Clause 13.—(CHARGE OF INCOME TAX FOR 1960–61.)

HC Deb 19 May 1960 vol 623 cc1499-551

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

3.58 p.m.

Mr. G. R. Mitchison (Kettering)

This Clause repeats the same arrangements for Income Tax and Surtax as we had last year and serves as a reminder that Income Tax and Surtax are annual charges. I have no quarrel with the rates, and for the moment I want to confine myself to two general observations.

If it were not mitigated by allowances, Income Tax would be a highly regressive tax and the object of allowances is to make it more progressive. The higher the proportion of the relief which can be given by way of allowances, the more progressive the result. When one looks at the last available Report of the Commissioners of Inland Revenue one finds that the number of individuals whose incomes were above the effective exemption limit for the ten years up to 1958–59 remained roughly constant, but the number who have been relieved from tax by the operation of allowances has fallen by about 1½ million and there has been a consequent rise in the number chargeable with tax. That shows a tendency over these years to make concessions in such a form that the allowances do not preserve their progressive effect.

During recent years, and I take simply the last three, the balance in successive Finance Bills between direct allowances, that is to say, allowances or reductions of tax, and allowances by personal and similar allowances has been very uneven. In the 1958 Budget, the personal allowances amounted to only about £5 million. In last year's Budget—the General Election Budget—there was a reduction in the rates of tax which resulted in £229 million less for the Exchequer, and in this year's Finance Bill the personal allowances of the character I have indicated amount to under £9 million. The effect of the last three years, therefore, must have been to continue the tendency that appears in the Commissioners' figures and to weigh the balance even more against an increasingly progressive tax.

We on this side of the Committee take the view that Income Tax ought to be not decreasingly but increasingly progressive, and we feel that in recent years, and over the run of years, not enough has been conceded by way of allowances. It is for that reason that in Committee on one Finance Bill after another we have put down Amendments and new Clauses seeking to extend the amount and the scope of allowances. We take the very simple view that, after all, if any concession can be spared from the Exchequer, it ought to go to relieve people at the bottom of the Income Tax scale, and, primarily, to see whether we can take them out of it altogether. Figures show that the number so getting out has tended to fall. Secondly, if we cannot do that, at least there should be concessions in the scope and amount of the allowances granted.

That is not to say that the Chancellor ought to vary the rate which he imposes under this Clause, but simply to comment on this increasing tendency, and to say that it is about time that the allowances received a substantial increase, and that, year by year and over the run of the years, they were given increasing importance. That is, after all, the right way, as we see it, to treat any tax, and certainly this particular one.

I wish to make one other point, and not to take up too much of the time of the Committee. I repeat, I think for the third time, that we make no complaint about the rate of tax this year. I might, perhaps, make one minor personal one, which is that it happens to be a rate that does not facilitate arithmetical operation, but that is not a very serious comment. A time will come, no doubt, when the rate will fall to be changed one way or the other, according to the view of the Government of the day and the economic circumstances of the country. When that happens, I would ask the Chancellor, and through him his successor—if he is not here personally, which is something that many of us would rather regret—to remember that people in this country, broadly speaking, pay their taxes in three ways.

First, they pay what are commonly called direct taxes, of which Income Tax and Surtax are not the only but the most obvious instances. Secondly, they pay indirect taxes. Thirdly, they pay what does not amount strictly to a tax, but comes to the same thing, and that is rates to the local authorities. I want to say a word or two about these three classes of tax.

First, I do not regard it as a good point in a Budget and in a Finance Bill that, when one looks in the Finance Bill to see the amount of money that is to be raised for the coming year, one finds that the largest amount is raised by an indirect tax. I am not for the moment concerned about the merits or demerits of the tax on tobacco, but, by and large. I think that we start in a critical mood if we find that that is the result of the figures.

Secondly, I turn to rates. A 1d. rate in this country produces between £2½ million and £3 million. It is a little under £2½ million in England and Wales, and the Scottish figure brings it up. Roughly speaking, and very roughly, 1d. off the Income Tax represents about eight or ten times the product of a 1d. rate, and, therefore, any concession that can be made by way of direct grant or direct assistance in one form or another to rates makes a very considerable difference. Rates seem to me to be one of the worst taxes in the world. They have every possible fault, but no practical alternative answer has as yet been found for financing the local authorities with money raised by themselves. We must expect them to continue.

But rates are increasing, and they are increasing while, at the same time, there is an increasing strain on local authorities—a strain both to carry out the necessarily increasing services such as education, and a strain because the money that they require to raise—in this instance, the capital money—has to be raised in present conditions at a very high rate of interest indeed. It is, therefore, not a matter of local authority extravagance, but one of necessity, imposed by the policy of the Government of the day and imposed, no doubt, by changes in the services that are required from the local authorities and other factors equally inevitable in any civilised country.

It is not the fault of the local authorities that these increases should go on, but there will come a time, I imagine, when the Chancellor will have to look at the balance between the two things, and to recollect, if he has to choose between some reduction in taxation, and, on the other hand, some concession to local authorities which will enable a reduction in rates to be made in lieu of a reduction in taxation, that rates are a singularly bad tax.

They are bad for two reasons. First, from the selective nature of their subject-matter. I am not going into what is obvious to every hon. Member of the Committee—that a tax levied solely on property in that form is bound to lead to anomalies as between one person and another, and, secondly, that they are a bad tax—

Mr. Gerald Nabarro (Kidderminster)

On a point of order. Could you tell me, Sir Gordon, what steps I may take to debate the local rate structure of this country in due course?

The Chairman

We cannot discuss it on Income Tax. I think that the hon. and learned Member for Kettering (Mr. Mitchison) was referring to alternative methods of taxation.

Mr. Mitchison

I am sorry that I should have disturbed the hon. Member for Kidderminster (Mr. Nabarro), but let me repeat very shortly to him, as perhaps I did not make myself clear, what I was trying to say.

It seems to me that any Chancellor of the Exchequer has the choice at intervals between financing the local authorities to an increasing extent and a tax concession. When it comes to that, all I am saying at present is that I regard rates as a very bad tax indeed, that rates are increasing, and that I hope that when the Chancellor considers this matter he, or his successor, will bear that in mind, and bear in mind, also— and this is the last thing that I have to say—that what the local authorities are doing in this country is, as I imagine the vast majority of the Committee will agree, something which is not only necessary but increasingly necessary if our civilisation is to be maintained at a high level or raised to a higher.

I ought not to have to stand here and talk about the need for higher standards and better facilities for public education, public health, and the like. I will not take up the time of the Committee by doing so. These things are perfectly obvious.

Therefore, to sum up what I have had to say today, it is, quite shortly, this. First, as to Income Tax itself, there has been in recent years, under successive Tory Governments, a tendency for the number of people who are helped out of taxes by the allowances to diminish. That appears from the Commissioners' figures and from the amount in recent Finance Acts. It is a tendency I deplore, because I think that it is sapping the foundations of what should be a progressive and increasingly progressive system of direct taxation.

Secondly, I say that if and when the time comes for changes to be made I hope that it will be remembered that there are three kinds of taxation; that we on this side of the Committee deplore large increases made by indirect taxation, such as the Tobacco Duty increase in this Finance Bill; and that we deplore, too, the increasing tendency for the operations of the local authorities to be made more difficult and to be limited by an increasing rate burden. We feel that the Government should bear these matters in mind when considering the rates of Income Tax in future years.

Let me before I sit down and before the hon. Member for Kidderminster succeeds, if he does succeed, in catching your eye, Sir Gordon, just say one thing— this for the fourth time: we make no criticism of the rates of tax this year. These are comments on the past and suggestions for the future.

Mr. Nabarro

I shall not attempt to follow the hon. and learned Member for Kettering (Mr. Mitchison) into the intricacies of the rating system. Suffice to say that in the speech I made on 5th April, on my right hon. Friend's Budget, I alluded to the unloading of central Government expenditure on to the local authorities and estimated the figure on that occasion at £50 million in the year 1960–61. My right hon. Friend did not refer to that point in his reply.

I differ fundamentally from the hon. and learned Member in my approach to Income Tax, and let me say at once that I shall criticise my right hon. Friend for maintaining what I consider to be a swingeing rate of direct taxation in the form of 7s. 9d. in the £ as the standard rate for Income Tax. That is one respect in which I differ from the hon. and learned Gentleman, but there is a second. He used the term half a dozen times, a " progressive system " for Income Tax. To my mind, there is no such thing as a progressive system for Income Tax.

Mr. John Diamond (Gloucester)

Or anything else.

4.15 p.m.

Mr. Nabarro

Oh, yes—in social philosophy, for example. My social philosophy is definitely progressive. However, there is nothing progressive about Income Tax. All Income Tax is bad. It is something we have to suffer.

I would say that the greater the number of people who have to pay Income Tax within the structure of that tax decided by this Committee, the better. I do not believe that payment of Income Tax should be restricted to a few persons fortunate enough to have substantial incomes. I would spread the net far and wide and not increase the amount of the Income Tax allowances as first priority. I would reduce the standard rate of Income Tax. The more workers, by hand and by brain, who pay Income Tax the greater the sense of social responsibility and the more important the understanding that the National Health Service costs over £700 million a year, that our public education service costs over £700 million a year—and I could go on at length, but not on this occasion—and that Income Tax is one of the major contributory means of financing that huge public expenditure in a social sense, which I do not object to in principle: it is part of the policy on which I am elected to this House.

I want it understood, however, and it would be if I had my way, that by the maximum number of people paying where it hurts most, through the P.A.Y.E. deductions every week, these services are immensely expensive, and that the standard rate of Income Tax, coupled, of course, with the three lower rates on tranches of income, are the principal contributory factors in financing that expenditure.

To what extent are they contributory? Last year, 1959–60, we raised £2,242 million in Income Tax. In the year 1960–61 we shall raise £2,485 million in Income Tax. Notwithstanding the rate remaining by this Clause, at 7s. 9d. in the £, the Chancellor is lifting out of the taxpayers' pockets an additional £242 million this year. It was, therefore, a trifle disingenuous of him to have presented in his Budget speech the picture that he is raising tax by a modest £70 million in this year.

Of course he is not. He is raising it by £70 million on such rates as he has increased for certain specific items, such as the increase in the rate of Tobacco Duty which we disposed of yesterday— disposed of in the wrong way, in my opinion. He raises an extra £70 million by increasing the rates of duty and the rates of taxes. What has been lost on the nation so far is that he is increasing tax this year by £242 million—in his collection of Income Tax by itself, let alone Surtax or death duties or other contributions of that kind.

The growth of the Income Tax and the yield from it in recent years of Tory administration has been stupendous. [Laughter.] This is no cause for laughing on the part of my hon. Friends. They should hang their heads in shame. [HON. MEMBERS: "Why?"] Why? For this reason, that we are collecting this year, 1960–61, £600 million more in Income Tax than we collected when we were re-elected in 1955, partly, of course, due to the rise in incomes, partly due, of course, to inflationary tendencies, but also due to the fact that we have not persisted in reducing the standard rate of Income Tax as rapidly as we ought to have done.

