HC Deb 20 June 1966 vol 730 cc125-37
Mr. Hirst

I beg to move Amendment No. 166, in page 19, line 38, to leave out "£2,000" and to insert "£3,000".

The Amendment is designed to provide an opportunity for discussing the question of Surtax on unearned income. The last time the subject was seriously discussed at any length was in June, 1961. We then had a long discussion on a series of seven or eight Amendments, but they were very limited in nature and were more or less specifically designed to cover the older ages in the population, people between 60 and 65.

I feel compelled to say, because I must be absolutely honest in the matter, that I thought that the then Conservative Government were, to say the least, extremely mean in refusing to accept those very limited Amendments. It is not too much to say that I was, frankly, rather ashamed of them. I say that to be fair to the Committee, as I usually am in these matters. I was very much on the wrong side of the debate on that occasion.

I say at once that for all too long there has been too large a difference, whatever argument there may be about what the difference should be, between the tax treatment of earned income and so-called unearned income. My right hon. and learned Friend the Member for Wirral (Mr. Selywyn Lloyd) inevitably made that very regrettable difference —unwarranted to my mind— infinitely worse and more marked by the substantial changes in 1961, which were very welcome and helped our economy very much at the earned Surtax levels. At this juncture I would most strongly protest at the continued use of the term "unearned". If I use that term at the moment it is only because it has become so used that I feel that I must do so for the sake of clarity. There has been erroneous thinking over the years which no Government, including, I am afraid, Conservative Governments, have done anything much to alter. Very strong appeals were made in the course of the debates in 1961 to which I referred. Speaker after speaker then pressed for a change from the term "unearned" to "saving in investment income" or some other term as a sounder, better and more accurate one.

It was not only in 1961 that we had such debates. I have taken part in such debates year after year. I remember this matter being pressed year after year by Mr. Geoffrey Stevens, when he was the hon. Member for Portsmouth, Lang-stone, in the course of his specially well-informed speeches, which some of us who took part in those debates miss in our discussions today.

These savings of one generation or another have in very many cases been built up over the years by persons denying themselves for the future of themselves or their families, and I suggest that it is monstrous that such people should be penalised by this very marked difference which is enshrined in our tax laws. On Second Reading I touched briefly on this subject and mentioned that the distinction does not arise in the United States tax laws. They see no distinction or need to make one. On that same occasion, I said that we would not have real progress in healthy investment so long as we penalised that sort of incentive. If people feel that they will not be penalised if they save, that is a first-class incentive to savings.

In the 1961 debates we put the case for circumstances whereby investments arising from savings could be encouraged to fructify to the benefit of all. Where would big business be today had it not been for the past opportunities of private individuals, in partnership or alone, to save money and plough it back into their firms, which have been amalgamated and have grown into such great organisations?

I remind the Committee that Surtax—it was called Supertax in those days—began in 1910 at the level of £3,000. It was and intended to be an imposition upon the rich. No one could deny that it had this effect in that it dealt with incomes of above £3,000. But circumstances have changed and in that context £2,000 today does not mean riches. There is a very different aspect altogether. I do not know the relative values offhand as between now and 1910, but certainly such a figure today is less than one-fifth of the value it held in those days. This fact makes the Amendment relatively modest. Indeed, it is so modest that I feel almost ashamed, but I want to keep a sense of proportion, as I did on the last Amendment.

Another aspect is, inevitably, the Labour reaction. Hon. Members opposite are grotesquely bad economists. I do not know why, for they have many trained economists in their ranks. But the more economists they recruit the worse they are. This particularly applies when they import them from abroad. Yet the Labour Party remains more or less aware of the importance of savings and of personal investment. It cannot be overstressed that savings and investment are the cornerstone of the economy and of the real standard of living of the people.

