Clause 10.—(CHARGE OF INCOME TAX FOR 1963–64.)

HC Deb 15 May 1963 vol 677 cc1330-71

3.49 p.m.

Mr. Geoffrey Stevens (Portsmouth, Langstone)

I beg to move, in page 9, line 27, leave out "£2,000" and insert "£3,000".

Mr. Deputy-Chairman (Sir Robert Grimston)

With this Amendment we can take the Amendment to Clause 11, page 9, line 31, to leave out "£2,000" and to insert "£3,000".

Mr. Stevens

I am obliged, Sir Robert.

The 1961 Finance Act gave effect to the intentions of my right hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd)—as the Chancellor said in his Budget speech—to take steps the result of which would be effectively to raise the starting point of Surtax on earned income from £2,000 to £5,000. I supported that intention and those proposals; I thought that they were right. It is not without interest that, coincident with the first occasion upon which the lower Surtax bill in respect of those in receipt of earned income became payable, there were definite signs of an upsurge in the British economy, in trade and industry.

I recall that, in urging these proposals upon the Committee my right hon. and learned Friend suggested that they might have some incentive effect in the minds and thoughts of those responsible for the direction of British industry. What has happened since 1st January, 1963, certainly has not tended to vitiate the argument which he then advanced.

I supported those proposals. I thought that they were overdue, but, also, that they were not sufficiently embracing, for they excluded income commonly known as unearned income. I do not like the term "unearned income", I prefer to call it investment income, or savings income. The object of my Amendment is to make a small improvement for those in receipt of unearned incomes. I advance two main reasons in support of my proposal.

In the 1956 Act provision was made whereby self-employed persons could charge for Income Tax, and also for Surtax purposes, premiums paid for pensions which would be payable to them when they retired. But when the pensions are paid to those people, they fall within the ambit of the 1961 Finance Act and no Surtax is payable in respect of them until they exceed £5,000 a year.

In 1956, there were a good many self-employed people—and here I must declare an interest—who were too old to take advantage of this provision. The amount of anal premium required for the remainder of their working lives, despite the tax advantage, was too high to make the thing an economic proposition. Consequently, there are people who have retired since 1956, people who were self-employed—and there will be such people in the years that lie ahead—who are unable to take advantage of what are commonly known as the Macmillan provisions.

They have had to save for their old age out of taxed income, and save year by year. When they come to retire they receive income, interest, dividends—whatever it may be—on the amount of their savings. That income comes to them not as earned income, as in the case of people in receipt of approved pensions, but as unearned income, and they pay Surtax on it. There are at present, and there will continue to be for many years, employed people in senior executive positions in organisations where there is no approved pension scheme. They, too, have to save for their old age, and they, too, when they retire and receive the interest or dividends on their savings will find the income from those savings is not regarded as earned income.

So there will be an increasing number of examples of the anomalous position which may arise when two people—it may be men or women—who are next-door neighbours retire and are in receipt of an income of £3,000 a year. One may have been in a pensionable job and the other have had to save out of taxed income. One will be paying no Surtax and the man next door will be paying £112 10s. in Surtax. Yet both have lived the same kind of responsible hardworking life for the same period, That seems to me the sort of anomaly which should be put right.

It may be said that a large proportion of savings income comes from inherited wealth and, obviously, there is some truth in that. But I think that far and away the bulk of incomes of this kind come not from the investment of inherited wealth, but from the investment of life savings. In any case—here, I come to my second main reason for commending this Amendment to the Committee—even if the income does come from inherited wealth, surely some regard should be had for the fall in the purchasing power of the £, the fall in the value of money, since the £2,000 starting point for Surtax was first approved forty-one years ago.

In 1951, the Committee first accepted this principle in respect of Estate Duty. Without a Division, the Committee agreed to raise the starting point for death duty from £2,000 to £4,000 and the House agreed unanimously. Since then there has been a further increase in the starting point for death duty. I submit that what is sauce for the death duty goose is sauce also for the Surtax gander.

I think, also, that this figure of £2,000 is the only Income Tax allowance in the history of this country which has remained unchanged since it was originally introduced. I refer to an "Income Tax allowance" because, as hon. Members will know, in the Finance Act there is no such thing as "Surtax". There are only higher rates of Income Tax. I sometimes wonder whether I could get out of paying my own Surtax demand by suggesting that there is no such animal as a Surtax. But I think it true to say that it is the only tax figure which has remained unchanged for forty-one years. That is the second argument which I am advancing in support of the Amendment.

The suggested increase from £2,000 to £3,000 is, I submit, a modest one. The cost to the Exchequer would not be very great. If it were approved, it would, as it seems to me, bring a measure of justice to a body of people which has been left out in the cold for too long, and I commend the Amendment to the Committee.

The Economic Secretary to the Treasury (Mr. Edward du Cann)

I must be frank with my hon. Friend the Member for Portsmouth, Langstone (Mr. Stevens) and tell him that this Amendment cannot be accepted. I regret having to say that, for my hon. Friend has made an extremely powerful, eloquent and moving plea—as one would expect him to do. Indeed, when he referred to the fact that many people have not the advantage of a pensions scheme there must have been many hon. Members who listened with a good deal of sympathy to what he had to say.

The Amendment proposes to raise the starting point for Surtax for 1963–64 to £3,000, and we are discussing with it a second Amendment which would deal with the amount payable during the current year. The rates to be charged on the successive slices of surtaxable income above £3,000 would be left to Parliament to determine next year as Clause 10 leaves it to Parliament to determine next year the Surtax rates for slices of taxable income over £2,000.

In brief, the basic starting point for Surtax is £2,000. But there are a number of allowances to be deducted in computing surtaxable income which have the effect, at any rate so far as earned income is concerned, that Surtax is not due on an income below £5,001. Indeed, if the full allowances are attracted, the figure can be slightly higher. The basic starting point for Surtax on investment income remains at £2,000.

I was pleased that my hon. Friend called it investment income rather than unearned income. It is true there are people in the United Kingdom drawing income which it may be that they have not done much to earn. But that does not mean that their families are not among those people who had to save and work extraordinarily hard to provide the income. I think that the term "unearned income" which is applied to them, especially in cases where people have deprived themselves of certain things during their lives in order to save, is an unnecessarily sneering reference. I agree completely with what my hon. Friend had to say on that subject.

4.0 p.m.

My hon. Friend is right in pointing out that there are certain anomalies in this position. He made the suggestion earlier, during our Budget debates, that this point should be attended to. I want him to know that that suggestion did not go unnoticed. It is also fair to point out that it would be quite wrong to suppose that nothing whatever has been done during the period of Conservative administration for persons in this category, for certain things have been done.

One improvement that they have obtained, in common with many other taxpayers, has been the reduction in the standard rate of Income Tax from 9s. 6d. to 7s. 9d., a reduction of about 18 per cent. Another is that some of them, especially those who are married, will have been helped by the point that the excess of the taxpayer's personal allowances over the basic single allowance now runs for Surtax. That was done in 1957. My hon. Friend suggests that although a certain amount may have been done, it is now time to do more.

Mr. Stevens

My hon. Friend is right in what he has just said, but the differentiation between investment incomes and earned incomes remains. People with earned incomes have had these Income Tax allowances increase in exactly the same way as those with investment incomes, so that, relatively speaking, the people about whom I am concerned are worse off.

Mr. du Cann

That is perfectly true and I acknowledge it. None the less, whatever else may have been done for other sections of the community, it is right to point out that something has been done for these people as well. My hon. Friend may say that what has been done is not enough. I am merely saying that something has been done and that it has been of some benefit. That is all I am claiming, and nothing mare.

My hon. Friend went on to discuss the changes made in Surtax in 1961. He said that it was decided, in the national interest at that time, that it was essential to give a clear preference to earned income. My right hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd) explained his reasons clearly at the time. My hon. Friend the Member for Langstone and I, in common with many others, supported my right hon. and learned Friend strongly over that matter. Indeed, my hon. Friend said today that some very sensible and and desirable results had emanated from that decision. I am certain that my hon. Friends, in general, were glad to see that decision taken, for it was a very much overdue reform.

My hon. Friend is today arguing that although something substantial was done for earned income, that throws the position in relation to investment income into starker relief. That is probably true. That is the difficulty in effecting any improvements, even if they are continuous over a period. The anomalies get thrown up all the more clearly.