Mr. Denzil Freeth (Basingstoke)

If my hon. Friend does not propose to finance the expanding social services— upon which, he himself said, he was elected—by getting more money from the taxpayer, and by getting it through obtaining a smaller percentage of a growing national cake, how does he propose to maintain the social services and, at the same time, reduce taxation?

Mr. Nabarro

I will send my hon. Friend the Member for Basingstoke (Mr. Denzil Freeth) a copy of my leading article in the Daily Telegraph on 6th April, in which I dealt with all these matters.

Mr. Douglas Jay (Battersea, North) rose—

Mr. Nabarro

I will give way to the right hon. Gentleman in a few moments. May I, first, finish answering my hon. Friend the Member for Basingstoke? Then I will gladly give way to any right hon. or hon. Gentleman.

The article was entitled, "Budget Blunders and Why"? It presented an alternative philosphy to that of my right hon. Friend the Chancellor of the Exchequer, resting on a simple proposition, for the benefit of my hon. Friend the Member for Basingstoke, that by reducing rates of direct taxation such larger incentives are furnished as to cause the Chancellor of the Exchequer's revenue to increase in the aggregation. I hope that my right hon. Friend will not shake his head as a negative, because that was the policy enunciated year after year from the Opposition benches between 1945 and 1951, when the Tories were trying to tip the Labour Party out.

Mr. Jay

As the hon Member for Kidderminster (Mr. Nabarro) said, "leading article in the Daily Telegraph", will he tell us whether he now claims to write all the leading articles in the Daily Telegraph, whether signed or not, or only the ones signed by himself?

Mr. Nabarro

I am sorry if I used the word "leading". I am not a journalist. I am only an amateur. I meant the main article, the signed article, the feature article. I repeat that I am not a journalist. I cannot be everything to all men all the time.

Mr. John Hall (Wycombe)

I am grateful to my hon. Friend for giving way for the third time. If, as a result of the feature of his feature article, the principle adopted was that by reducing the standard rate of taxation the Chancellor would be able to obtain greater revenue from taxation, would not that be doing precisely what my hon. Friend is now complaining of, namely, taking more money in taxation out of the pockets of the people?

Mr. Nabarro

There is rising expenditure, which has to be financed by divers means. I have already said that the increased yield of Income Tax has been £600 million over the last five years. It is due partly to inflation, partly to rising incomes, and partly to the fact that we have not reduced the standard rate fast enough. What I quarrel with is the claim of my right hon. Friend to have increased tax this year by only £70 million, whereas, in fact, Income Tax by itself is admitted to rise by £242 million.

In this country today there are 18 million Income Tax payers. In 1939, twenty years ago, there were 3.8 million. Not only has the number of Income Tax payers multiplied by five times in twenty years, but the yield of Income Tax has multiplied by more than that in twenty years. In 1939, the yield was £400 million. Today, the yield is £2,242 million in the year 1959–60, and is budgeted at £2,485 million in the year 1960–61.

The best that can be said for the Conservative record in this matter is that it is infinitely better than the record of the Socialists. When we inherited office in 1951, the standard rate of Income Tax was 9s. 6d. in the £. In 1953, it was reduced by 6d. to 9s. in the £. In 1955, it was reduced by a further 6d. to 8s. 6d. in the £.

This is what I want to draw particularly to the attention of my right hon. Friend, whether he is the incumbent of the office of the Chancellor of the Exchequer in 1964 or not. We had to wait from 1955, when the standard rate was reduced to 8s. 6d. in the £, until 1959— four years—for a reduction of 9d. in the standard rate to bring it down from 8s. 6d. to 7s. 9d. We had to wait for four years. We had to wait from the eve of the 1955 General Election to the eve of the 1959 General Election.

Last weekend, in his constituency of Tiverton, Devonshire, my right hon. Friend proclaimed himself as not being interested from a personal point of view in the next General Election. I hope that that will not colour his judgment in the immediate future. I do not like reduction in the standard rate of Income Tax coinciding with a period immediately preceding a General Election. I want a modest reduction in the standard rate of Income Tax steady, every year. I am not alone in this. I am backed by powerful colleagues on the Conservative benches.

Mr. Ede (South Shields)

They do not vote with the hon. Member.

Mr. Nabarro

I am not the keeper of their consciences in fiscal matters. I am only the keeper of my own conscience.

Mr. C. W. Reynolds (Islington, North)

That is a full-time job.

Mr. Nabarro

It is a full-time job. I hope that the hon. Member for Islington, North (Mr. Reynolds) finds it a full-time job looking after his own conscience. Judging by his behaviour in the House of Commons, it ought to be. My fiscal conscience belongs to me alone, and I know how to vote in financial matters. However, I propose to allude to the fact that I have powerful allies on the Conservative side of the Committee in the matter of reducing the standard rate of Income Tax.

Therefore, I hope that the Chancellor of the Exchequer or the Financial Secretary will not take the view, in replying to the debate, that I am advancing a highly individualistic line not representative of the views of the Conservative Party. There is grave disappointment that there was no reduction in the standard rate of Income Tax this year. I do not believe in the philosophy of " pie in the sky by and by", or "on the eve of a General Election". I believe that there should be a little off the standard rate of Income Tax every year.

I was quite modest before the last Budget. I said that the Chancellor of the Exchequer should take 3d. off the standard rate, thereby reducing it to 7s. 6d. When the Chancellor decided last year to reduce the standard rate to 7s. 9d., I had a good deal to say on the point made by the hon. and learned Gentleman about the clumsiness of the rate of 7s. 9d. I spoke about the difficulties of calculation, with none of which the Chancellor agreed. He is so much better than I am, both at mental arithmetic and in the use of a slide rule.

The 3d. off the standard rate which I recommended this year was greatly outdone by my colleagues. I refer at once to my hon. Friend the Member for Portsmouth, Langstone (Mr. Stevens), a powerful colleague in financial and fiscal matters, vice-chairman of the Conservative Parliamentary Finance Committee, and chairman of the Income Tax Payers' Society.

My hon. Friend the Member for Lang-stone wrote to my right hon. Friend the Chancellor of the Exchequer before his Budget in these terms: My dear Chancellor, The financial out-turn in the first nine months of the current year shows very clearly that the reduction of 9d. in the standard rate"— that was in 1959— has. indeed, had a most beneficial effect on the economy of the country, and the Executive Committee of this Society"— that is, the Income Tax Payers' Society— have no hesitation in urging you to a further reduction. The first of the Income Tax recommendations my hon. Friend made in his letter reads as follows: The standard rate of Income Tax on the incomes of private individuals should be reduced in the next four years to 5s. in the £. This means an average yearly reduction of about 8d. Accordingly, the Executive Committee strongly urges you in your forthcoming Budget at least to reduce the standard rate to 7s. and thus take the first step towards reaching this objective. 4.30 p.m.

My hon. Friend is three times as forthcoming as I am—three times as dashing. I proceed at the rate of 3d. in the £ off the Income Tax this year. He proceeds at the rate of 9d. in the £ off the Income Tax this year, but he sets his eyes on a distant horizon. He says, "Then, reduce the rate to 5s. in the £ within the next four years." A jolly good objective, but I hope that those of my hon. Friends who were indicating some dissent from my words a few moments ago will not now consider that I am being too cautious, when my distinguished friend the Member for Langstone offers three times as much to his society—of which, of course, I am a member, and to which I send him an annual subscription— [Interruption.]

An hon. Member suggests that I should be made president of the society, tout no, they would not have me as president—I am much too modest in Income Tax matters. I only want 3d. off the standard rate of Income Tax this year, but my hon. Friend wants 8d.— [HON. MEMBERS: "Ninepence."] No, 8d. I am sorry; my hon. Friend called for an average yearly reduction of 8d. and, for this year—a penny over the odds—9d. off.

Let me fry some larger and more succulent fish. My right hon. Friend the Member for Monmouth (Mr. Thorneycroft) wrote an article in the April, 1960, issue of an important journal called the Director, which is the house journal of the Institute of Directors. My right hon. Friend, is of course, a member of the Institute, and carries all the authority of an ex-Chancellor of the Exchequer. Of course, I am a member of the Institute of Directors, as well—[Interruption.] Yes, I pay a subscription, and it is chargeable against tax, as is known. I am not obliged to admit these things, but I am trying to draw attention to the fact that I have powerful allies in my theme today.

Here is what my right hon. Friend wrote in the April, 1960, edition of the Director: If the public—and, because of the public, the politicians—could really make a stand on public spending, the chances of tax relief would alter overnight. Secondly, I would advise industry to look at a Parliament rather than a Session. Tax relief today should be looked at by those who study it as a five-year exercise. We should be asking ourselves not simply what we would like from a fairy godmother this year, but what we would reasonably expect to get over the full five-year period. It is perhaps particularly apt that we should do so this year with a Conservative administration recently returned with an increased majority and presumably including among its aims some measure of tax relief". We have not had it this year—

Sir Jocelyn Lucas (Portsmouth, South)

Hear, hear.

Mr. Nabarro

My hon. Friend the Member for Portsmouth, South (Sir J. Lucas) says "Hear, hear", but all we have had is increased tax—

Mr. James Dempsey (Coatbridge and Aidrie)

What about vintage port?

Mr. Nabarro

I do not drink vintage port.

My right hon. Friend the Member for Monmouth goes on with this very graphic paragraph. I think that the Committee should hear it, because all hon. Members of the Committee are not members of the Institute of Directors, and may not, therefore, read this journal. My right hon. Friend says: The view is held that so long as any spare capacity can be found anywhere, the Government's principal task is to flog the economy along the road at the best speed it can muster; stop whipping the poor horse— Stop whipping the poor horse, indeed! for an instant, and it will halt and start eating grass at the side of the road. The fact that this method of driving has already brought the wretched animal to its knees on a number of occasions deters its advocates not at all. The great thing, they say, is to keep the brute moving, and a sharp reduction in Income Tax might add a succulent carrot to the other inducements already being applied. My right hon. Friend continues in that vein for several pages—the need for tax reduction, notably Income Tax—and then he postulates that over a five-year Parliament there should be a total reduction of £1,000 million in taxes, of which £470 million should be a reduction in the Income Tax. He uses these words, speaking of the standard rate of Income Tax: An average reduction of 3d. a year. Present cost about £94 million. Should be a reasonable demand on any sound Administration. That is, each year for five years.

I hope that my hon. Friends who groaned dissent a few moments ago will not imagine that I am talking in a highly individualistic fashion today, when I call in aid my right hon. Friend the Member for Monmouth, and when I call in aid my hon. Friend the Member for Lang-stone, who, in principle and in purpose, are entirely at one with me in these important matters.