It is the small businesses which have prospered through this system and which have grown and developed under healthy and sound conditions, improving the standard of living of those working in them as well as the owners. But hon. Members opposite are inevitably in a dilemma. Yet it is of their own choice. They believe that a high level of savings contributes not only to the dignity of man but is also an answer to inflation. Despite this, they also believe in high taxation. They consider high taxation to be a weapon for levelling down. That is all their taxation does. It does not give people an incentive to level themselves up. It can only do that when it is reduced. High taxation is the creed of hon. Members opposite and that creed is written into every page of the Bill.

7.45 p.m.

I wish that hon. Members opposite were logical in their belief about the consequences of their guilt but actions speak louder than words. We are returned to this Committee to do justice to people in all walks of life. Of course, we have to take first one section and then another. Some sections deserve our attention before it is given to others. That is what happened under the Conservatives time and time again, and this was right and proper. I humbly suggest and plead for a sense of justice for those who have retired and who have built up an income from their own labours for the future or who are able to have an income from others who saved for the future.

As I have pointed out, many of these incomes were buildt up by people who have now retired. Through the appalling inflation of modern times, their savings have lost very much purchasing power. As Mr. Stevens said, there is a clear case in equity and on social grounds for savings. If the case was so clear in 1961, it is infinitely clearer and more urgent today.

Then there is the question of the inheritance of wealth in itself. What is wrong in anyone trying to build up, through savings, an income for the future benefit of their families? It is a sound, social, wise and prudent way of life. There is nothing harmful in it. Estate Duty is there to take account of the social aspects of inherited money. But it should not be penalised as it is under the existing Surtax rules for this class of income.

My first plea is to get away from the erroneous expression "unearned income". Many people whose position I have attempted to describe do not understand the expression. If we can only get away from that erroneous phrase we shall at least be starting along the road to a greater sense of justice for a large number of people who have, I regret to say, been by-passed by all Governments, year after year.

I have already expressed my own sense of responsibility for what can or cannot be done in each financial year. No doubt this is not a year in which the Government could accept this Amendment. I am conscious that, even if they accepted my case as a good one, they could not carry it out this year when, practically speaking, no further alleviation of taxation is to take place. Thus, I cannot press the Amendment but I am grateful to the Chair for calling it so that some voice can be raised for those who have been left out far too much.

I move the Amendment in the hope that in the not too distant future the present Government will beat the future Conservative Government to it and bring some measure of justice to this aspect of taxation. It would be too much to expect that they should restore the lost value altogether but they should certainly carry out some amelioration of the injustice that these people have suffered.

Mr. Harold Lever

I hope that it is not too much of a disappointment to the hon. Member for Shipley (Mr. Hirst) if the response of at any rate one hon. Member on this side of the Committee is not in accordance with the caricature which is constantly being painted by hon. Members opposite of the views of the Labour Party as being a high-taxing party and so on. I wish that hon. Members opposite would not constantly caricature the views of the Labour Party in this way. Some of my newer colleagues might take their Socialist instruction from hon. Members opposite and come to believe that it was truly party orthodoxy which was being preached by hon. Members opposite and vote accordingly, and that would be very distressing for me. I know that it was said in the last debate that I was not in the main stream of thought of my party on this question. I am not sure that that view is well justified. Certainly in the matter of disliking unnecessary taxation I think that the hearty majority of members of my party are as passionately keen to keep tax down as anyone else.

I think that the hon. Gentleman underestimated my party in supposing that it was hostile to unearned income in the sense that he described it. I think that my hon. Friends recognise, as we must all recognise, that unearned income is very often simply earned income congealed, at any rate earned income which has congealed with time, and we respect it in the proper hands in all circumstances according to the way it gets there. But the fact that we recognise that it was once earned income does not mean that we are not entitled reasonably to make a differentiation between earned and unearned income. It is a differentiation which has been made by Conservative Governments who, we are assured by hon. Members opposite, have a passion for low taxation and equity and all the good things in fiscal life. Surely the hon. Gentleman will appreciate that we can make a distinction for tax purposes between the two kinds of income without despising the one, even though we think that there are occasions when it must bear a higher burden than perhaps earned income has to bear when all circumstances are taken into account.