I cannot accept the Amendment, at any rate as it stands, for one reason above all. As drafted, it would apply to all incomes, and not only to income from investments. It would not change the existing rules about the special earnings allowance for Surtax. It would raise the effective starting point for earned incomes to £6,000 instead of the present £5,000. Thus, the existing Surtax preference for earned income, about which my hon. Friend has complained, would remain.

I have shown why the Amendment is technically defective and would not affect the kind of improvements my hon. Friend wishes to achieve. But if that were not enough on its own, the cost of the change, based on the present Surtax rates, would be about £45 million in a full year; and even if my hon. Friend withdrew the Amendment and tabled a fresh one which would put right the defect I have explained, the cost of the proposal would still be £25 million in a full year.

The cost of the second Amendment this year would be about £18 million if it were put in order. In its present state it would cost £30 million. To accept the Amendment, therefore, would commit the Government to a considerable change in the incidence of Surtax for 1963–64. I hope that my hon. Friend will understand that, apart from the technical position, the cost alone completely rules out doing something of this sort. I am not suggesting that this is so for all time, but that it is so now for this reason; my right hon. Friend the Chancellor of the Exchequer has proposed modifications in personal allowances this year—

Mr. G. R. Mitchison (Kettering)

Before the hon. Member leaves that point, could he say what the Amendment would cost?

Mr. du Cann

I thought I had done that, but if I did not make the position clear I apologise to the Committee. I said that the cost of the first Amendment—that is, the one to Clause 10, page 9, line 27—would be £45 million in a full year, and that if it were amended to take account of the point I put in relation to its technical defect it would then cost about £25 million in a full year.

As I was saying, as part of the theme of the Budget this year my right hon. Friend has proposed modifications in personal allowances—we shall be discussing them shortly—which, including the increased allowances for National Insurance contributions, are costing £184 million in this financial year and £235 million in a full year. He has decided that by far the greatest part of the relief must be concentrated on the modest and middle range incomes. It is estimated that well over 90 per cent. of the full year cost will go to taxpayers below the Surtax level.

To give the further concession suggested by my hon. Friend—however sympathetic one may be to the general purposes of the Amendment—would, obviously, be very much out of context with the main theme of the Budget. That theme is, I think, entirely clear. It has seemed to me, listening to the debates so far and having taken part in some of them, that the theme of the Budget is very much welcomed by the House of Commons and the country in general and that it is regarded as a theme which should be supported. The suggestion to raise the Surtax starting point in the way my hon. Friend proposes, though perhaps attractive from many points of view, must plainly be out of the question in the sense that it runs entirely counter to the theme of the Budget, apart from the matter of cost.

Although I dare say that my hon. Friend will feel reluctant, I hope that he will not wish to press his Amendment, in view of my remarks.

Mr. Mitchison

I always wait to see, when an Amendment of this kind is before the Committee, whether it represents a serious division of opinion in the Tory Party or whether it is one of those fireworks which are let off in the course of the Finance Bill without the intention of having much effect or doing much injury. I think that, on the whole, this is in the latter category; although we wait with interest to see whether it is on that footing or whether there is a serious division of opinion among hon. Members opposite.

The hon. Member for Portsmouth, Langstone (Mr. Stevens) honestly and properly pointed out that the effect of the Amendment would be almost entirely in favour of those who had what he chose to call "investment incomes". He proceeded to tell us a tale about people who had saved money and were providing for their old age by some scheme or another.

The definition of "earned income" in the Income Tax Acts—and, after all, that is what we are considering now—includes, in broad terms, pensions and superannuation schemes; and the line is certainly not where he invited us to draw it. I therefore treat the Amendment as it is intended by its mover to do what it says, that is to say, to favour the Surtax payer who is in receipt of unearned income.

When we were discussing the 1961 concessions, we had to consider not only the case of the Surtax payer who, like Dr. Beeching, was enjoying an earned income well in excess of either £2,000 or £3,000, but also the equally frequent case—indeed, I think far more frequent case—of the man enjoying both unearned and earned income—or, if the hon. Gentleman prefers it, investment income. That is by far the commonest case.

When we analysed the £83 million concession that the Conservative Party thought fit, by that Budget, at that stage in the progress of the national economy, to concede to Surtax payers, we found that while, naturally, a great deal of it operated entirely in favour of the earned income element, there was also a very considerable proportion of the total concession—to the best of my recollection, about half of it—going to investment incomes because, the incomes being mixed arid a proportion being, as it were, exempted from Surtax at the bottom of the scale by the form of the 1961 concession, those who were receiving both an earned and unearned income found that the earned income received the concession directly, and the unearned income received it indirectly because it slipped, as it were, lower down the scale, even into, or much nearer to, the exempted belt.

That was the effect of the 1961 concession—there is not the least doubt about it; it was freely admitted by the Treasury spokesman at the time, and the actual figures were given. While I am not concerned with the actual proportion—although, if the Economic Secretary would like to repeat it, I would like to hear it all over again; it will be a slightly different figure now—the fact remains that this £83 million went as much to the indirect benefit of investment income possessors as to earned income possessors. Those were the figures—

Mr. Stevens

The hon. and learned Gentleman's speeches are always of the greatest interest to me and I listen to him with great care and attention, but I most carefully restricted the incomes of which I was speaking to those that came to people who had retired from work. Would the hon. and learned Gentleman be good enough to relate to that a speech which is at present concerned solely with incomes consisting partly of earned income and partly of investment income?

Mr. Mitchison

I prefer to keep my speech to the terms of the Amendment, which does not relate to superannuations, pensions or anything else, but simply to Surtax payers as a class, as he himself quite honestly explained. I am sorry that he should appear to be retracting from it now.

It would, in practice, benefit the holders of what he calls investment incomes and I call unearned incomes, because I prefer the language of the Income Tax Act, which calls certain incomes, including a number from superannuation schemes, and so on, earned incomes, and assumes, as I do, that for Income Tax purposes it is right and proper to call other incomes unearned incomes. I would rather take my language from the statutes than from the ideology of the Tory Party. It promotes clarity of thought in these matters.

I am accordingly pointing out, and I do not propose to stop pointing out, that the £83 million concession in the 1961 Finance Act inured at that moment in the progress of the national economy to the benefit of unearned income holders just as much as to the benefit of earned income holders. I agree that, in form, the concession was given to the earned income holders, but the point was made perfectly clear. The hon. Gentleman knows far too much about these things to be in any way ignorant about it. Therefore, what he now proposes is to give a little more money, by way of concession in taxation to a group of people who received a very substantial amount of the £83 million which a Tory Government thought fit to give them in the 1961 Act.

4.15 p.m.

That is the Amendment we are discussing. We are discussing it on a Bill which, on the whole, as the Economic Secretary pointed out, makes Income Tax concessions at the bottom of the scale—in favour of the married man with children, and so on—and, in so doing, follows, as we have pointed out on several occasions, the suggestions that we on this side have been making for many years; and, in particular, the very valuable suggestion about altering in favour of the small man in these circumstances the belt of reduced income relief.

That is the context in which we are considering the Amendment, which would involve a very substantial amount. I prefer to keep to what we are discussing, and the hon. Gentleman knows perfectly well what he puts forward in these matters. The cost would be £45 million—one of the major reliefs in the Budget. I should be interested if there were any volume of open support from hon. Members opposite in favour of such a proposal in such a Budget at such a time, when the rest of the Budget is devoted to measures which, rightly or wrongly, are intended to go in relief of unemployment and in relief of the development districts, where unemployment is specially prevalent.

Do hon. Members opposite intend to support £45 million going to this particular class of citizens instead of being used to extend even more the relief given, say, in respect of development districts or, say, in another direction which is omitted from the Budget? I mention it only shortly, because we shall return to it, but it is perfectly obvious that if we really want to help the people who do not even have to pay Income Tax because they have not enough income, let alone become Surtax payers—who have never considered from their own point of view whether they should call the income they have not got investment income or unearned income—that help should be by way of some form of indirect tax relief.

We have put down Clauses on the Notice Paper—I only mention them, and obviously shall not deal with them now—which would have that effect; taking Purchase Tax, for instance, off the lowest scale of goods to which it has been made to apply since the 1955 election. That kind of thing must surely commend itself far more, not only to the hon. Member himself, when he thinks it over, but to all his hon. Friends who were heard to say "Hear, hear" at various points without, perhaps, fully considering what was the alternative to that which they were applauding, and which, I think, should commend itself to the Government far more than this proposal.