What I want to know is: when do we get these tax reductions? Are we to be told, if the economy is well "fizzed up", as it was this year, "Yes, but the economy is already fully loaded. If there were a reduction in Income Tax it would hasten inflation. Therefore, there can be no reduction in Income Tax when times are good"? I suppose that, equally, next year or the year after, if there were some slack in the economy, if there were some unemployment to be found, if there were a lack of total occupation of resources, as the economists so often cite it, we would then be told that business profits were falling and that the economy could not afford it, the Chancellor could not finance from his revenue, attenuated, as it would be as a result of a reduction of business profits, a further reduction in the standard rate of Income Tax?

It seems to me that that is what my right hon. Friend the Chancellor of the Exchequer is telling us—

Viscount Hinchingbrooke (Dorset, South)

Another alternative is that the Government would drastically increase public expenditure to take up the slack of unemployment, and the consequence of that would be another increase in indirect taxation in due course.

Mr. Nabarro

Yes, I am deeply indebted to my noble Friend—he has added a further point to this argument.

What I am trying to do is to demonstrate to the Committee that whatever the economic circumstances of the country a Conservative Chancellor of the Exchequer will, in disingenuous fashion, come to the Committee and say. "We cannot have a reduction in the standard rate of Income Tax this year"—for this, that or the other reason—

The Chancellor of the Exchequer (Mr. Derick Heathcoat Amory)

May I ask my hon. Friend whether what he has just said has been borne out by the Budgets of 1958 and 1959?

Mr. Nabarro

In the 1959 Budget my right hon. Friend reduced the standard rate of Income Tax by 9d. In 1955, the standard rate of Income Tax was reduced by 6d. There may be many reasons given for my right hon. Friend's decision last year to reduce the standard rate by 9d. I appreciate the merit of the economic argument that there were resources to be occupied—I agree—but I also appreciate, and my right hon. Friend, as a good politician, would appreciate as well, that it happened to be the eve of a General Election.

The point that I want to make to him is that I do not want to wait for five years more for another reduction in the standard rate of Income Tax. I prefer to have it at a steady rate—and I am glad to see that I carry with me my hon. Friend the Member for Langstone, chairman of the Income Tax Payers' Society—that powerful body. I am carrying a lot of my hon. Friends with me in this.

Let us make no mistake about it. I am quite blunt and honest about this matter. I have stumped the country for ten years saying that the Socialist Party is the party of high taxes and the Tory Party is the party of low taxes.

Mr. Roy Jenkins (Birmingham, Stechford) rose—

Mr. Nabarro

May I finish this point before I give way? I do not like the behaviour of my right hon. Friend the Chancellor of the Exchequer in controverting what I said publicly.

Mr. Jenkins

Does the hon. Gentleman think that the best way of reconciling his outlook and that of the Chancellor might be to return to the old Chartist demand for annual Parliaments?

Mr. Nabarro

No. There is a lot to be said for that approach to matters, but there is more to be said, perhaps, for a three-year Budget. I might debate that with the hon. Gentleman at the London School of Economics, or at Oxford, or Cambridge University at any time he wishes. These are all fascinating theories, but let us not take our eyes off the ball this year.

We are proposing to raise £2,485 million this year from the Income Tax. In my view, it is far too much. Every conceivable excuse has been rustled up by the Treasury and by my right hon. Friend the Chancellor for giving no Income Tax relief this year. Powerful Tory Members on my side nod their heads all around me—my right hon. Friend the Member for Monmouth, my hon. Friend the Member for Langstone, though not, of course, my hon. Friend the Member for Birmingham, Yardley (Mr. Cleaver), who thinks that taking anything off taxes leads to rip-roaring inflation. But, then, he comes from Birmingham.

Mr. Leonard Cleaver (Birmingham, Yardley)

Will my hon. Friend be good enough to tell the Committee, if he wants to reduce taxation by so much, which expenditure he will cut out?

Mr. Nabarro

My hon. Friend is a little too naive in these matters. He has evidently neglected to observe that in every year since the end of the war Tory philosophy has dictated that when direct taxes are reduced one provides greater incentives and yields increased production which, in turn, increases the revenue. That has been Tory philosophy since 1945. I have pronounced it at least fifty times in the City of Birmingham, several times in my hon. Friend's constituency, and I have never been contradicted by anybody there until his arrival in the House.

Mr. Mitchison

On a point of order, Mr. Arbuthnot. Am I compelled to look at the right ear of the hon. Member for Kidderminster all the time? I should see the whole of the right side of his face if he addressed the Chair instead of addressing one of his hon. Friends behind him.

The Temporary Chairman (Mr. John Arbuthnot)

The hon. Member should address the Chair.

Mr. Nabarro

I am sorry that my stridency has wakened the hon. and learned Member for Kettering (Mr. Mitchison) from his slumbers. Moreover, I have not been talking about the local rates. I have been talking about the Income Tax.

My hon. Friend the Member for Yardley is, of course, a distinguished chartered accountant in Birmingham. It is clear that he does not share my philosophy about the Income Tax. I am sorry that he does not. The majority of the Conservative Party does. I do not spend my time advocating, before General Elections, reductions in direct taxation and then come to the House and support an opposite policy.

Mr. Kenneth Lewis (Rutland and Stamford)

Some of us go a certain way with my hon. Friend, but he does not help his case when he exaggerates. He has already said, of course, that he believes in the social programme of this Government—

The Temporary Chairman

Order. We are on Clause 13, which deals with the Income Tax.

Mr. Lewis

If I am out of order, Mr. Arbuthnot, my hon. Friend was out of order before me, since he raised it. I am simply drawing attention to what my hon. Friend—

4.45 p.m.

The Temporary Chairman

The hon. Member must not put himself out of order, whatever else may have happened.

Mr. Lewis

I will try to keep myself in order. If one looks at the pre-war period in this country, one sees that Income Tax was extremely low. My hon. Friend will surely agree that in those days we had very large-scale unemployment. This cuts across his argument somewhat. What one must try to do is to achieve a balance. I agree that a case can be made out for reducing certain Government expenditure and reducing taxation, but to say that one must go on and on reducing both Government expenditure and the rate of Income Tax would mean that the whole philosophy on which we won the last General Election would be down the drain.

Mr. Nabarro

I should speak for an interminably long time if I replied to a general proposition of that kind. I think that I have dealt with most of the matters in that intervention.

The effects of continuing excessive taxation are, of course, wholly injurious. The excessive taxation I refer to in this context is 7s. 9d. in the £ as a standard rate of Income Tax. A large and highly complicated part of this Finance Bill deals with tax evasion and tax avoidance. Excessive taxation also leads to the publication of such documents as How to Pay Less Tax, by Mr. Alexander Thomson of the Evening Standard, in which one finds passages dealing with the "The Family Man" and "The Businessman". As the Committee knows, the family man pays Income Tax and the businessman pays Income Tax. There is a heading "The Seven-year Gift", and a whole host of other associated matters.

Most tax evasion springs from an excessive level of direct taxation. [HON. MEMBERS: "Hear, hear."] Most of my hon. Friends agree with that.

The Temporary Chairman

The hon. Member should address the Chair.

Mr. Nabarro

Yes, Mr. Arbuthnot, but occasionally I have to turn over my left shoulder. I shall not do it more often than is necessary.

Most of my hon. Friends agree with me, of course, but there are certain professional people who have an interest in taxation complexities. I believe that simplicity of taxation is a virtue, and that is one reason why I have complained about 7s. 9d. in the £ as the standard rate. It is not simple. It is unnecessarily complex. It ought to be 7s. 6d. in the £

Mr. Paul Williams (Sunderland, South)

This year.

Mr. Nabarro

Yes, this year.

I hope, therefore, that the majority of my hon. Friends will agree with me in principle today that it should be a strong criticism of this Finance Bill that we are maintaining the standard rate of Income Tax at 7s. 9d. instead of endeavouring to reduce it. The second point is that I do not expect to wait for five years before the standard rate of Income Tax is reduced again. The third and powerful point is that, so long as we maintain direct taxation in this country at these excessive and exorbitant levels so will this wretched incubus of tax evasion and avoidance continue to grow. The Parliamentary result, of course, is that we have 73-Clause Finance Bills, and attendant Schedules, such as the present one, a large part of which is devoted to trying to plug up the holes of tax evasion.

I shall not vote against this Clause. [HON. MEMBERS: "Oh."] The hon. Member for Gloucestershire, West (Mr. Loughlin) who immediately starts chortling, after having been in the House of Commons, possibly, for only five months, has not yet realised that it is almost impossible for any Member of the Committee to vote against the standard annual Clause raising the Income Tax. [HON. MEMBERS: "Why?"] Because Income Tax is, in present circumstances—I am not affiliated with Mr. Khrushchev, who wants its abolition—still necessary. My case is that it is too high and that it ought to be 7s. 6d., not 7s. 9d. But that does not mean that I can vote against the whole Clause which raises the Income Tax. It was the Chairman who decided not to call my Amendment to reduce the standard rate, by just 3d.

Mr. Charles Loughlin (Gloucestershire, West)

This is not the first time that the hon. Member for Kidderminster (Mr. Nabarro) has spent a considerable time in castigating the Government and has then run away from the Division Lobby.

Mr. Nabarro

Really, the hon. Gentleman is puerile in his interruptions. Only yesterday I had to lead the whole of his party into the Lobby, against the Tobacco Duty.

I will not vote against the Clause standing part. My Amendment to reduce the standard rate from 7s. 9d. to 7s. 6d. has not been called, but I give the Chancellor and his successor fair warning. I will not give up my campaign to secure a reduction of Income Tax. The trouble with my right hon. Friend's Budget this year is that it has increased taxes when it ought to have reduced them. He represented to the nation that he has increased taxation by only £70 million, whereas the increase in taxation was many times that amount, including £242 million more revenue from Income Tax and—I hope that this will strike a chord in the mind of the hon. and learned Member for Kettering —a further increase in the form of local rates.

For all these reasons, I hope that the Financial Secretary, when he replies, will pay some attention to that not inconsiderable section of his party which believes passionately that Income Tax is far too high and should be reduced at the earliest date.

Mr. Diamond

Up to a point, I share the view expressed by the hon. Member for Kidderminster (Mr. Nabarro) that the rate of tax is too high and should be reduced, but he only touched at the end of his remarks on the manner in which it ought to be reduced. Earlier it seemed to me that what he was getting at was a reduction in expenditure in social and other services and was trying to pretend that merely by a reduction in Income Tax there would be such an increase in activity that it would make up for the tax lost. I would not accept that, but I share his view that we should endeavour to be much more straightforward and simple about our tax affairs. We should try to turn over a new leaf and collect the same amount of revenue by the simple process of reducing the effective rate of tax and making everybody who should pay do so.