For this purpose I cannot help relying on something said by the right hon. Member for Enfield, West (Mr. Iain Macleod) on the last Amendment when I wanted to make a brief intervention. I am somewhat mollified, not having been able to make that intervention, by the great integrity—one might almost say the accustomed integrity—which led the right hon. Gentleman to the conclusion which I would have reached and which was that one could not vote in favour of the last Amendment.

In arguing that the high taxation of income had a seriously damaging effect on incentives—and this applies to Surtax as much as to Income Tax—the right hon. Gentleman said that leading American industrialists had told him— and I am sure that this is absolutely right —that when the Americans reduced taxation the incentive of doing so had an electrifying effect on the American economy. Of course it had an electrifying effect on the American economy, but that was not because of the incentive of paying less Income Tax, but because of the electrifying effect of the injection of so much new purchasing power into an under-employed economy. To attempt a similar electrifying effect in the present situation of the nation would be entirely unsatisfactory. The right hon. Gentleman would then have been in receipt of a confidence which would have told him of the electrocuting effect of a reduction of taxation.

Mr. Douglas Dodds-Parker (Cheltenham)

Is the hon. Gentleman saying that the Government should slow down the economy by increasing taxation so that there should be no pressure on the economy at all?

Mr. Lever

When there is a lack of demand and serious unemployment, as there was in America at the time to which the right hon. Gentleman was referring, a serious under-employment of resources, manpower and machinery, that is one thing, but anybody who believes that that is the case in our economy at the moment should have voted in favour of the last Amendment and in favour of significant reductions in taxation all round in order to stimulate the economy. But there can be very few hon. Members on either side of the Committee who have that view of the economy when the facts are so clearly in the opposite direction.

Hon. Members opposite often confuse incentive and fair play. What matters is that a man's reaction to the taxation which is imposed upon him is not that he will not work because he has to pay 10s. or 12s. in the £. What can affect his desire to work is his sense of being unjustly used, unfairly treated, singled out for spitefulness, or unfairly chosen for a particular rate of tax. A sense of oppression has a serious disincentive effect.

In different circumstances, there might be a very reasonable case for having another look at the Surtax arrangements. It was very fairly recognised by the hon. Member for Shipley that no such possibilities exists at present, but I should like to go on record as saying that the Government ought to have generally in mind that, by the erosion of currency and the higher rates of tax imposed on the lower levels of Surtax incomes, the original allowances are devalued and the rate of tax automatically raised without any statutory increase.

We say that we are imposing the same rate of tax, but we are imposing not the same but a slightly higher rate, by reason of the erosion of the value of currency and the higher rate at which the lower un-Surtaxed slice of the income has been taxed. The Government should have that continually in mind. Everyone must recognise that the Government must look at all the circumstances, but we should bear in mind that we are now operating Surtax on incomes which in pre-war buying power start at about £500 or £600 a year and I do not recall even the most enthusiastic Surtaxers of my younger days in the Labour Party urging that we should be keen to tax Surtax income at those levels.

It is easy for those of us who are marching towards fogeydom and who are the middle-aged Members of the House of Commons who think in terms of prewar buying power and pre-war standards of income, but we must not lose sight of the fact that incomes are different and that standards are different and that the level at which we now enforce Surtax and thet level at which it begins to bite are probably out of date and should be reviewed as soon as the country's economic circumstances permit.

Sir J. Eden

I am sure that the Committee is grateful to my hon. Friend the Member for Shipley (Mr. Hirst) for moving the Amendment, particularly since it gave rise to the most interesting contribution of the hon. Member for Manchester, Cheetham (Mr. Harold Lever). I very much hope that the Financial Secretary will be able to show considerable sympathy for the points of view which have been expressed, even though they were advanced with extreme and almost unusual modesty and calmness. None the less, they raised issues of considerable importance.

