sit again upon Monday next.