I refer to the effective rate, not the standard rate. I draw a marked distinction between the two things. The hon. Member for Kidderminster was quite right when he said that the taxpayer who pays under P.A.Y.E., by and large, pays where it hurts most. He went on to say that there are about 18 million taxpayers, the majority of whom no doubt pay tax under Schedule E. It is wholly wrong to say that by Parliament fixing different standard rates and different allowances the difficulty is entirely overcome, because those who pay an apparently high rate of tax on high incomes avoid tax whereas those in the lower income groups have no opportunities of availing themselves of tax avoidance schemes and have to pay a rate which is, in effect, disproportionately great. This Finance Bill attempts to alter that in some way, but it does not go far enough.

In discussing this Clause, which refers both to raising Income Tax and to the rate of Income Tax, I want to suggest two things that we ought to do. First, I suggest that the definition of "income" should be altered. Naturally, I am most anxious to keep myself in order. Therefore, I refer to the fact that the first words of the Clause are "Income tax". It goes on to refer to the rate of Income Tax. I think that the present definition of "income" is much too narrow. All money that is available to spend should be regarded as income. Some have large sum arising from a variety of ways, frequently called capital gains, but this is merely words. It is money available for spending. It is the excess over what an article cost against what it realised. It is wholly free of tax, whereas a certain section, not necessarily small in everybody's case, of what is available for spending is fully taxed in other people's cases.

This is wholly wrong and gives rise to social tensions and feelings that certain classes have marked unfair advantages over others. I am sure that if the Chancellor were prepared to widen the interpretation of " income" considerably so as to include all money available for spending, he would be able to reduce the rate of tax markedly without prejudicing the amount of revenue available.

Mr. John Hall

The hon. Member is advancing a very interesting theory. I wonder whether he would like to give a few practical examples. In saying that all income available should be taxable, does he mean that all capital that might be gained in a given year should be subject to tax? Does he mean that winnings in a game of chance, such as the football pools, should be subject to tax? What exactly does he mean?

Mr. Diamond

I am sure that you, Mr. Arbuthnot, would not wish me to go into great detail on the question of a capital gains tax, but what I am saying is that there should be a widening of the interpretation of "income" in order to include all money available for spending. Realisation of capital would not be included. The excess of the realisation of capital over the cost would be regarded as money available for spending, because the person's capital would be unaffected. A person would start in a certain period with a certain capital and any excess realised would be regarded as income. The original capital would not be affected. The amount available for taxation would be enormously increased, the rate would be reduced and the temptation of tax avoidance would be enormously reduced. The encouragement to divert attention from tax avoidance schemes to constructive work would be increased and social tensions would be avoided. I would have thought that the Chancellor ought to consider altering the whole of our attitude on this matter so that we can be rid for all time of this series of debates year after year in which we have to try to plug loopholes and deal with the problem of the high rate of tax.

Mr. Stanley R. McMaster (Belfast, East)

Does the hon. Member suggest that an allowance should be made on the realisation of capital? If so, does he appreciate that capital losses often exceed capital gains?

The Temporary Chairman

We cannot debate the matter of capital losses on this Clause.

Mr. Diamond

I naturally accept what you say, Mr. Arbuthnot—

Mr. John Hall

Further to your Ruling, Mr. Arbuthnot. Would it not be in order to refer to the question of capital losses? Capital gains have been used as an example of income by the hon. Member for Gloucester (Mr. Diamond). He has said that that should be treated as income, which was the point referred to by my hon. Friend the Member for Belfast, East (Mr. McMaster).

Mr. Diamond

I referred to capita! gains being available for spending and, therefore, there should be a much wider interpretation of the word "income". Capital losses would be set off against capital gains. It is all very simple, but there is not time to discuss the matter in great detail.

What I want to put before the Chancellor is a new approach for a much reduced effective rate with people paying the effective rate of tax on the money available for spending that Parliament intends they should pay when we pass Finance Bills. If we could stop tax avoidance we should go an enormous way to bringing about a much better feeling on and approach to these matters generally and towards collecting greater revenue.

Mr. P. Williams rose—

Mr. Diamond

It would be helpful if I could say ten consecutive sentences without interruption.

Mr. Williams

I appreciate that, but surely it is important to get to the root of the argument straight away without interjecting half-way through. Surely we should go to the seat of the trouble and remove the cause for tax avoidance, which is too high a level of taxation.

5.0 p.m.

Mr. Diamond

The hon. Member's intervention shows that perhaps he realises what I am saying. I am saying that it would be a good thing to reduce the effective rate of tax so as to reduce and, if possible, extinguish the desire to avoid tax. It is not worth while avoiding tax, which is a costly business, unless there is a good deal to be avoided.

The Chancellor has told us that a great deal is avoided. He told us that on one form of tax avoidance alone the loss is running into many tens of millions. That is without having regard to all the others which have not yet come to the notice of the Chancellor. I think that we should be on very sound ground in trying to reorganise our approach to Income Tax so that people would not be encouraged the whole time to look for methods of tax avoidance.

There is also the question of tax evasion. I had not thought that this was a problem which would need to take up much of the time of the Committee. I thought that the Treasury and Inland Revenue had sufficient powers, but I am obviously quite ignorant on these matters. Some of the latest figures have shown that that is far from being the case. We are told by the Inland Revenue that of one and half million people self-employed in small businesses, one-third —that is, 500,000—show by their assessed tax figures that they earn less than £250 a year; that is, 500,000 active, enterprising, self-employed people earning less than £250 a year, less than £5 a week. Another 500,000 earn on average £300 a year. One million people earn these fantastically low figures according to the Inland Revenue report. It is, therefore, not surprising that a letter should have been written to the Financial Times by an official of the Inland Revenue Staff Federation saying: Is it really the case that nearly one million go-ahead, self-employed people remain satisfied every year with less than a railway porter or an agricultural worker can earn?

Mr. John McKay (Wallsend)

When my hon. Friend says that the self-employed on average earn only £200 a year, is it not the case that self-employed people put to cost account wages for themselves in addition to the £200?

Mr. Diamond

It is not the case. I am glad that my hon. Friend raised that point. He is referring to the case of a number of corporate bodies where the profits are extremely low because the profits charged against the profits of a limited company include the salary of the managing director. I am referring to the self-employed person where no such charge would be appropriate or allowed. Here the true net income of these individuals, 500,000 of them, is less than £250 a year, and another 500,000 have an average income of £300 a year. Do they complain? Not likely. They go on doing this year after year. The total number involved has continued for many years as is well known to the Inland Revenue, the Treasury and the Chancellor. Surely no one would suggest that these enterprising individuals are happily satisfied to go on earning these derisory figures. They are naturally satisfied to go on paying tax based on these derisory figures, and it is right that this should be brought to the atten- tion of the Committee, so that it can realise the enormous extent of tax evasion. The total yield of Surtax is very considerably less than it ought to be when one looks at the total figures of taxable income.

Another way by which we could reduce the standard rate of tax while collecting the same amount of revenue and supporting the same social services is by collecting the Estate Duty which should be payable. What dead man would object to the paying of Estate Duty?

The Temporary Chairman

The hon. Gentleman is going a little wide of the Clause we are discussing.

Mr. Diamond

My anxiety would be not to do that at all. I am entirely in your hands, Mr. Arbuthnot. I would suggest to you that the argument I am trying to put before the Committee is that the standard rate of Income Tax, which we are discussing and which is the essence of this Clause—indeed, the Clause is about nothing else—should be and ought to be different if various methods open to the Treasury were adopted by the Treasury to reduce the effective rate of tax.

In a few sentences only, I remind the Committee, in contradistinction to what the hon. Member for Kidderminster said about Income Tax and the amount of Income Tax being collected increasing year after year, that Estate Duty has remained constant for the last ten years although the national income has doubled during that period. The basis of the national income is to a certain extent securities which must have gone up in value. We know that all equities quoted on the London Stock Exchange went up by 51 per cent. last year alone, and yet Estate Duty, which would provide the method of reducing the standard rate of tax, remained constant.

Mr. John Hall

Is the hon. Gentleman not aware that the yield in real terms from an estate which may have been worth £10,000 pre-war is far less in real terms at the present rate of progressive taxation than the yield to the legatees on that same estate before the war?

Mr. Diamond

I cannot accept that without going into the figures in detail. I am stating the fact that Estate Duty collections have fallen over the last ten years while the national income has doubled during that period, and that during last year alone capital in terms of equity values quoted on the London Stock Exchange increased by 51 per cent. If the conclusion from that is not that Estate Duty is being increasingly avoided, as we all know it is, then I am a Dutchman.

Mr. Nabarro

What the hon. Gentleman has left out of his calculations in referring to Estate Duty is the fact that doctors keep us alive so much longer. That is the answer.

The Temporary Chairman

I do not think that arises under this Clause.

Mr. Diamond

Finally, I suggest to the Chancellor that another way of making it possible to reduce the standard rate of Income Tax would be for him to turn his attention to the major methods of dodging taxes which are still open. I do not refer to the switching of income into capital, which will be discussed later. I refer to the method of assessing tax on businesses under Schedule D. As we all know, this has always been collected on the basis of the income of the previous year, which gives an opportunity for a great deal of adjustment and manœuvring with the taxpayer's money. If the Treasury would consider turning Schedule D, which is a tax payable on businesses, into a pay-as-you-earn tax, in the same way as Schedule E, so that businesses were assessed on the income of the year and not on the income of the previous year, not only would many loopholes of tax avoidance be stopped up, but the tax would be brought into relation with the period when the income was earned, which would serve the national interest very well.

This proposal would not mean more work. This matter has been discussed and was before the Royal Commission on the Taxation of Profits and Income, which made a recommendation about it. I do not know of a single argument or responsible body of opinion against it. I only know that, as in all other things, the Treasury is lagging years and years behind. The Treasury never does anything unless it is too late and always on too small a scale. Nevertheless, I hope that the Treasury would give sympathetic consideration to the suggestions I have made so that we can much reduce the effective rate of tax without for one second decreasing the revenue being collected and the social services which it serves.

Mr. William Shepherd (Cheadle)

I will not try to get out of order by following the hon. Member for Gloucester (Mr. Diamond) into all the arguments which he endeavoured to make.

I think there is some reluctance on the part of hon. Members opposite and, I may say in all due modesty, among hon. Members on this side of the Committee to face up to some of the realities of the present situation. I have no doubt that by redefinition of income and by chasing the avoiders and by other methods we can bring about some improvement in the revenue.

I wonder whether the hon. Members appreciate the realities of the position of Great Britain in 1960 in the world as we know it. It would be very simple, if we were a country like Belgium, to have a very low rate of Income Tax. If we had no commitments to the Commonwealth in terms of capital, if we had no demand for a large and ever-increasing defence expenditure, if we were not the leaders in social progress, if we had not a great deal to make good from the war, we could have a much lower rate of Income Tax than now exists.

However, I hope no hon. Member will propose that Great Britain should endeavour to be a great nation on the cheap. The United States of America tried that for quite a time and the result was a second world war of great magnitude. I urge my hon. Friends and hon. Members opposite to try to face up to the realities which confront the country.