We shall hear what the Government say about that when we come to it, but if we are then to be told that we cannot afford any substantial Purchase Tax concessions, that we have done as much as possible already by way of personal reliefs and cannot meet any further cases, however hard they may be, it is quite obvious that the Government can hardly begin the day by accepting this Amendment. Indeed, a Government who had any courage in the matter and were confident of the united support of those sitting behind them, might have gone a little further than the Economic Secretary chose to go, and have said, as I say now, that, at this stage in the nation's economic fortunes, it verges on the wicked to put forward such a proposal.

This proposal is utterly monstrous. It is so riotously unfair to the majority of people who, in one form or another, would have to find the money for the concession, that I should have thought that not even the most brazen-faced member of the Conservative Party could have moved it in this Committee as anything but one of those fireworks that are not intended to do anybody any harm and which everyone knows are quite certain to be rejected not only by the Government but by every sensible Member of the Committee—and, of course, we are all sensible.

Mr. Charles Fletcher-Cooke (Darwen)

I am sorry, but not surprised, that my hon. Friend the Economic Secretary has rejected the Amendment. I am not surprised because of the figures which he gave of the cost in a full year. I should like to say a few words on this subject, because I think that we are getting into a dangerous situation in dividing even more gravely than formerly earned income from investment income; and I do not think that it needs a particularly brazen face to make the point. It is certainly not made on my part from any moral fervour on behalf of those who are enjoying an unearned or investment income. It is made simply because of a matter of administration.

The hon. Member for Gloucester (Mr. Diamond) will remember the eloquent speeches which he made year after year about the amount of litigation in courts on whether certain benefits are income or capital. It is undoubtedly true that the courts are loaded with this sort of argument, by which people, quite naturally, try to maintain that certain benefits are capital increments when they are alive, but, of course, it is argued after they have died that it was income.

I fear that if we go further along the line of dividing earned income from investment income for the purposes of taxation we shall have a whole new series of shifts by the taxpayer, all sorts of dodges, some of them unmasked and some not, by which what purports to be earned income is, in fact, investment income and the courts and the Inland Revenue will be overloaded again with this sort of argument which brings the tax system and the courts of law into disrepute.

It may be said that hitherto the division between earned income and investment income has been well known to the Income Tax law for a long time and that there has not been this attempt by people to maintain that unearned income is earned income and that, therefore, my warning is out of place. But the point is that hitherto it had not been worth their while, because hitherto this division has been at a low level. It has not impacted on what I might call the litigating classes. However, when the level is at £5,000 it is worth while people rearranging their affairs and perhaps consulting the hon. Member for Gloucester and others on how to do it, on how to cause the maximum litigation and the maximum worry to the Inland Revenue and the maximum disrepute to the legal system.

Although I realise that it cannot be done now, I hope that there will be no tendency in future on the part of the Treasury to increase this division between earned and unearned income, because if there is it will give accountants and lawyers another field day.

Mr. Mitchison

Do I conclude that the hon. and learned Member is in favour of taxing something which is now called capital and not income because the distinction is unreal?

Mr. Fletcher-Cooke

That would go way outside the Amendment.

Mr. Roy Jenkins (Birmingham, Stechford)

I am glad that the hon. and learned Member for Darwen (Mr. Fletcher-Cooke) decided to intervene in the debate and to broaden the subject a little, because this important Amendment raises important matters of principle. I see the force of some of the hon. and learned Member's arguments, but associated with them is a danger. If they had been put to the then Chancellor, the right hon. and learned Member for Wirral (Mr. Selwyn Lloyd) in 1961, they must have been very damaging indeed of the spirit underlying that Budget, because if that Budget boasted of anything at all it was that it was right to make a differentiation between earned income and unearned or investment income.

If the hon. and learned Member now says that this has been a danger and that no sooner one starts it than one raises all sorts of difficulties and possibilities of litigation, and that we should be in greater difficulty with people pretending that unearned income is earned income as we are already with people pretending that what are really income payments are capital payments, this completely undermines the principle of making the distinction which was at the root of the 1961 Budget.

The hon. Member for Portsmouth, Langstone (Mr. Stevens) complained unreasonably that my hon. and learned Friend the Member for Kettering (Mr. Mitchison) had addressed his speech to the effect of the Amendment and not to the effect of the hon. Member's speech. I thought that that was an unjustifiable complaint, but to try to make the hon. Member happy I will address this part of my speech to the effect of his speech, and, in particular, to the spurious case which he tried to deploy, though persuasively as he always does.

This was the case of somebody who was not able to take advantage of the 1956 provisions by engaging in a top-hat scheme, or whatever it might be, to provide for his old age and had to do so by means of straight savings out of income. The problem with which I understood the hon. Member was concerned was that of a man who was not interested in building up a great accretion of property to pass on to his children, but who had been forced to save out of income to provide a reasonable standard of living for himself in retirement. What we are concerned with is somebody who has reached the position of retirement and out of savings has an unearned income of £3,000 a year.

I can quite see that, in the case of some people earning substantial incomes, before they had the opportunities which are at present available it might have been difficult to save sufficient out of earned taxed income to provide an unearned income on retirement of that magnitude. But in the case of those who have reached that position at present, even without the Amendment, I should not have thought that they would be in much danger of financial hardship.

We are dealing with the position of a man towards the close of his life, who has retired at 60 or 65, and has an expectation of life of perhaps ten years on the average of fifteen years in exceptional cases and who has accumulated savings and is interested in using the accumulation to sustain his standard of living. We are not talking about the ability to pass on property. We are talking about the man who has accumulated enough to give an unearned income of £3,000. I say in all seriousness that somebody who has passed the age of 60 with that amount of capital is in a perfectly good position, by means of buying an annuity or a judicious diminution of capital, to look after himself perfectly adequately without the assistance of the Amendment.

4.30 p.m.

Mr. Stevens

I think it will be in the recollection of the Committee that I did not make any suggestion of hardship. I simply raised the question of the anomaly as between one class of person who gets a Surtax benefit and another class who do not. I did not mention the question of hardship. The hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) is as adroit as his hon. and learned Friend the Member for Kettering (Mr. Mitchison) in putting up red herrings. The hon. Member will be aware that with an annuity of £3,000 a year there is no capital value to pass on to successors in title.

Mr. Bruce Millan (Glasgow, Craigton)

The capital portion of an annuity of £3,000 is not taxable and there would be no Surtax payable in any case, even under the present provision.

Mr. Jenkins

Powerful as both those interventions were, I had not brought my remarks to a close and there are one or two other points I wish still to make.

I certainly got the impression that the hon. Member for Langstone was dealing not merely with the narrow point of anomaly, but also with the real case of hardship. If that were not so, I do not know what the Economic Secretary—who is a past master at returning a soft answer from the Treasury Bench—was doing when he congratulated his hon. Friend and referred to the moving theme of his remarks. If he was dealing only with a small legal anomaly it would be most inappropriate and out of keeping for the hon. Member for Langstone to use moving expressions in reference to such a matter.

I am sure that the hon. Member will recognise that his Amendment goes very much wider and would mean a substantial reduction in taxation on property interest generally. It should be argued on that basis and not on the slightly spurious basis of a limited class of people who are not, I believe suffering hardship at all.

One could deduce an argument for saying that as £2,000 has remained at the lower limit on property incomes for over thirty years that in itself is an argument for making a change, but there are other considerations to be borne in mind. One could say that there is no particular reason why it should remain an immutable law of our society that property incomes should continue to be taxed in the same way as other incomes have been taxed for the last forty years and that we should make adjustments. Secondly, we have to bear in mind the ease of maintaining property incomes at a particular time when with balanced and harsher taxation of property incomes in relation to monetary values it had become much easier to obtain very substantial property.

It may well be that the English landowning class is better off at present than at any time since the collapse of agricultural capital in the 1880s. These considerations should be set against the rather detailed considerations which the hon. Member for Langstone advanced.

Mr. Stevens

I am grateful to my hon. Friend the Economic Secretary and to the hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) for listening to what I said. We all know how difficult it is to draft an Amendment which means exactly what one has in mind. I think that my hon. Friend accepted that. The intention was to restrict the proposal to investment incomes. I entirely accept that on the ground of cost within the context of the Budget this Amendment cannot be accepted this year. I very much hope, however, that the Chancellor will bear in mind what I said at the end of my speech, that those with investment incomes of between £2,000 and £3,000 a year have been left in the cold. I hope that in the next Budget he will do something for them. With that in mind, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Question proposed, That the Clause stand part of the Bill.