A number of representations have been made to me about the differentiation in treatment between earned and unearned income for these purposes. If we could go some way towards indicating hope that shortly there would be a change of attitude and a change of approach, that would go a long way towards relieving some of the present distress.

Many people feel that they are being unfairly singled out for special treatment which they do not deserve. Surely we all desire to encourage people to earn more so that they may put it away in greater savings. That is the background to much of our discussion of personal taxation matters. How can we encourage savings on the one hand and yet ultimately penalise those who successfully invest their savings? Surely what we want most to achieve is greater savings in order to lead to greater investment. Without investment we cannot possibly get the industrial expansion which we must have to try to rescue the economy.

Personally, I am a very keen supporter of any move to try to expand share ownership among people at all levels and in all income groups. I hope that we shall give every conceivable encouragement to the Wider Share Ownership and kindred movements. This is extremely important. I have spoken elsewhere advocating far greater dissemination of information by companies through their annual reports to shareholders and prospective shareholders of all kinds. This is part of the general subject which we are considering tonight of not discouraging those who save to invest, because that is an essential part of the capitalist system which all of us defend.

8.0 p.m.

I, therefore, hope that, in replying to this debate, the Financial Secretary, on behalf of the Government, will give a lead to encouraging a change of attitude and the simple point put forward by ray hon. Friend that we should stop talking about unearned income as though it was anti-social and to be avoided and despised. What the hon. and learned Gentleman can do in his speech by emphasising the importance which he attaches to this form of income through these savings and these investments would go a long way to easing the minds of people who are suffering under a sense of being most unfairly treated.

The whole Committee, I am sure, wants people to produce more, to earn more, to own more and to save more. Before we can achieve these desirable objectives. we must tax less.

The Financial Secretary to the Treasury (Mr. Niall MacDermot)

In moving the Amendment on which we have had this short and amicable debate, the hon. Member for Shipley (Mr. Hirst) adduced mainly general economic arguments, some of which were dealt with at length in the preceding debate. I do not want to follow the hon. Member in seeking to reply to what my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever) called the caricature of the attitude of the Government and our party towards taxation, nor do I propose to try to respond by replying to what I regard as the equal caricature which has been presented of the attitude of the party opposite to taxation. The fact is that any Government is wrestling and grappling with the problem of how to raise the funds which are required for the level of public expenditure that we all vote and to do so with the lowest possible levels of taxation. These depend on the growth rate and the amount of savings that we achieve.

The hon. Member for Shipley supported, by his hon. Friend the Member for Bournemouth, West (Sir J. Eden), urged that we should as soon as may be abolish the distinction which at present exists with Surtax as between investment income—I am quite content to call it that—and earned income. The hon. Member for Bournemouth, West in particular urged this as a necessary incentive towards saving. Speaking purely personally, I am not convinced by this argument.

I entirely agree about the need for us to be more successful in inducing people to save, but I should have thought that the levels at which there is that greatest need is not among the Surtax-payers so much as among the ordinary Income Tax-payers and the ordinary wage-earners, many of them earning substantial wages. It is at those levels, where in the aggregate so much of the country's income is earned, that we would like to see the level of saving much higher. For my part, therefore, I feel that there is a good and sound principle underlying the distinction which was introduced by the right hon. and learned Member for Wirral (Mr. Selwyn Lloyd) in the Surtax treatment of investment income compared with earned income.

If I may turn briefly to the Amendment and point out its implications, the proposal is to raise the starting point for Surtax from £2,000 to £3,000. I take it that the hon. Member for Shipley intends that the starting points for each slice would equally be raised by £1,000.

Mr. Hirst

I instanced the tax in the United States of America, but the hon. and learned Gentleman has got me wrong or has misunderstood me. I was not being unreasonable in saying that the whole distinction should go like that, because that would be a major matter. I argued, and I was supported by the hon.

Member for Manchester, Cheetham (Mr. Harold Lever), that there is an injustice for the position having been left completely behind and that the difference between the two is too marked and unfair. I had it in mind that the Government might do something to close the gap a little. There is a distinct injustice that is has remained the same for the last 20 or 30 years.