In terms of world size, we are no longer a great industrial nation. Despite our lack of size and the resources of other countries, we are endeavouring to "keep up with the Joneses". In some respects, of course, we have been ill advised to do so, but we cannot reduce Income Tax unless we are prepared to make serious inroads into many aspects of our national life which, on reflection, most hon. Members would regard as supremely important.

Having said that, I have no masochistic desire to see Income Tax any higher than it need be. Obviously, I would like to see it down to 2s. in the £, or even to what it was when it first started.

Mr. John Rankin (Glasgow, Govan)

Or down to nothing.

Mr. Shepherd

Or even down to nothing, as the hon. Member said.

Mr. Rankin

Like the Chinese.

Mr. Shepherd

However, I am not happy about some of the tendencies with Income Tax in the last ten years. There has been far too great a tendency for too much of the tax load to be borne by Income Tax and not in other directions. In 1948, direct taxation represented 45.6 per cent. of the total tax raised and in 1959 that figure had risen to 50.7 per cent. Indirect taxation was 48.3 per cent. of the total in 1948 and last year was down to 45.4 per cent. There is a strong case for reversing that tendency.

I am not prepared to risk your disapproval, Mr. Arbuthnot, by dealing with spending taxes, but I say without hesitation that the existing situation, in which proportionately more is raised by direct and proportionately less by indirect taxation, is wholly unsatisfactory and that steps should be taken to reverse it.

5.15 p.m.

Hon. Members have said that Income Tax is too high, and I agree with them, but it is not as high compared with other countries as some hon. Members have made out. Roughly 30 per cent. of the gross national product at factor cost is taken in this country in the form of tax, both local and national. In the United States, the figure is 25 per cent.; in Western Germany, 28 per cent.; and in France, 28 per cent. In France and Western Germany there is little difference between the percentages of the gross national product at factor cost which is taken by taxes, both direct and indirect, but there is a significant difference between Western Germany and this country and between France and this country in the proportions taken by direct and indirect taxation.

In Western Germany, for example, only 11 per cent. out of that 28 per cent. is taken by direct and the remaining 17 per cent. by indirect taxation. In France, the corresponding figures are 8 per cent. and 20 per cent. In this country, about 14 per cent. is raised by direct taxation and only about 15 per cent. by indirect taxation. Compared with the pattern of countries with economic set-ups similar to our own, the amount which this country derives from direct taxation is too high. We can get a reduction in the standard rate of Income Tax by shifting the growing emphasis from more direct taxation to more indirect taxation.

I regard the present level of Income Tax as oppressive, and I recognise that it is discouraging to many people, not only to people who are earning a great deal of money. I thought my hon. Friend the Member for Kidderminster (Mr. Nabarro) was wrong when he spoke of increasing the area over which Income Tax was paid. We have a tremendous number of Income Tax payers in this country.

Mr. Nabarro

I am sure my hon. Friend would not wish to misinterpret what I said. I said that there were 18 million Income Tax payers, which was five times the number pre-war, and that, in contradistinction to the hon. and learned Member for Kettering (Mr. Mitchison), I supported the net being cast as wide as that, but I did not say that I wished to increase it.

Hon. Members

You did.

Mr. Shepherd

My hon. Friend's recollection of his words and mine are at some variance. I am pointing out that in practical terms it is not possible to extend the area over which Income Tax is drawn. We already have 18 million or 19 million Income Tax payers, which is a very large number.

I am often surprised when I look at wage packets to see how large an amount a man, particularly a single man with a relatively modest salary, has to pay in Income Tax. It is almost frightening to see these figures written on the outside of wage packets. Therefore, I think there is an urgent need to reduce the level of Income Tax, and it seems to me that there are two ways in which that can be tackled in the future.

Obviously, we cannot reduce certain types of expenditure, but we can, in order of expenditure from below the line and to reduce Income Tax, take some forms have them financed in some other way. I will not go into detail, but it is obvious that the financing of the nationalised industries and of the Health Service would, if it could be transformed in some other way, make a dramatic contribution towards Income Tax reduction.

Mr. A. C. Manuel (Central Ayrshire)

In what way?

Mr. Shepherd

I am not able to develop the matter at this stage, but perhaps later on we can say something about these things. I am not able at this stage to develop the precise directions in which this might go. What I am saying is that if there is to be, in the position in which we find ourselves, any dramatic reduction in Income Tax in the light of the increasing demands made in many directions, one of the most pregnant ways of doing it is by changing the method by which the nationalised industries have their finance provided and by having some other form of financing the Health Service.

I have made these observations with some little difficulty owing to the fact that I have had to skate very near to the bounds of order. I will repeat the note on which I started. It is that we cannot expect to be a great nation on the cheap. I as an Income Tax payer do not want to pay any more tax than I am forced to pay, but, on the other hand, I would not be prepared to have a lowering of our social standards, of the prestige of this country overseas or of the position of Britain as the head of the Commonwealth just for the sake of getting a mere reduction in Income Tax.

Mr. Donald Chapman (Birmingham, Northfield)

I would want to think a good deal about what the hon. Member for Cheadle (Mr. Shepherd) has been saying. I should have thought that he ought to weigh in the balance the fact that standards of living and incomes have risen by 20 per cent. in the last ten years and that if there is a very small increased proportion taken by direct tax it is out of a very much better personal income. I am not sure that we always take that factor into account. Is a 3 per cent. or a 5 per cent. increase really as significant as the hon. Gentleman made out?

I wish to refer to what the hon. Member for Kidderminster (Mr. Nabarro) said, because one thing that disquiets me about the series of speeches which the has been making throughout the discussions on this Bill is the impact that it is having outside. I do not know whether it is that the newspapers are protecting a Conservative Administration from 'the kind of attacks being made here, but I am certain that if a back bench hon. Member on this side of the Committee made the sort of attack on his leadership that is being made at every stage by the hon. Member for Kidderminster the newspapers would be full of it and would be saying that the Socialist Party, or whichever party it was other than the Tory Party, was in danger of falling in ruins.

Mr. W. R. Rees-Davies (Isle of Thanet) rose—

Mr. Chapman

I cannot give way to the hon. Gentleman just now, but I will do so a little later. As he knows, I do not usually refuse to give way.

When we think of the widespread attack the hon. Member for Kidderminster has been making on his right hon. Friend the Chancellor, it is remarkable that it is not being recorded outside. If the hon. Gentleman could have seen the face of the Chancellor of the Exchequer when he was making some of his remarks about him and casting very strong suspicions on his probity for making tax concessions before a General Election, I think he would have considered a little more carefully before making that sort of attack on his own Front Bench. I would hope that we on these benches have a little more loyalty than has the hon. Member for Kidderminster in circumstances such as that. I do not know of any hon. Members on this side of the Committee who would accuse their right hon. Friends of doing things like that before a General Election, but that is what was done by the hon. Member for Kidderminster today.

Sir Alexander Spearman (Scarborough and Whitby)

I think the hon. Gentleman is perhaps exaggerating the seriousness and importance attributed to the views expressed by the hon. Member for Kidderminster (Mr. Nabarro).

Mr. Chapman

Of course, that is an alternative explanation. I suppose, firstly, that there is the fact that the Government are protected by the Conservative newspapers from the attacks of the hon. Member for Kidderminster and, secondly, that these attacks have now reached such a pitch of buffoonery that they are not being as seriously regarded as they might otherwise be.

Mr. Nabarro

I intervene in the speech of the hon. Member for Birmingham Northfield (Mr. Chapman) to contradict the point which he makes. I read all the popular newspapers this morning and most of them carried reports in their columns of my speeches yesterday. I thought that I was very adequately reported.

Mr. Chapman

Of course the hon. Gentleman is adequately reported.

The Temporary Chairman

I would remind the hon. Member that we are on Clause 13, which deals with the rate of Income Tax.

Mr. Chapman

I am just expressing surprise once again that we can have a forty-minute speech of that kind by the hon. Member for Kidderminster and yet tomorrow morning's newspapers, I will almost guarantee, will hardly contain any significant comment upon it.

Mr. Nabarro

I will send the hon. Gentleman a copy of the Daily Express tomorrow.

Mr. Chapman

I want to go a little wider into what the hon. Gentleman is saying. On the whole, I think that the gap between the two parties on the question of reductions in the standard rate has narrowed significantly. It would be very easy for me to jump on to the same bandwagon as the hon. Member because we both come from an area of the country which is showing remarkable prosperity.

I would put it quite simply. In my constituency we now see the youngsters who come to play football on a piece of waste land arriving in motor cars. The girls who come along to watch are dressed in a way that would not disgrace the Paris fashions. It is very tastefully done, too. There has been a remarkable change in a period of fifteen years. It is no use the hon. Member for Ilford, South (Mr. Cooper) grinning. I accept these things. The obvious thing is that, in those circumstances, it is very easy to jump on the bandwagon, especially as these young people are so new to prosperity, and say that we should reduce the standard rate because this will buy votes very easily indeed at this stage. The number of people who pay Income Tax has gone up from 15 million to 18 million, and it is now probably 19 million, and that in less than ten years.

Mr. A. E. Cooper (Ilford, South)

It does not easily buy votes.

Mr. Chapman

It does—

Mr. Cooper

During the last election the Leader of the Opposition and other hon. Members oposite came forward with three deliberate cash bribes to the electorate, and they were rejected out of hand.

Mr. Chapman

That is a rather different point. I do not want to argue it now, because I would be out of order. It was a question of whether the electors thought that we could afford these things. I think that they were wrong.

The whole emphasis on the lowering of Income Tax has a great appeal to young people in their late teens and early twenties who are, as the hon. Member for Cheadle says, receiving fat pay packets and paying a good deal of Income Tax by way of P.A.Y.E. As I say, it would be very easy to jump on that bandwagon. But we must not always act from the most selfish individual motives. I want Income Tax and the standard rate to be reduced, but I would say to the hon. Member that there are more important priorities than that. That is the point which ought to be made to him all the time—that this must be kept in proportion.

5.30 p.m.

For example, there is the whole question of old age, which has been debated at length and into which I will not go now, and of the number of people who are in deprivation in the later years of their lives. There are many cases of lack of resources in the event of extended sickness and infirmity and many cases of difficulty in widowhood. There is the whole question of the family man. My hon. and learned Friend the Member for Kettering (Mr. Mitchison) was right in saying that before we consider reducing the standard rate we ought, after all these years of advances in the national income, to increase the children's allowances, which have barely risen to keep pace with the cost of living over the last ten years.

I would point out to the hon. Member for Kidderminster that some of us, in constituencies such as I represent and in days of increasing prosperity, could very easily play to the gallery and say that our constituents would welcome the easy reduction in the standard rate of which he is talking. But some of us are not prepared to go so far so easily without first asking whether there are not other priorities to be attended to. I think that the hon. Member does a disservice if all the time he asks the nation to take the most selfish point of view in these matters.