Mr. Anthony Crosland (Grimsby)

It has been a tradition for some years past that on this Clause, or its equivalent, we should have a brief debate on some of the more fundamental principles of Income Tax. No doubt after the disarrangement of business today, the Chancellor will wish more ardently than ever that such a debate should be brief. I promise him that I shall be brief, but this is an occasion on which to discuss some of the principles of our income taxation.

This is useful because we have already seen this afternoon, and in the course of some of our debates yesterday, that there are still some myths and misconceptions about the place of Income Tax in our taxation system, I wish to mention one or two of them and ask the Economic Secretary or the Financial Secretary to comment on them. One myth, which I think is less common than it was in years gone by, if only because of answers given from the Treasury Bench, we used to hear endlessly from hon. Members opposite. It was that the total weight of taxation in this country was so crushing and crippling that it was the main reason for slow economic growth, and so on.

That misconception has been completely destroyed by figures which have been given from the Treasury Bench and which were quoted in an excellent pamphlet which appeared recently. As my hon. Friend the Member for Gloucester (Mr. Diamond) has been given some free advertisement this afternoon, perhaps I may be allowed to give a litle free advertisement to my hon. Friend the Member for Glasgow, Craigton (Mr. Millan).

I refer to a pamphlet, "Prospects for a Prosperous Society" by Bruce Millan. It contains some extremely interesting figures which prove once and for all—if it still needs to be proved that the suggestion that the total weight of taxation in this country far exceeds that of Germany and other countries on the Continent is completely without foundation.

That myth No. 1, the hoariest myth of the last ten years, has now been largely abandoned, but the second myth of which we hear a great deal in this kind of debate is that even though the total weight is not greater than that in the Six, nevertheless the balance between direct and indirect taxation is less favourable because in this country we bear a greater weight of Income Tax and a lesser weight in indirect taxation and that is one of the facts responsible for our slow growth. That argument will not stand up for a moment once one looks at the figures in detail. The argument is in any case based on a totally unsupported assumption that direct taxation at this level has a desperately disincentive effect on initiative, work and risk taking. This assumption has been repeated year after year with no support by any empirical evidence.

The only time that it was looked at in detail was when it was considered by the Royal Commission on the Taxation of Profits and Income, presided over by that great spy catcher Lord Radcliffe, some years ago. That Commission looked at the question of how the weight fell on the wage earner and also the higher income receiver. In both cases the Commission concluded that Income Tax at the level we then had—and it was higher than now—did not exercise a serious disincentive effect on iniaitive, capacity for work, risk taking and the rest.

I should have thought that the events of recent years were final evidence of this fact. This afternoon, the Economic Secretary took pride in the fact that the standard rate has been reduced in recent years from 9s. 6d. to 7s. 9d. This has certainly had no beneficial effect on the rate of growth, which was actually slower last year than it was at the beginning of the period. If one wanted more evidence one could find it in the fact that under the Surtax concessions of two years ago every middle executive in the country should now be working two hours extra as a result, yet our growth has actually gone dawn. It certainly is not going to increase this year on account of Surtax concessions, but because the Chancellor has made the more prudent move of injecting more demand into the economy.

It seems to me, therefore, that the myth that one of the things from which this country is suffering is its relatively too great reliance on direct taxation will not stand up to examination of the facts concerning incentives Further than that, the statement itself is untrue once direct and indirect taxes are defined in a more or less commonsense manner. Again, this is something which my hon. Friend the Member for Craigton points out very clearly in the booklet I have mentioned.

It is true that we bear more direct taxation in this country compared with indirect taxation only if we include a pay roll tax and National Insurance contributions as being direct taxes. In some sense they are. One could argue indefinitely about the extent to which they are passed on. But taking the much more normal, conventional and commonsense definition of indirect taxation as being taxes on goods—for example, Purchase Tax and Customs and Excise duties, or in other countries the sales tax, the turnover tax, and the rest—it is completely untrue that this country relies very much more heavily on direct taxation, as compared, for example, with the European countries, which rely more heavily on indirect taxation. I do not think that this commonly accepted statement can be taken as true.

The third myth, which is propagated particularly by the Minister of Education, or was when he was associated with the Treasury, is that under the Conservative régime of the last few years direct taxation as a proportion of total taxation has increased. This conjures up the agreeable picture of a Tory Government with an inextinguishable zeal for greater equality, a total indifference for their more comfortably off supporters, and a constant desire for greater social justice, and so on. It would be very curious if, at the end of ten years of Conservative government, we had a more progressive tax system than we had at the beginning, if they were genuinely taking a greater proportion of our total tax in direct taxation.

Again, this turns out not to be the case on a detailed examination of the figures. It is true that direct taxation has increased as a proportion of the total if—but only if—we include National Insurance contributions in direct taxation. Whatever their utility from other points of view, they certainly cannot be called a highly progressive tax. Once we take away National Insurance contributions, which have certainly increased very considerably under the Conservative Government, and confine our attention to personal Income Taxes, we find that they have significantly fallen as a proportion of total tax under the Conservative Government, which, indeed, is what we would expect.

In other words, the tax system has grown markedly more regressive. Thus, these are three myths none of which we can accept, but all of which it is a good thing briefly to attend to once a year.

One or two facts, as opposed to myths, emerge from the presentation of the Clause in this form.

Sir Alexander Spearman (Scarborough and Whitby)

How does the hon. Gentleman reconcile his statement that there has been no growth during the past year compared with the previous year with the statement in the Economic Report that the output per man hour last year had risen by 4 per cent. in comparison with no change in the previous two years?

Mr. Crosland

Perhaps whoever is to reply could give us official Government figures, because I do not think that my statement would be disputed.

Sir A. Spearman

I was quoting the Economic Report.

Mr. Crosland

Perhaps the Government could give us as a comparison official figures derived from the Economic Reports of previous years as to the rate of growth in the last three years compared with that in the five years before that. There certainly has been a fall in the average rate of growth in the most recent three years as compared with the five years before that.

I turn to one or two facts, again very briefly, which emerge from the presentation of the Clause in this form. The first fact is that the Chancellor of the Exchequer has decided to reject the suggestion so often made that Income Tax and Profits Tax should be assimilated into a single corporation tax. I think that on this we should have a comment from whoever is to reply. In his Budget statement the Chancellor of the Exchequer said this: My predecessor referred to the question of amalgamating Income Tax and Profits Tax into a single corporation tax. The Inland Revenue have discussed a scheme for this purpose on a confidential basis with certain experts drawn from outside bodies. As the Committee may well he aware already, these discussions have led to the advice from industry that schemes which have been considered for the amalgamation of the two taxes are not satisfactory. I accept this advice …"—[OFFICIAL REPORT. 3rd April, 1963; Vol. 674, c. 466.] 4.45 p.m.

I cannot say what the advice was. Without knowing the advice, one cannot say that the Chancellor was wrong to accept it. All one can say is that we should have more explanation from the Government about why this idea has been rejected. It is, after all, an idea with a long history. It was put forward in the minority Report of the Royal Commission on the Taxation of Profits and Income. It is fair to say that the idea has been supported by the great majority of the most ortho- dox and respectable financial commentators. It tends to be supported by most City commentators. I should be grateful if the Economic Secretary, if he is to reply, would tell us why, as stated in this rather brief passage, the Chancellor has chosen to accept the advice against this tax which was tendered to him this year.

The other fact which emerges from the appearance of the tax in this Clause is that we are still to stick for another year to a system of income taxation which is fundamentally unsatisfactory. It is a system of income taxation which is based on a very narrow definition of income and hence it leads to extreme inequities between different taxpayers, quite apart from the inequalities between, as it were, the top and bottom of the scale.

One of the iniquities which we have often discussed and ought briefly to refer to again is the inequity between earned income receivers—I am not talking about capital—according to the source of their income. I am not talking about unearned income or investment income for the moment. This is partly a matter of the notorious difference between the treatment of expenses in Schedule D and Schedule E. It is partly due to the fact—one might as well put this brutally—that salaried executives, for example, have a very much lesser possibility of tax avoidance, I am not talking about illegal evasion, but of tax avoidance—than do many types of proprietor.

Not only does there tend to be an inequity between these two types of earned income receiver and taxpayer, but there are still some glaring loopholes in our Income Tax arrangements which deserve to be looked into in more detail. Can it possibly be maintained that the entire system of seven-year covenants can stand up to a critical examination? I do not believe for a moment that it can.