Mr. MacDermot

The distinction has not been the same for 20 or 30 years. Surely, the present levels of the distinction between the two were fixed by the right hon. and learned Member for Wirral in one of his Budgets.

I remind the Committee that in recent years there have been two reforms which have improved the Surtax starting point over a wide field. Since 1957, the amount by which the total of the personal allowances due to an individual exceeds the single person's allowance has been deductible in computing his total income for Surtax. In addition, the special Surtax reliefs in respect of earned income have been allowable since 1961—that is, the earned income relief deduction and the special Surtax earnings allowance. The effect of all these is to raise the Surtax starting point for a single man for earned income to £5,001, and for married men and others entitled to more than the basic single person's allowance the starting points are somewhat higher.

If the hon. Member's proposal were accepted, the starting point for Surtax would be raised to £3,000 with those allowances left unchanged. The result would be that not only earned income, but investment income, would to a substantial extent be free of Surtax. A single person could have earnings up to £6,126, with a higher figure for a man with dependants, or earnings of £5,000 and an investment income of £1,000 and still not be liable to Surtax. The cost of these changes would be substantial. In the first year in which they would operate, which would be 1966–67, the cost would be £43 million and in a full year it would be £62 million.

Mr. Hirst

The hon. and learned Gentleman knows only too well the difficulties and limitations of putting down Amendments on the Committee stage of the Finance Bill. I recognise that my Amendment would go right across the board. The hon. and learned Gentleman could tell from the whole tone of my speech, however, that I was inviting the Government to say how they could help the investment income as I call it, in a strict compartment of its own, without affecting the earned income, which is fairly satisfactorily guarded. For drafting reasons, I could not do all this in my Amendment.

Mr. MacDermot

I appreciate the point made by the hon. Member and the way in which he moved his Amendment. I am not trying to take any false debating points, but it is only right that I should explain the implications of the Amendment.

I conclude by saying, as, I think, the hon. Member tacitly acknowledged when moving his Amendment, that this is clearly a year in which my right hon. Friend the Chancellor of the Exchequer has found it necessary to raise a substanial additional sum in taxation. Obviously, therefore, it is not a year in which it would be realistic to propose a raising of the starting point in Surtax rates.

The hon. Member has made his point. I have given my immediate personal reactions to the main point which he has argued. What the hon. Member has said will, of course, be borne carefully in mind if we reconsider this tax in a future year.

Mrs. Margaret Thatcher (Finchley)

I would like to say a word in support of the Amendment moved by my hon. Friend the Member for Shipley (Mr. Hirst) and to thank the Financial Secretary for giving a fairly detailed reply. My support is in the spirit in which my hon. Friend moved his Amendment and the spirit in which the hon. Member for Manchester, Cheetham (Mr. Harold Lever) made his contribution.

Equity does not stop at an investment income of £2,000 per annum. Sooner or later we must pay attention to raising this limit. I understand that this year is not the year to do it, but we hope that one year, possibly before the next General Election, the Chancellor will find that he has enough spare to do what my hon. Friend the Member for Shipley is asking.

Mr. Hirst

I am grateful to the hon. and learned Gentleman for what he has said, though he has not said all that I had hoped. I would like him to have added a little indication of what the cost would have been in the clear spirit of ray speech; that is, were the Government able to think up the necessary drafting to ensure that this alleviation would only be borne by the unearned or investment income people. I hope that he will give some thought to that aspect.

I would never have dreamed of puting down the Amendment had I been of the opinion that I could press for a reduction of £44 million. The great bulk of that is going to those who already benefit by the 1961 arrangements. I wanted to benefit those people who were left out of the 1961 arrangements. I hope that I have made that point, and perhaps he will give some thought to that aspect. If a study can be made and if I can be informed of the sorts of sums that have been worked out, I shall be grateful.

However, in view of what he has said, I beg leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Clause ordered to stand part of the Bill.