I hope that sometimes he will reflect that, although there is increased prosperity, there are still a number of people at the very bottom of the scale who ought to have priority before the standard rate of Income Tax is reduced. The family man, although not always in immediate difficulty, nevertheless ought to have a greater priority than the single man who is paying the standard rate. I am surprised that there has been no defence of this kind from the more progressive on the Conservative benches. I shall be surprised if they all simply support the proposition that the first priority is a reduction in the standard rate.

By the next election this gap between the two parties will probably have narrowed even more. At the moment, 18 million to 19 million people pay the standard rate, and I think that the figure will rise to the 20 million mark quite quickly with the present advances in the standard of living.

Having said that about the Conservative Party, I hope that my own party, too, will take careful note that we must beware, in the years of prosperity and advanced standards of living, of being labelled as the party of high direct taxation. It certainly does not serve to be on that proposition in areas like the prosperous Midlands today. Like the Conservative Party, we must temper decisions about reductions in the standard rate with regard for the needs of those who are less fortunate than most of us —those at the very bottom of the scale. I know that the emphasis will end differently on the Conservative side of the Committee from that on this side of the Committee, but I think that we ought to look into the middle of the 1960s and say bluntly that we, too, will be increasingly a party of lower taxation—it is quite right that it should be so—while taking care of the most deprived in our community.

Mr. P. Williams

The whole Committee will probably agree with the last phrase of the hon. Member for Birmingham, Northfield (Mr. Chapman), for it is vitally important for the continuing prosperity of the country that, if possible, we should all aim at controlling Government expenditure and, consequently, being able to influence the Government to reduce the level of taxation throughout the whole range.

I have three short reasons for entering the debate. First, I think that the content of the Clause is bad because it maintains the standard rate at an inequitable and clumsy level. As my hon. Friend the Member for Kidderminster (Mr. Nabarro) said, there could be no more ridiculous figure, other than the halfpennies and farthings we were discussing yesterday, than the figure of 7s. 9d. It is a great regret to me that the Amendment on the Order Paper seeking to reduce the standard rate by 3d. has not been called. I think that this year it would have been a perfectly reasonable operation to rectify the slight miscalculation of last year. The 9d. was a ridiculous figure to take. It would have been much more sensible either to have gone for 6d. last year or preferably for 1s., but if that were not possible, it should have been possible to put it right this year by a corresponding adjustment to reduce the standard rate either by 3d. or, preferably, by another 9d.

My second reason for disliking the Clause is that it appears to continue the basic philosophy of a high-tax economy. It seems to me that unless we can get away from this assumption that we are committed inevitably and inexorably to a high-tax economy, we shall never release the latent energies of our country and of many people. One may be able to do it in cricket but I do not think that one can always hit one's way out of a non-existent danger. Similarly, I do not believe that one can high-tax one's way out of trouble. I believe that at this stage it would have been quite reasonable to make small but significant reductions in taxation. I oppose the basic philosophy behind the maintenance of the standard rate at 7s. 9d., the basic philosophy appearing to be that we should maintain and continue to maintain a high-tax economy.

Mr. Manuel

I am very interested in the hon. Member's argument that if there is a high rate of Income Tax we shall not release the latent energies of the people. Does he not agree that if there is not a fairly high rate of public expenditure we shall not release many of the latent talents that exist? For example, if full education grants were not given to low wage earners for the education of their children, many talents would not be discovered in the higher reaches of education. Would he scrap that in order to have a lower rate of Income Tax?

Mr. Williams

I remind the hon. Member that one of the fundamental failures of the Socialist Government between 1945 and 1951 was that they believed in a high-tax economy and appeared to believe in trying to hit their way out of trouble. All they did was to hit the country into near bankruptcy.

Mr. Manuel

Answer the question.

Mr. Williams

I suggest to the hon. Member that all the initiative and new sources of creative ideas do not necessarily come from the Government. I do not accept the doctrine that the Government are inevitably right. Many new initiatives and new industries can come from releasing the energies and abilities of a free enterprise society. For this, among other reasons, I oppose this philisophy of high-tax economy.

Mr. Mitchison

Does the hon. Member disapprove of the National Health Service and all the other social services which were introduced directly after the war as a result of a measure of high taxation? Would he prefer the ghastly muddle there was after the 1914–18 war?

Mr. Williams

I do not understand how the hon. and learned Member managed to get that sentiment out of the remarks I was making unless he was asleep, as he appeared to be asleep.

Mr. Mitchison

The hon. Member is quite mistaken in supposing that I was not listening, in full possession of my faculties, to every word he was saying.

Mr. Williams

I am grateful for the hon. and learned Member's attention. My third reason—

Mr. Manuel

Answer the question

Mr. Williams

My third reason for opposing the attitude of this Clause is similar to that given by my hon. Friend the Member for Cheadle (Mr. Shepherd).

If one has to make the assumption that in any year a certain level of revenue is essential, we ought now to be altering the balance between direct and indirect taxation. My hon. Friend gave certain figures on this matter. I agree with him that we ought now to be devoting our minds rather more to lowering taxation on income and, if it is essential —although, I suspect, it is not—to raise by a corresponding amount the taxation on spending. This seems a much more equitable and fair way as between individuals, in the first part, and a much more sensible way of stimulating the economy, in the second part. In line with all this, our objective now should be not only to conserve but to create new wealth. I do not believe that the Clause. unamended, helps.

Mr. Rankin

From the hon. Member for Cheadle (Mr. Shepherd) and the hon. Member for Sunderland, South (Mr. P. Williams) we have had revealed one of the basic reasons for today's debate. I am not sure whether the hon. Member for Kidderminster (Mr. Nabarro) is directly identified with their attitude, but certainly his Amendment, which was not called, has sparked off the basic cause for the debate. I refer to the widespread attitude within the Tory Party that there should be a change in the incidence of direct taxation and of indirect taxation.

The hon. Member for Kidderminster referred to the fact that the amount yielded by direct taxation in this year's Budget was £2,485 million, but the hon. Member failed to say that the amount yielded in the Budget from indirect taxation—that is the taxation on expenditure —to which the hon. Member for Sunderland, South referred, was £2,777 million.

Mr. Jay

May I assure my hon. Friend that his figure of £2,485 million is not all direct taxation but is the Income Tax alone?

Mr. Rankin

I had the hon. Member's speech in mind when I used that phrase. We are talking about a reduction in the standard rate of Income Tax. Already, therefore, there is a serious gap between those two forms of taxation, a gap approaching £300 million. That is the gap which the hon. Member for Sunderland, South proposes to widen.

By increasing that gap, whether he confesses to it or not, the hon. Member is seeking to impose a still greater burden upon the working class in favour of those who are better placed. Indirect taxation affects working men and women far more than the well-to-do, whose incomes can allow them to face these charges which, particularly in the case of children's clothing and other items, press heavily upon the incomes of ordinary people. Obviously, this is a direct political move to secure the personal advantage of the class which hon. Members opposite largely represent in the House of Commons.

Mr. P. Williams

I am interested in the hon. Member's argument. He represents the same sort of area in Scotland as I represent in England and he knows perfectly well that he is talking a lot of tomfoolery.

5.45 p.m.

Mr. Rankin

The hon. Member does not do it so well.

Let me give an example. In the House of Commons, the non. Member and I repeatedly have pressed the Government for more help to shipbuilding and to shipping. Last year, the industry got it from the Government in the shape of 40 per cent. investment allowance. Did that concession go to improving the industry which the hon. Member and I have the privilege of speaking for and supporting in the House? The Times of 28th March tells us that the Cunard surplus for the past year was £900,000.

The Deputy-Chairman (Major Sir William Anstruther-Gray)

I am reluctant to interrupt, but we are debating the rate of Income Tax.

Mr. Rankin

I quite agree, Sir William. I always thought that it was permissible to give an example in reply to an interjection. The hon. Member has accused me of bias, and I am giving him an example to show that I am not biased but am stating the fact.

Those investment allowances were granted by the Government and were increased to 40 per cent. This year, the Cunard Company has declared a surplus of £900,000. Of that surplus, £565,000 was directly due to those increased investment allowances. It was used, not to help the workers, but to help the profiteers and the dividend hunters by increasing the dividend to 10.2 per cent. instead of paying the 3.2 per cent. which otherwise would have been earned.

In their attitude today, in seeking to shift the balance from direct taxation to indirect taxation and to make the disbalance bigger even than it is, hon. Members opposite are speaking not for the nation as a whole, but for a class. The party opposite is a class party, as its members have shown time and time again.

The argument can be carried a little further. From the income that he gets, the Chancellor of the Exchequer must maintain the social services, to which the hon. Member for Kidderminster referred. Seven hundred million pounds are required for the Health Service and over £700 million for education. The Chancellor has not only to maintain these services, but to increase them, particularly education. To do this, he must get an income. That income comes chiefly from direct taxation, £2,485 million, from indirect taxation, £2,777 million, and from tax on capital, £213 million. Why is there this appalling gap? My hon. Friend the Member for Gloucester (Mr. Diamond) has referred to this exceptionally small yield of national income from taxation on capital, amounting to only £213 million. Is there no thought that we might pursue the many ways that are open to increase that part of our national income and, therefore, perhaps, reduce Income Tax? The hon. Member for Kidderminster never suggested that, nor did he say—

Mr. Nabarro

I tried hard not to have the former occupant of the Chair call me to order. I kept in order throughout. If the hon. Member tempted me into those lush pastures, I should be out of order at once.

Mr. Rankin

There are many means of escape. The hon. Member's language is often so exhilarating and exotic that he confuses his own argument along with his audience.

That is a source of increasing the budgetary income, and the Chancellor has faced it in one of the most remarkable Budgets ever produced during my time as a Member of the House of Commons. It is a Budget that admits to the existence in this country of a criminal class which is pursued in order that it may be brought to judgment by a Tory Government. It is the "strippers" and the "washers" who are defrauding the country now of £100 million per year.

The Deputy-Chairman

Whatever "strippers" and "washers" may be, they have nothing to do with Clause 13, which we are now discussing.

Mr. Rankin

It is surely within my province, when the Chancellor's sources of income are being attacked by the hon. Member for Kidderminster, to suggest to the Chancellor where he could recoup himself to the extent of £100 million today by getting after this criminal class which occupies such a large part of the Budget. I hope that hon. Members on the other side of the Committee will realise that if it had not been for these people this Finance Bill would have been about half its present size. And the Financial Secretary is out for that £100 million. I hope that he will verify that figure as the stake when he replies.

I do not wish to see indirect taxation going any higher. If I had the option of choosing between increasing indirect taxation and increasing direct taxation, I would go for an increase in direct taxation. I do not want to see that. I think that it can be avoided if all those who dodge and evade taxes today can be made to cease their anti-social behaviour. I am sure that many hon. Members opposite, particularly the rebels, will agree with me in that.