Far more serious than the inequity between Schedule D and Schedule E taxpayers, there is the iniquity between people with capital and people without. This goes back to the point already raised by the hon. Member for Portsmouth, Langstone (Mr. Stevens).

The Economic Secretary in his speech replying to the Amendment, spoke of sneering references to unearned income.

I think that what we are discussing ought to be clear. I do not think that anybody on this side of the Committee would ever make sneering references to people who have built up a moderate capital on which they propose to live in their old age. Nobody is inclined to sneer at people like that. If we are talking about unearned income or investment income, by far the greater part of it goes, not to that type of taxpayer, but to people with far larger sums, either inherited or built up in the course of their lives. We are not discussing typically a person with a capital of £3,000 or £4,000—nor was the hon. Member for Langstone, if it comes to that.

The fundamental fact here is that the differentiation in our tax system, which was the subject of much discussion on the Amendment, between earned income and unearned income, although to my mind desirable, is completely inadequate. The differentiation was introduced well before 1914 to reflect the fact that the person with capital was in any fundamental sense very much better off than the person without capital, even though the incomes of the two might be the same. That was the reason historically for the introduction of the differentiation in favour of earned as against unearned income.

I am in favour of this differentiation, but my main objection to it is that it is far too small to reflect the real difference in spending power, in real wealth, in capacity to pay, or what you will, of two individuals with the same income, one with a substantial amount of capital and the other without. The differences between two such individuals are enormous.

The person with capital can maintain a level of spending which is not rigidly limited by his income or by the taxation of his income. He can, under our present system, unless he is lunatic enough to sell within six months, make capital gains which are still substantially tax free. He has far more general freedom, such as freedom not to take a job for a spell, far more room for manoeuvre, freedom to take risks, far more freedom from authority—far more freedom of all kinds.

In fact, taking these two individuals—the one with capital and the other without—with the same incomes, their total situation in life, as it were, is in no way reflected by their incomes. The man with capital is far better off in both material and non-material ways than the man without capital. My objection to the differential in our present Income Tax law is that it is far too small to reflect the real differences between these two individuals.

Mrs. Evelyn Emmet (East Grinstead)

Would the hon. Gentleman clear up one point? Will be say at what stage it is possible to earn capital and remain an honourable member of society, and beyond which one then becomes slightly disreputable because one has too much?

Mr. Crosland

So far as I know, I have accused nobody of being disreputable merely because he owns capital, and neither would I do so, particularly after the trouble and the battle that my hon. Friend the Member for Cardiff, South-East (Mr. Callaghan) got into.

The point is that if people own large amounts of capital—and I have not said that it is disreputable for people to own these large amounts of capital—there should be a system of taxation which bears on them in relation to their true wealth, and not simply the income from the capital which is not a reflection of their true wealth.

Mrs. Emmet

At what stage does the hon. Gentleman put the word "large"?

Mr. Crosland

At what stage would the hon. Lady do so?

Mrs. Emmet

I am asking the hon. Gentleman.

Mr. Crosland

I probably would not disagree with the hon. Lady. What figure would she regard as large—£20,000, £50,000, £100,000.

Mrs. Emmet

I am asking the hon. Gentleman.

Mr. Crosland

I will take any figure that the hon. Lady cares to fix. I will take her definition of a large amount of capital. I do not think that hon. Members on different sides of the Committee would disagree about what is a large amount of capital.

Mrs. Emmet

State a figure.

Mr. Crosland

No, I will accept the hon. Lady's figure. What figure would she like—£50,000?

Let us take that figure. Even assuming that two groups of people have the same incomes, the people with £50,000 are treated differently by our Income Tax system but the differentiation is not sufficient to reflect the difference in their positions. One of the many reasons for this is that the man with capital can and the man without capital cannot have access to capital gains which are tax free under our present definition of "income". One of the ways in which we could make the differentiation more real would be to have a genuine and more proper system of capital gains taxation.

I apologise for having spoken for rather longer than I had intended, but for all these reasons. I think that there are inequities in our present system of income taxation. I do not think that it is satisfactory as it stands. However, we on this side of the Committee are, as ever, magnanimous. We do not regard these criticisms as being a sufficient reason for voting against the Clause. It would, I suppose, be inprudent to do so as we shall be in office in a few months' time, anyway.

Mr. Marcus Kimball (Gainsborough)

The hon. Gentleman slipped rather quickly over the reference to seven-year covenants. Would it be the policy of hon. Members opposite, if they had the chance, to change the provision under which many retired people with only their State pension are able to supplement their income with a little extra under a deed of covenant?

Mr. Crosland

No, I am not against all deeds of covenant. I think that I chose my words carefully. What I said was: can any hon. Member say truthfully that he regards the whole range of seven-year covenants under our present income tax legislation as being satisfactory? Personally, I do not. I certainly can see a case for seven-year covenants in many circumstances. I would have thought, however, that the privilege was the subject of misuse, and I should like the Treasury to look at it very carefully indeed.

Mr. Donald Wade (Huddersfield, West)

I am not going to enter into this auction between the hon. Member for Grimsby (Mr. Crosland) and the hon. Lady the Member for East Grinstead (Mrs. Emmet) as to what is a large amount of capital.

I should like to refer to another subject which is relevant to this Clause. Under this Clause the standard rate of Income Tax will be retained at 7s. 9d. in the £. I think that this is an appropriate time for questioning the necessity for having a standard rate at all. There is a great deal of unreality about this standard rate. When it is said that Income Tax is imposed at 7s. 9d. in the £, that creates the impression that the majority of Income Tax payers are, in fact, paying 7s. 9d. in the £.

But that is most unlikely to be the case. Very few Income Tax payers pay precisely 7s. 9d. in the £ on their total income. If one calculates the total income of any individual, one finds that the amount of tax that he pays is not 7s. 9d. in the £. It may be more if he is a Surtax payer—it could well be more—but in the majority of cases it is less than 7s. 9d. in the £.

This use of the expression "standard rate of Income Tax" adds to the general confusion. Therefore, in any major tax reforms I would certainly advocate the abolition of the standard rate of tax and I would introduce a sliding scale. I think that, as a result of that, the amount of tax which people would pay would be more easily understood.

It seems fashionable at this stage of the debate to refer to pamphlets and other publications. I understand that, under the American system, in the House of Representatives one can ask for any article or publication to be included in the record. I am not suggesting that we should adopt that system here. It would certainly add to the amount of time taken in reading HANSARD if that were the case. However, if such a system did apply here I would ask for a Report to the Liberal Party on Taxation under the chairmanship of Professor Wheatcroft, published in September last year, to be included in the record because I think it is an extremely good booklet and I believe it has been commended by the hon. Member for Sowerby (Mr. Houghton).

I will content myself by quoting one brief paragraph from it. It refers precisely to this subject of the standard rate of Income Tax. It says: The existing income tax is built round the fiction of a standard rate of tax which in theory provides a common level of tax for the five income tax schedules. In fact, a complicated system of allowances and exemptions has been introduced, which permits most tax-payers to pay income tax at less than the standard rate. The committee believes, there- fore, that it is the high, but largely irrelevant 'standard' rate which makes the existing system incomprehensible and unwieldy. I think it would be a valuable reform to abolish the standard rate as such. The amount of tax that people would pay would be more readily understandable if one had a sliding scale which could be quoted in terms both of percentage of the £ and shillings in the £.

Of course, I recognise that this raises certain questions, and I am not going to dwell on them at any length. First, the question arises as to whether this would complicate the system of P.A.Y.E. I do not believe it would. I think that one could quite well arrive at the rate by reference to a sliding scale, but I would suggest that allowances should be treated as tax deductions: that is to say, one would not take into account the allowances before arriving at the taxable income. One would arrive at the income and the rate according to a sliding scale, and then one would make a tax deduction in accordance with the allowances applicable. The net amount actually payable would work out the same. It is merely a matter of a difference in procedure.

The other question which is very naturally asked is: what about the deduction of tax at the standard rate, for example on dividends? I think it would be quite possible to arrive at a rate per cent. which would be deducted, say, from dividends paid out of the profits of a company. That, of course, would be accounted for by the company to the Revenue and the taxpayer would receive a tax credit.

5.0 p.m.

I do not think that the administrative difficulties are insuperable, and I believe that it would be a step towards the simplification of taxation if we got away from the idea of the standard rate. If that were so, one would no longer be involved in discussing the relationship between Surtax and Income Tax. That would be irrelevant because Income Tax and Surtax would be merged and there would be one sliding scale.

So long as we have this standard rate and have to consider where tax reduc- tions should be made, I would come and Surtax could be merged and there down in favour of other reductions at the precise moment in time, rather than a reduction in the standard rate. I am speaking of the present financial year. Therefore, like the hon. Member for Grimsby I am not opposing the Clause. I think that it is just about right that the standard rate remains at 7s. 9d. in the £ and that we should use such money as is available for tax reduction in other ways. I hope that it will not be long before we have some major tax reforms which will include the abolition of the standard rate of Income Tax.

Mr. Bruce Millan (Glasgow, Craigton)

My hon. Friend the Member for Grimsby (Mr. Crosland) in a brief speech made a number of extremely interesting points. In our lengthy debates on the Finance Bills we do not often have much of a chance to talk about basic questions of taxation or of taxation reform, and I want to make one or two brief points. May I begin by thanking my hon. Friend very warmly for the kind things that he said about me?

Concerning the standard rate, I agree with the hon. Member for Huddersfield, West (Mr. Wade) that there is a strong case for trying to get rid of the concept of the standard rate, because, undoubtedly, many people who come nowhere near paying the standard rate of Income Tax are under the mistaken impression that they are paying tax at that rate, and even people with quite high incomes, because of the operation of the earned income relief, do not pay the standard rate of 7s. 9d. in the £. There is, therefore, a great deal to be said for getting rid of this concept and working on a graded system of taxation without placing any undue emphasis or importance upon any particular rate of tax.

I appreciate that this is a very much more complicated change than may appear at first sight, because there are all the difficulties of withholding rates of tax from dividends and interest, to mention only one of the possible complications. But it seems to me that this is one of the fundamental questions of the form of structure of taxation as distinct from the incidence of taxation which any Government ought to be looking at.

In so far as direct taxation is a disincentive at all, it must be a disincentive at the marginal rate of tax, the rate of tax which applies at the next additional step in any individual's income, and if many individuals are under the mistaken impression that their marginal rate of tax is 7s. 9d. in the £, whereas in fact it is considerably less, that seems to me a very undesirable situation from the incentive point of view. I should have thought that, quite apart from any arguments about incidence of the rate of tax, this was a change in structure which any Government concerned with incentives might be willing to look at. I appreciate, of course, that it is an extremely complicated matter.

There is another question which I think the Government ought to look at. This is the fact that the standard rate of Income Tax, or any rate of Income Tax, is modified considerably by all sorts of concessions, allowances and reliefs. Many of these allowances and reliefs are perfectly legitimate and all of us would support them. But there is a criticism to be made of the present Income Tax system, in that the nominal rates of tax are in fact considerably higher than the actual rates of tax, when one takes into account the very considerable opportunities that are available to the taxpayer for reducing his actual taxation liability. I think that it is also a fair point to make that the further one goes up the income scale, the much greater are opportunities for reducing one's actual taxation liabilities.

My hon. Friend mentioned seven-year covenants. Obviously, many of these covenants are in favour of charities, and one would have to tread very carefully in this matter. One would not want to disallow covenants for charities which up to the present had been allowed for taxation relief. But this is simply one example of the opportunities that there are available for the taxpayer to reduce his taxation liability and to give charities a good deal of additional income at the expense of the Treasury. We may consider this a desirable thing to do, but I think that it has to be looked at carefully. If charities are a matter where obviously there is a balance to be drawn, I should have thought that covenants in favour of individuals raise fundamental issues of taxation policy, where the balance seems to me to be drawn at the moment too much in favour of the taxpayer who wants to alienate his income and reduce his taxation liability to provide additional income for, perhaps, payment of public school fees, or for a relative, largely at the expense of the Revenue. This is the sort of thing that we ought to be looking at.

Mr. Kimball

The hon. Gentleman has got it wrong. Under the seven-year covenant system, the actual person paying the tax and paying the covenant does not gain anything from it. It is my right hon. Friend the Chancellor of the Exchequer who loses because the charity claims back the money from the Chancellor of the Exchequer. It does not reduce one's tax liability. The hon. Gentleman is barking up the wrong tree about a very valuable concession which he does not understand and which will cause an awful lot of worry to people who benefit from it.

Mr. Millan

This confirms the point that the Treasury loses the money. Therefore, if the Treasury is losing, it has an interest in seeing that it does not lose an excessive amount of money whether in favour of charities or anyone else. If we want to make these payments to charities, we ought to be clear about the way we do it, and this, too, is a matter which the Government should consider.

The Chairman (Sir William AnstrutherGray)

I am reluctant to interrupt the hon. Member, but I think that in considering any sort of relief of taxation we should take into account that that would come under a different Clause.

Mr. Millan

My mind was diverted by the interruption of the hon. Member, which was quite irrelevant to the point which I was making, and which was related to the alienation of income in favour of individuals. That seems to me to be very relevant to the question of the standard rate of Income Tax. The point that I am making is that if an individual at a high rate of taxation is able to alienate some of his income in favour of someone else at a low rate of taxation, the taxation liability taken as a whole is very considerably reduced. I am illustrating this as a loophole or defect in our present taxation system which makes the present Clause providing for a standard rate of Income Tax at 7s. 9d. in the £ quite unrealistic. I should have thought that that was in order under this Clause. It is only one illustration of the point which my hon. Friend the Member for Grimsby was making.

One could talk in the same way about business expenses or life assurance relief. Many people with high incomes pay for life assurance policies not for the purpose of obtaining life assurance but for the purpose of obtaining tax relief. It may be perfectly legitimate to allow certain taxation reliefs in respect of saving, but I cannot for the life of me see why there should be such favourable allowances given to saving through life assurance compared with saving through the savings banks, provident societies, unit trusts—perhaps this might appeal to the Economic Secretary—or a variety of other methods.

The point is that all these allowances and reliefs go to reduce the effect of a graded Income Tax. Although one is able to adduce good reasons for giving the concessions when one thinks in terms of concessions which are comparatively modest in relation to individuals, there is at present a great deal of abuse and, in fact, the effective rates of taxation, particularly on those with the highest incomes, are very much less than the actual nominal rates of taxation which we provide for, quite unrealistically, year by year in our Finance Acts. It seems to me, therefore, that the Government, who have been thinking about tax reform, should pay attention to this matter.

My hon. Friend the Member for Grimsby referred also to the entirely different situation of the person who has unearned income and, therefore, a considerable amount of capital behind him as compared with the person who relies exclusively on earned income. It seems to me that in taxation matters, as in many matters, the balance is not heavily weighed at the moment against the person with unearned income but it is, in fact, weighed too heavily against individuals with earned income. Far from accepting an Amendment of the kind we disposed of earlier this afternoon, in order to get real equity in our taxation system we require an Amendment which would put the balance in the other direction, whether by means of a capital gains tax, a wealth tax, or whatever it might be. But that is a taxation reform of the kind which would affect the incidence of taxation. My preference, if we had to decide priorities in this matter, would be to favour taxation reforms which affect the incidence of taxation rather than reforms which simply affect the structure of taxation.

Obviously, there must be a great difference between the two sides of the Committee on this question of changing the incidence of taxation, but, even if we cannot agree with the Government about that, they should at least look at some of the other reforms which have been mentioned—the assimilation of Income Tax and Surtax, a corporation tax, the abolition of the concept of the standard rate—all of which would make our taxation structure a good deal more intelligible than it is now without necessarily affecting the incidence of taxation between different classes of taxpayer. Because we have so few opportunities to debate this subject, I hope that the Economic Secretary will be able to say something about it.

Mr. du Cann

As the hon. Member for Grimsby (Mr. Crosland) said, the fact that we have this hardy perennial in the form of a Clause to raise Income Tax and the higher rates of tax for the succeeding year gives us an opportunity to have a general discussion about taxation which is much to be welcomed. Several interesting points have been raised during this short debate—I appreciate that it has been deliberately short—which we have had.

I was glad that the hon. Member for Grimsby referred to the publication Taxes for a Prosperous Society written under the name of the hon. Member for Glasgow, Craigton (Mr. Millan). With very much of that pamphlet I agree. On the other hand, I must say very firmly, particularly having regard to the somewhat optimistic remarks of the hon. Member for Grimsby about the result of the next election, that, although I agree with a great deal of it, there is much in it which I hope will remain still the subject only of academic study and never be put into practice. It is clear that both sides of the Committee differ quite substantially in their attitudes towards taxation.

5.15 p.m.