I should have liked to have spoken long on this topic, but it is the desire of both sides that we should draw this debate to a conclusion. But not only is there this attempt to upset and exaggerate what already is an unfair disbalance between indirect and direct taxation; there is also a challenge to the general standard of living of the people. We continually hear claims from the party opposite that they have reduced the cost of living. I am certainly not against reducing it. But this Committee has to be careful in coming casually to decisions of that type, because first of all we have to show clearly that we can reduce the cost of living without attacking the standard of living. That is the important thing. I wish to say quite clearly that I do not want to see a low cost of living, because I fail to see how we will get a high standard of living based on a low cost of living.

My hon. and learned Friend the Member for Kettering (Mr. Mitchison) referred to local taxes. I was once a victim of that, when local taxes were said to be too high and Income Tax was too high and the Government of the day decided to reduce them. The first body they attacked was the teaching profession, of which I was then a member They did it by reducing our standard of living, by reducing our salaries. Is that what hon. Members opposite are after?

Mr. Nabarro

The hon. Member is completely out of order.

Mr. Rankin

I am talking about taxation, and following two good examples— my hon. and learned Friend the Member for Kettering and the hon. Member himself.

Mr. Nabarro

I did not talk about local rates.

Mr. Rankin

The hon. Member talked about national rates and my hon. and learned Friend talked about local rates I am talking about both.

Mr. Nabarro

On a point of order, Sir William. I am driven by provocation to raise this. Is it possible to talk about the whole field of taxation? I scrupulously avoided talking about local rates in my speech.

Mr. Rankin

I have been skimming over it, not talking about it.

The Deputy-Chairman

I have already pointed out twice to the hon. Member for Glasgow, Govan (Mr. Rankin) that he has been straying rather far from the Question, "That the Clause stand part of the Bill." I hope that he will try and confine himself more closely to it.

Mr. Rankin

I thought that there was only one wandering boy in the Committee, and that he came from Kidderminster. I will conclude by saying that I think the hon. Member for Kidderminster has done a service in enabling us to discuss this matter today.

The hon. Member for Cheadle and the hon. Member for Sunderland, South both referred to the fact that we wanted some form of control over expenditure. We want control over more than expenditures. We want control over planning, and that is part and parcel of this debate.

The Deputy-Chairman

Order. I must seriously ask the hon. Member to pay attention. Planning has nothing whatever to do with this Clause.

Mr. Rankin

I accept what you say, Sir William, but if we are to follow the advice of the hon. Member for Kidderminster and reduce Income Tax from 7s. 9d. to 7s. 6d. then the Government will be faced with a great deal of planning in order to carry out his desire.

Mr. Cooper

I have a great personal liking for the hon. Member for Glasgow, Govan (Mr. Rankin), whom I have known for many years, but after listening to him today I am not surprised, if that is the sort of language used on the hustings, that the Labour Party finds itself so deep in the slough of defeat. The loose sort of language he has used about a "criminal class" must be rebutted, for the simple reason that to be a criminal one must break the law. As I understand it, there is no law being broken at the present time. What is happening is that certain events are taking place which, I agree, are anti-social, but to be anti-social is not to be criminal, which is a very different thing altogether.

I join in support of the hon. Member for Birmingham, Northfield (Mr. Chapman). He said quite a lot which, upon reflection, we can agree upon. We have to think of the effect of high direct taxation upon production. The importance of that is that in the social welfare services which we are trying to build up we are attempting to extend the age of children staying at school and to do more for old people. In addition, as a result of medical science and generally better standards of living, people are living much longer than they were hitherto.

6.0 p.m.

The result is that between these two classes, of children and old people, there is the earning population which has to provide out of its production all the social services that are required. It is because we must look for this greater production all the time, to provide for far more social services, that we should seriously consider whether we should now lay greater emphasis on taxation of spending rather than on earnings. A great deal of careful thought must be given to this problem over the next year or two.

I disagree with my hon. Friend the Member for Kidderminster (Mr. Nabarro) on many points of his speech. I regret very much his personal attack on my right hon. Friend the Chancellor of the Exchequer, which I believe to be wholly unjustified and certainly not in the best traditions of the House of Commons. It is a great pity that my hon. Friend uses his very considerable talents in this language of exaggeration and personal abuse. I wish that he could be more temperate in language. If he were, I am sure that what he had to say would be listened to with far greater respect in this Chamber and in the country.

Whatever our theories may be on the disadvantages of high taxes—and my own views on the subject are well known—nevertheless we must pay for the services which we wish to provide. We as a Conservative Party have fought a number of General Elections, all of which we have won on the basis of increasing the level of the social services, and we must really pay for them. It is all very well to say that it is only before General Elections that taxes are reduced. In no fewer than seven of the nine Budgets presented by Conservative Governments taxes were reduced.

Mr. Chapman

That allegation did not come from this side of the Committee but from the hon. Member for Kidderminster (Mr. Nabarro). I do not think that it has been mentioned on this side.

Mr. Cooper

Certainly the right hon. Gentleman the Leader of the Opposition made that precise charge immediately following the Chancellor of the Exchequer's speech after this year's Budget had been delivered to the Committee.

I am simply pointing out that in seven out of nine Budgets introduced by Conservative Chancellors taxation has been reduced. It is not true to say, as my hon. Friend the Member for Kidderminster said, that in only two Budgets have there been reductions in Income Tax. That is true, if he meant by that a reduction in the standard rate, but there was a substantial concession on the earnings allowance in one Budget, and other concessions have also been made.

My criticism of my hon. Friend the Member for Kidderminster is simply that he will not face the fact that we have a highly developed system of social services for which we must pay. All I am asking of the Financial Secretary to the Treasury is to give some thought to a matter to which we could all address our minds—whether the time has arrived when we should consider moving the emphasis of our taxation system away from earnings to spending.

Mr. Jay

I think that most hon. Members have been trying to face the realities of Income Tax today, but I am afraid that I cannot count the hon. Member for Kidderminster (Mr. Nabarro) among that number. I say to the Government straight away that I hope that they will not follow the new "Nabarro Plan," accepting increasing social expenditure and cutting rates of Income Tax right down eventually to zero. That, indeed, is the royal road to inflation if ever there was one.

I agree with the hon. Member for Kidderminster that the present Government cannot possibly claim to have been reducing taxation over these years. The hon. Member did not go back far enough. If we go back to the last full year of the Labour Government and compare the total yield of Income Tax, it will be found that it has actually risen from £1,436 million ten years ago to £2,485 million, the figure which the hon. Member quite correctly gave for the forthcoming year. That is a rise of over £1,000 million in Income Tax revenue over the last ten years under a party which claims to be steadily reducing taxation

Whatever else we say, it is clear that the Tory Party has become a party of high taxation. Nor is it true to say that this is simply because people have much higher money incomes today. Perhaps many hon. Members opposite have not realised that the actual proportion of personal income paid in Income Tax has been rising over the last five or six years. The Times published some figures just before the period of the Budget which were quoted in the Budget debate and which show that between 1954 and the latest year, in spite of alleged tax reductions, the actual proportion of ordinary personal incomes paid in Income Tax had slightly risen rather than fallen.

It follows that since the main change in Income Tax during those years was a reduction in the standard rate, which must proportionately benefit more the higher incomes, many of the lower incomes must have paid a higher proportion of income in Income Tax over the last five years. The hon. Member for Kidderminster proclaims himself a progressive. He is rather like Humpty Dumpty in trying to make words mean what he says they mean. This is not a very familiar use of the word "progressive". In taxation it means usually a type of tax which falls more heavily on those with greater means than on those with smaller means, and that is the type of tax which we on this side of the Committee stand for. It is in the reverse direction that the Government have been moving over recent years.

In considering Income Tax we ought also not to forget the enormous increase collected by the National Insurance contribution in the last few years. The total from employers and employees has risen to about £700 million a year, which is not far short of the total yield of Schedule E Income Tax for which the latest figure stands at about £900 million. There is nothing more regressive, falling proportionately more heavily on small incomes, than the National Insurance contribution. If the Financial Secretary to the Treasury took incomes from £12 a week downwards and calculated the proportionate rise in Income Tax and insurance contributions together week by week, he would find that proportionately the yield actually rose as income fell below £12. It is nonsense, therefore, for the party opposite to claim that there have been large reductions in taxation during the last few years.

As to the future, if there are to be reductions—and I look not to one year but to some years ahead—we on this side of the Committee do not believe that a reduction in the standard rate, desirable as it is, should be the first priority. Some hon. Members have forgotten today that Income Tax is not just a tax on personal incomes. It is a tax on business profits. Much the larger proportion of the tax now comes from business profits and not from personal taxation. Schedule E raised only about £900 million out of a total of £2,400 million. Therefore the effect of any straight cut in the standard rate would be to give the greater part of the relief not to personal incomes, earned or unearned, but directly to business profits.

We say that when we are able to give reliefs on Income Tax the first priority should be by way of personal allowances, which quite clearly would give relief where the need was greatest.

Sir A. Spearman

Will the right hon. Gentleman bear in mind that only a small fraction of those business profits are actually spent? Most of the money is saved and put to depreciation.

Mr. Jay

The hon. Gentleman is quite right if he says that some is saved and put to depreciation, but when he says that only a small proportion is spent he is rather exaggerating, because something of the order of 40 per cent. to 50 per cent. is paid out in dividends.

However, I was saying that the right way is to give priority to personal reliefs which will enable us to cut some of the smaller incomes out of Income Tax altogether and give assistance where it is most needed.

What is the case advanced by hon. Gentlemen opposite for giving first priority to the standard rate? If they argue this on the ground of need, no case can be made out at all because we all know—and we have argued this many times—that a cut in the standard rate gives the greatest benefit to the individual with the biggest income and the fewer dependants. But if it is going to be argued—although it has not been seriously argued by hon. Gentlemen this afternoon—that first priority should be given to the standard rate on the ground of incentive, it does not seem that that case has been made out.

The hon. Member for Kidderminster put the argument fairly plausibly that a reduction in the standard rate last year was followed by a big rise in production during the year.

Mr. Nabarro

And in savings.

Mr. Jay

The hon. Gentleman contends that a reduction in the standard rate would start the whole economy expanding and moving forward. The truth is that the recovery of the economy last year was due not to the effect of a change in Income Tax but to the additional consumer demand because of hire-purchase reliefs and general tax reductions in the Budget.

If the hon. Member for Kidderminster does not believe that, let him consider the years 1952 and 1957. In 1952 the then Chancellor of the Exchequer increased the earned income allowance and production stagnated throughout that year for the first time for many years. In 1957 the cut in Surtax made by the right hon. Member for Monmouth (Mr. Thorneycroft) was supposed to initiate a period of great incentive and expansion, yet we had a fall in production in that year also.

Economic experience lends no weight to this argument. Indeed, I would say to the hon. Member for Ilford, South (Mr. Cooper) that in the period he described as one of high taxation under the Labour Government production and exports rose much faster in those years than in the years when he claims that there has been a reduction in taxation.

Mr. Cooper

The right hon. Gentleman will surely concede, first, that in the years 1945 to 1951 there was virtually no production in markets overseas, which meant that we had no difficulty in selling our goods, and, secondly, that in this country we had a great void to fill as a result of six years of war?

Mr. Jay

All I am arguing is that experience lends weight to the argument that there is no connection between standard rates of Income Tax and the rate of advance in production year by year.

If hon. Gentlemen opposite are trying to make the case not on business profits but on personal incomes they have the conclusions of the Royal Commission on taxation firmly against them. The Commission found that there was very little evidence at all on this, and it said specifically that that applied to the higher incomes as well as to the lower. If, on the other hand—and I say this in reply to the intervention by the hon. Member for Scarborough and Whitby (Sir A. Spearman)—their argument is that high taxation on business profits is a disincentive to investment, the answer is that we now have initial allowances and investment allowances which can give a substantial rebate on Income Tax to any firm which actually engages in physical investment. There is very little substance left in that argument either.

6.15 p.m.

Looking forward, it seems to us that although we do not want the standard rate of Income Tax to remain at this level indefinitely, the way that we should move is to try to shift the balance of direct taxation relatively away from personal incomes and towards business profits, particularly distributed profits. There should be a shift in emphasis from one to the other, and that should be one of our major objectives in devising the future of direct taxation. In addition, so far as the shift moves on to business profits it should be made to fall on distributed profits rather than on undistributed profits, which, as the hon. Gentleman rightly said, are put to reserve and used for ploughing back and reinvestment. If the Government had not abolished the discrimination between one and the other in the Profits Tax, that would have been easier to do.

My hon. Friend the Member for Gloucester (Mr. Diamond) suggested that there was still a great deal of room for widening the basis, as it has been called, for bringing in all sorts of income which is not yet defined as income, including capital gains—although that is not our main subject of discussion now—and also for bringing in a great deal of income which, in one way or another, is slipping through the net. I agree that if each of those things were done, other things being equal, it would be possible to have a lower standard rate than we have at the present time.

Those are the directions in which we would like to see the Government move. Desirable though it is we should not like the Government to give first priority to a straight cut in the standard rate.

The Financial Secretary to the Treasury (Sir Edward Boyle)

We have had an enjoyable and wide-ranging debate, and I think that I should be out of order, and it would be tedious for the Committee, if I tried to pursue all the subjects raised during the last two and a quarter hours. My hon. Friend the Member for Cheadle (Mr. Shepherd) in his thoughtful and helpful speech was right to remind us that when one considers the standard rate of Income Tax one has to think of it in relation to our national commitments as a whole. One has to think of it in terms of our commitments in defence, overseas aid, social services, expenditure at home, and, not least—and I was glad that my hon. Friend mentioned this specifically—our work of industrial recovery in repairing the ravages of war.

I should like to go straight to the speech made earlier this afternoon by my hon. Friend the Member for Kidderminster (Mr. Nabarro). Having read my hon. Friend's article in the Daily Telegraph, having listened to his speech to the Committee, and, if my memory serves me rightly, having heard 87 interventions from him in debates since the Budget debate, I feel a tiny bit like the Lancashire bowler, Richard Tyldesley, who when he read a series of criticisms by Neville Cardus in The Guardian, said: I would like to bowl at that blighter one day. He used a ruder word than blighter, but I think the point will be clear to the Committee.

I hope my hon. Friend will forgive me for saying that I do not believe that the last election was won on the economic doctrines of my hon. Friend. I believe that the principal reason for the result of the last election—I will not develop this point at length, but it was mentioned, very fairly, by the hon. Member for Birmingham, Northfield (Mr. Chapman)—was the fact that over the 'fifties as a whole there had been a 20 per cent. rise in the standard of living of ordinary wage earners. People voted at the last election for a continuation of the freer and happier lives they felt they were living, as compared with ten years ago.

Mr. Mitchison

"I'm all right Jack."

Sir E. Boyle

That is an extremely unfair comment. The whole object of our economic policy is precisely to enlarge the range of freedom of choice and of opportunity. However great may be the importance which we attach to our social services, and so on, there is nothing wrong in the ordinary individual wanting to lead a freer life than his forefathers were able to do.

Mr. Mitchison

I do not regard it as an unfair comment. What the hon. Member was talking about was the last election. We are all entitled to our views and I have expressed mine.

Sir E. Boyle

My belief is that the policies of the present Government, whose financing we are discussing this afternoon, are of value precisely for the reason I have mentioned.

I want to reply to two points made by my hon. Friend the Member for Kidderminster and then to advance a few arguments in connection with the Clause. I regret what I thought was a quite unjustified and wrong insinuation that my right hon. Friend, in his Budget last year, was influenced by political considerations in reducing Income Tax. I do not think that at the time there was any doubt in the House that we needed an expansionary Budget in order to liberate the productive energy of the country. My hon. Friend's animadversions today were completely unjustified.

Mr. Nabarro

If my hon. Friend reads my speech tomorrow he will see that two considerations found a place in my references; reflation was one and the last Budget before the General Election was the other. One is economic and the other political. As I made a speech just before the 1959 Budget urging upon my right hon. Friend five tax reductions, of which he carried out three, I am not guiltless in the political sense. But I am a political animal, and I believe in winning elections.

Sir E. Boyle

We all know that my hon. Friend is a political animal. When I read his speech tomorrow morning I hope that I shall derive greater pleasure than I derived from listening to it.

There is no reason for any member of the Committee to hang his head in shame because my right hon. Friend has not operated the doctrine that whenever the yield of taxes goes up taxation should automatically come down. So far as the rise in the yield of taxes reflects growing pressure on resources, that may well make a Chancellor more and not less cautious. My hon. Friend's doctrine, which he stated quite clearly today, that as the yield of taxes rises so taxation should automatically fall, is the best recipe for inflation that I have ever heard in this Committee, and is certainly not in the interests of many of the worst-off taxpayers.

My right hon. Friends have an extremely good record in the matter of reducing direct taxation. During the last eight years taxes have been reduced on a number of occasions, and I have been informed only today by the Inland Revenue authorities that if we now had the tax rates that were in force in 1951–52 the prospective yield of direct taxation in the current financial year would be £1,300 million higher than it is. We have already substantially reduced direct taxation, and we hope in the course of this Parliament to make further reductions in the burden of taxation on individuals.

Mr. Jay

Is the Financial Secretary aware that it could equally truly have been said that if the tax rates in force in 1945 had still been in force in 1951 the revenue would have been £1,500 million higher?

Sir E. Boyle

That may be true, but it does not in the least invalidate my point, which is that by a series of reductions of taxation, not only in the standard rate but also through an increase in the earned income allowances and an extension of the earned income allowances into the Surtax range, the present Government have substantially reduced the burden of direct taxation during their term of office.

The fact remains that in view of our commitments as a nation any Chancellor of the Exchequer, in any year, must consider carefully what the standard rate should be. I do not believe that it makes sense to talk of making a painless reduction in the standard rate every year.

Mr. Mitchison

As Alice might have said to the March Hare, if the burden of taxation has been reduced, why is it that we pay more taxes?

Sir E. Boyle

The hon. and learned Member is well capable of making a distinction between the rate of tax, the yield of tax, and the burden of tax. We are now discussing the rate of tax. The yield of tax depends upon the level of production and economic activity. I would remind the hon. and learned Member that as the national income rises, and as we become more prosperous as a nation, the burden of taxation automatically becomes more supportable. There are three different factors, and the hon. and learned Member is capable of distinguishing between them. When he compares our record with the record of the Labour Government he must remember that in 1945, just after the war, we started with what were deliberate wartime levels of taxation.

I want to say a few words about the position today. There are three main reasons why my right hon. Friend inevitably had to take a cautious attitude in his Budget this year, and why it has not been possible to reduce the standard rate. The first is a purely budgetary reason. As the Committee knows, Government expenditure this year has risen by rather more than £300 million. On that, I can only say that Government expenditure is rising not because of the policies embarked upon since the election but in full implementation of the policies on which we fought the election. Further, in my view nothing is more cruel and unjustified than promising people social benefits and then suggesting that they can get them without paying for them. Any attempt to have social benefits without paying for them through taxation can only result in a fall in the standard of living of those who are least able to afford it.

The second reason why we cannot reduce the standard rate is the general economic pressure on our resources. As I ventured to say in the Budget debate, it is not only Government expenditure that is potentially inflationary, or that makes an impact on our resources; all expenditure has an impact on our total resources. I thought that it was fairly common ground in the Committee—it was certainly a doctrine expressed by my right hon. Friend the Prime Minister when he was Chancellor of the Exchequer—that the Budget was one of the most important means of keeping a balance between our productive resources and the claims made upon them.

My right hon. Friend the Chancellor made it absolutely clear in his Budget speech, and still more when he wound up the Budget debate, that one of the reasons for a firm Budget this year was to leave room for the increase in productive investment taking place in our economy. I should have thought Chat my hon. Friend the Member for Kidderminster, and those of my hon. Friends who, like myself, represent Midlands constituencies, would have been well apprised of the importance of this point. If we are to earn our living in a competitive would, and push up our exports in order to earn those imports on which our whole standard of living depends, we must have an efficient industry and regular re-equipment of it. That is why I believe that my right hon. Friend has been correct in retaining the investment allowance but not reducing the standard rate of tax this year.

I have been asked what effect the Budget will have on production. I cannot be dogmatic on that point. In 1954 we had a standstill Budget and in that year the rate of production rose fairly sharply. Of course, there is a level of taxation which, if persisting for long enough, will exercise some depressing effect on production, but to say that a firm Budget for one year will affect production adversely is to be far too dogmatic. In the long run the level of production will be more affected by the level of productive investment in industry than by any other single factor.

The last reason for a firm Budget is well known to the Committee. Our balance of payments is not in such a secure position as it was a year or two ago. There is no reason for me to mention that except to remind the Committee that ultimately our balance of payments must be one of the main determinants of our economic policy in the short run. That is the third reason why my right hon. Friend cannot reduce the standard rate this year.

6.30 p.m.

In view of what was said yesterday I apologise for advancing some economic arguments to the Committee. Yesterday we heard protests about economists at the Treasury, and so on. I have heard that protest made often, although I never heard it made with less persuasiveness than by the right hon. Member for Easington (Mr. Shinwell) yesterday. Whatever his motives, I can only express my dissent from the rather' dogmatic stand taken by the right hon. Gentleman.

In conclusion, may I say that surely the test of any economic effort, the test of our own economic effort, must, in the long run, be its achievement— whether in a purposive, thrusting manner we expand production by breaking into new export markets, and so on. It is by our record of achievement and what it means in the export field and increased productivity at home that the welfare of our people at home and our economic effort must be judged. I put it to the Committee that there is no inconsistency at all between a purposive forward-looking thrusting attitude to our economic policy, and saying that in this year, with severe pressure on resources, my right hon. Friend cannot afford to take any risks. In that spirit I ask the Committee to accept this Clause.

Question put and agreed to.

Clause ordered to stand part of the Bill.

Clause 14 ordered to stand part of the Bill.