I was interested in the somewhat immodest remarks—he will not mind my saying that—of the hon. Member for Huddersfield, West (Mr. Wade) who suggested that the Liberal Party pamphlet represented the panacea for all our ills and that we only had to throw away all our pennies and, in the words once used by my right hon. Friend the Member for Woodford (Sir W. Churchill), get rid of the "dammed dots", everything in the garden would be lovely.

Mr. Wade

I did not use the word "panacea". The hon. Gentleman must be fair. I said that it was a very valuable document well worth studying. At least, I said words to that effect, and I did not use any exaggerated phraseology. It is a very useful document.

Mr. du Cann

I dare say that it is. Perhaps the best thing to do is to pass from it as quickly as possible.

Mr. Douglas Houghton (Sowerby)

I thought that it was the father of the right hon. Member for Woodford who referred to those dots, not the right hon. Gentleman himself.

Mr. du Cann

Entirely right—I agree. I pass, then, from the Liberal Party pamphlet, whether it be a panacea or not.

I thought that the hon. Member for Huddersfield, West, made a relevant point, which was confirmed by the hon. Member for Craigton, when he reminded us that the term "standard rate" is, in a sense, misleading because the effective rate of tax, as pointed out in the Financial Statement, is, in the overwhelming majority of cases, very different from what we call the standard rate.

The hon. Gentleman went on to say something about the merging of Income Tax and Surtax. I am sure that this would be very desirable if it could be achieved, but I think it right to draw attention to the remarks of my right hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd) who spoke at some length on this subject during the Budget debate in 1961. What is plain is that the difficulties really are formidable and certainly should not be underrated. Even if one, so to speak, forgot the term "Surtax", which is in any case, perhaps, a term of art, all that would happen in the end would be that one would change the nomenclature but not the system. Certainly, if those two forms of tax were to be amalgamated, very important and far-reaching changes would have to be envisaged, and I am not at all sure that all of them would meet with the approval of the Committee as a whole. Be that as it may, what is plain is that the simplification of taxation is very much to be desired, though it is easier to describe than to achieve in fact.

Our discussion yesterday of the Customs and Excise on the first nine Clauses of the Bill showed that there is continuous scope for simplification. My right hon. Friend should be given a good deal of credit, which he has not yet been fully accorded either by the Committee or by the country as a whole, for such simplification as has been achieved in the Budget.

What interests me about the short debate we have had is that no one has suggested a reduction in the standard rate of Income Tax. I am sure that many of my hon. Friends would like to have seen a reduction in the standard rate. So, I think, should we all. But my right hon. Friend deliberately decided against that and decided to concentrate his reliefs on taxpayers with small and medium incomes. The fact that no one has specifically raised this question seems to me to be a clear indication yet again, if it were needed, that the theme of the Budget is very much approved.

The hon. Member for Grimsby said a good deal on the subject of direct and indirect taxation. I agree at once that international comparisons are very difficult to make. It is by no means easy to find common basis from which to start. But I find some difficulty in entirely following his very definite assertion that direct taxation has been reduced only in the case of personal taxation while there has been a Conservative Administration.

I have the facts in front of me and the position is that of total taxation something like 51 per cent. was taken by direct taxation in 1950–51, which compares with the figure of 53.2 per cent. today, after my right hon. Friend's Budget. If the calculation is made on the existing basis, and before the Budget for 1963–64, the figure would be 54 per cent. It is therefore right to argue that the proportion taken by direct taxation has, in fact, increased, and I hope the hon. Gentleman is satisfied at that assertion.

On the other hand, for my own part, I am delighted that the result of the Budget should be to reduce the proportion taken by direct taxation, for I am certain it is the view of my hon. Friends, and certainly it is the view of my right hon. Friend and myself, that the proportion taken by direct taxation had already risen too high.

Mr. Crosland

I am grateful to the hon. Gentleman for giving way. I think there may be a misunderstanding. The point I was making was that the proportion taken in direct taxation has increased only if National Health Insurance contributions are included as direct taxation. I think that the figures which are relevant are those excluding National Insurance contributions.

Mr. du Cann

I think that the hon. Gentleman and I ought to pursue this matter privately because we could go to and fro over it for a very long time. I do not follow the hon. Gentleman's point about National Insurance contributions for this reason. They are, after all, a payment for a benefit which one is going to receive eventually and are not simply a matter of taxation which, in theory, at any rate, is entirely lost. Therefore, it seems to me that the view which the hon. Gentleman is putting forward, and which he is certainly entitled to take, does not altogether hold water in the sense in which he was putting the argument to the Committee.

Mr. Millan

Surely the hon. Gentleman is not saying that other forms of taxation which are then lost are Income Tax and so on. Surely there is no distinction between Income Tax taxation and indirect taxation and the National Health contributions from that point of view. We all hope that we shall get value from the Government, but some have doubts about it, though I should not think that the hon. Gentleman is one of them.

Mr. du Cann

The hon. Gentleman is slightly ahead of me. I was going on to a further point on this question of direct and indirect taxation, and it is this. In discussing this Budget, and in discussing this Clause in particular, I think it is perhaps almost inevitable that we should overlook—though I believe that we should not—the very substantial changes which my right hon. Friend has already made in Purchase Tax and indirect taxation. The reductions in Purchase Tax will cost £87 million in a full year.

Nor do I think that one should ignore—and here I come to the point raised by the hon. Member for Craigton—the really enormous expenditure taking place at the present time on the social services. A man who does not have to pay for the education of his children is obviously getting a very real benefit indeed, and there are many other examples which I will not particularise at the present moment. What I want to say in sum to the hon. Member for Grimsby is, first, that we take the view that the incidence of direct taxation had risen too high. We take the view that it is appropriate to reduce it. We also take the view that a great deal has been done, particularly in recent months, to reduce indirect taxation, and also that one cannot leave out of the calculations the many benefits which our citizens are properly obtaining through the social services. It is extraordinarily difficult to generalise on this subject.

I think that the hon. Member for Grimsby, perhaps not quite to the extent that the hon. Member for Craigton did, gave a number of very serious hostages to fortune on the subject of the Labour Party's taxation policy for the future. A great deal was said by inference about the need for a wealth tax. There was some difficulty about definition. My hon. Friend the Member for East Grinstead (Mrs. Emmet) interrupted the hon. Member for Grimsby in order to try to get him to be specific as to the quantum of capital that it would be thought appropriate by the Labour Party to take. It was not clear to me whether it was £20,000 or £50,000, but, whatever the figure is, it seems to me not to be a very large sum in the context of today. I cannot help feeling that there are many in the United Kingdom who, once they realise the ramifications of the scheme in the minds of the hon. Gentleman and his colleagues, will be very angry indeed, not least people in the farming community.

Mr. Crosland

May I ask the hon. Gentleman a question? The National Economic Development Council, of which the Chancellor is chairman, has recently come out with Report No. 2, saying that the idea of a wealth tax is worth the most serious consideration of any Government. Will the hon. Gentleman ask his right hon. Friend the Chancellor at what level the National Economic Development Council thinks that this wealth tax should start?

Mr. du Cann

I agree with my right hon. Friend's estimate. First, I think the hon. Member for Grimsby should get his quotations right. I recommend him to reread the paragraph. The word "may" was prominent in it. Perhaps I could refer the hon. Gentleman to an Answer I had the pleasure of giving to his right hon. Friend the Member for Battersea. North (Mr. Jay) last Thursday, in which the position was set out clearly. He will see that it was referred to in an article in the Sunday Times last Sunday by a man whose name temporarily escapes me. I think that the point is perfectly plain and that there is no capital to be made on the subject.

What I want to get very clear is this. I really cannot understand the attitude of the Labour Party which says, in effect, that if a man work hard all is life and saves £3,000 by building up a little shop or something of that sort, and sells it before he dies, that is a good and fine thing to do, but that if a man works equally as hard and builds up £20,000 there is something wicked and anti-social about it. I cannot understand it. It makes no sense at all. Indeed, I go further and say that what we require in these days more than anything else is to encourage the person who will build up a business, make something of himself, create an asset for the country and provide employment. Indeed, if we had a little more initiative and enterprise, and if people were not frightened of what the Labour Party might do to them in the future, it might be that we should make a good deal more progress.

We also had a discussion on the subject of structural changes in taxation, whether we should try to effect primarily the incidence of taxation on individuals. The hon. Member for Grimsby referred especially to the announcement which my right hon. Friend the Chancellor made during his Budget speech on the possible amalgamation of Income Tax and Profits Tax into the form of a single corporation tax. Of course, the inquiry now being made by someone whom an hon. Member called yesterday "Mr. Gordon Richards" has more relevance on this point.

In regard to the specific questions which I was asked, as to whether this idea has been dropped because the financial discussions foreshadowed by my right hon. and learned Friend the Member for Wirral had not been successful, I can say in reply that clearly the idea has not been abandoned. It will continue to be considered. The fact is that the particular schemes being discussed simply did not prove to be satisfactory.

Finally, a number of detailed points were raised on the subject of taxation matters. In general, it was suggested that there are many iniquities in the present system. I certainly think it true to say that there are a number of anomalies. I have suggested that to some extent we have been able to make progress and to take away some of those anomalies, especially in the Customs section. I hope that this is a continuous matter. Certainly it is very much the intention of my right hon. Friend and of my Treasury colleagues that it should be continuous. The aim should always be before us to attempt to provide a more simplified and better and fairer system. I do not pretend that the system is in any way entirely satisfactory.

5.30 p.m.

I will not deal with all the detailed questions, but I should like to mention one in particular, namely, covenants. If the Labour Party proposes to do away with covenants, it should say so plainly to the electorate. A very large number of people and institutions obtain great benefit from this form of help.

My principal reason for raising the subject is this. As right hon. and hon. Members on both sides know, as Economic Secretary, I have some responsibility for the arts. I am constantly being pressed for more money to be made available for the arts. The Committee is aware of the position, and I will not dwell on it. A great deal of progress has been made, but I am particularly pressed by some hon. Members opposite to provide tax concessions for the arts on the American model—in other words, to go very much further than we are going at present with regard to covenants.

It seems to me that there is some conflict of opinion among members of the Labour Party on this subject, and I wish them joy in resolving it. For my part, I would simply say again that I believe that the system of covenants has been of great assistance to many institutions which are well deserving of help, and from that point of view they are rather to be encouraged than abolished.

I am sure that it is most useful that we should have debates of this sort. It is perhaps a pity in many ways that we have not allowed ourselves more time to consider this subject. As the hon. Member for Sowerby (Mr. Houghton)—I apologise for the mistake earlier—suggested in his Second Reading speech, there will be opportunities to discuss Purchase Tax later. Perhaps we can regard those debates as an extension of this one.

Mr. Houghton

I had no intention of taking part in the debate on this Clause until I listened with growing impatience to the highly provocative speech of the Economic Secretary. This Clause gives the Committee an opportunity to discuss the traditions and the system of taxation in this country, to cast doubts on its equity and to make suggestions for its improvement without inviting the hon. Gentleman to make speeches charged with political prejudice and innuendo in the hope that he may do some political damage to the Opposition.

The Economic Secretary asks what the Labour Party would do about this or that and that we should make our position plain. Cannot we have a discussion on a matter of this kind without commitments from either side? Cannot we make suggestions which may receive, or should receive, the consideration of the country and of the House of Commons generally without having the sort of response that we have had from the hon. Gentleman? He asks what the Labour Party would do about covenants. We are not against covenants in principle, provided that they are used for an approved purpose and not abused. But will hon. Members opposite defend the alienation of personal incomes in favour of members of a man's own family for the express purpose of lightening the family tax burden?

The hon. Gentleman probably remembers or, if he does not, has read of the bogus covenants in favour of minors which became such a scandal before the war that a Conservative Chancellor of the Exchequer had to put a stop to them. Millions of them were being taken out by parents to alienate their own income in favour of their own children. Two parents could meet and come to an understanding regarding their mutual commitments under their respective covenants. No money ever passed, yet they were able to claim tax remission on behalf of their own children as minors. One could buy these forms in stationers' shops, just stick a stamp on and get tax relief. No wonder Mr. Neville Chamberlain brought that racket to an end.

That is the origin of the present law that a parent cannot alienate his own income to one of his own children, and this Government would not propose to change it. But income can be alienated in favour of a niece, nephew or grandchildren and there can be mutual pacts made within a family to alienate income on an exchange basis. That is the sort of covenant to which we object. and if hon. Members opposite want to get up and defend that sort of arrangement let them do it now. We fully realise that covenants in favour of charities are beneficial for many causes of which we approve.

I pass from covenants, because I do not wish to take up the time of the Committee unduly. I must say that I am charged with emotion at the moment, and I must sit down before it gives out. The Economic Secretary says that, when people in the country hear what the Labour Party proposes to do about changing the base of taxation and to make it more equitable, they will be very angry. Will they? Who will be angry? Out of 21 million people whose incomes were examined by the Inland Revenue in its 105th Report, just published, 13½ million had no investment income at all. Sixty-four per cent. of the capital wealth revealed by the Inland Revenue Report is in the hands of less than 1 million people. A third of it is owned by 130,000 people. In other words, £400 million worth of investment income is owned by 130,000 people.

Those figures reveal the present distribution of capital wealth in the country, and my hon. Friend the Member for Grimsby (Mr. Crosland) pointed out that the person who has a large sum of capital behind him is obviously in a better position to pay taxes than the person depending on his salary month by month who may have a break-down or suffer some family disaster which can make a drastic reduction in his standard of living.

Sir James Duncan (South Angus)

Will the hon. Gentleman agree that every farmer with a 100 acre farm would be caught if the wealth tax started at £20,000?

Mr. Houghton

I am not saying that it should start at £20,000. No one on these benches has said that a wealth tax should start at £20,000. Discussion has taken place on a wealth tax and suggestions have been put forward about the framework within which that tax should be devised. There is no commitment on these benches that a wealth tax should start at £20,000. In fact, there is no commitment on these benches that there should be a wealth tax at all.

The Financial Secretary to the Treasury (Mr. Anthony Barber)

I think that the figure of £20,000 was mentioned by a prominent member of the Labour Party and was discussed in various newspapers. Are we to take it that the tax might conceivably start at less than £20,000?

Mr. Houghton

I shall become even more angry. The hon. Gentleman is merely trying to lay a further political trap in the hope that something may come out of it. I know well enough that there are no depths to which hon. Members opposite will not stoop in their present desperate plight. Intellectual dishonesty will become absolute perfidy before the next election is over. [HON. MEMBERS: "Answer."] What have I to answer? I am asking the Committee and the coun- try to consider a change in our tax system which will spread the burden of taxation more equitably on the shoulders which have to bear it. That is what I am asking and in that context a tax on wealth cannot be ruled out. Indeed, it is getting more respectable every day. There is no doubt that we cannot get a fair system of taxation without it.

Will hon. Gentlemen opposite deny that the fruits of proprietorship are far greater than the rewards of endeavour? It does not matter how exalted an executive is, he cannot accumulate the capital which is at the disposal of a person who may capitalise the prospects of his own business. It that denied? Over the years, hon. Members opposite know that many individuals have built up enormous fortunes out of capital appreciation, the conversion of the prospects of their business into capital rewards, which so far have gone untaxed.

People are walking about and listening to the legend that taxation is so high and so crippling that they can hardly move without the tax collector having his hands in their pockets, and yet we see these enormous fortunes being built up, clearly showing that the system of taxation of incomes is not doing the job that it purports to do and is certainly not bringing equity into the distribution of the load of taxation. Are any of these things denied on the benches opposite? If so, let us hear it now. If not, let us stop a lot of this humbug and hypocrisy.

Mr. A. R. Wise (Rugby)

This is a serious matter of political philosophy. Is the object of taxation to provide revenue with which to run the country, or to conduct a reorganisation of the social system?

Mr. Houghton

The hon. Member knows full well that taxation is used for redistributive purposes. It is not only out of National Insurance contributions that benefits come. The National Health Service, the social services generally and education are all, in a sense, measures of the redistribution of national income.

When the hon. Member for Rugby (Mr. Wise) asks whether taxation is to be used for revenue purposes or for an alteration in the social system, my answer is that "revenue purposes" has a much broader context now than it had in the nineteenth century, when Governments regarded revenue as merely the basis for defence, the Civil Service and a narrow field of Government activity. It is much broader than that now.

I will not detain the Committee any longer, but the speech of the Economic Secretary was more than I could stand and I have brought to bear upon the discussion a few facts which have to be taken into account by people outside before they get worked up into a condition of anger in order to preserve the wealth of 130,000 people.

Question put and agreed to.

Clause ordered to stand part of the Bill.

Clause 11 ordered to stand part of the Bill.