Clause 3. (Hansard, 23 May 1968)

§ Mr. Worsley
The Clause says that there shall be paid out of moneys provided by Parliament any attributable increase, and, during our discussions on Clause 2, we ironed out, I hope, any confusion about the method of financing. But I am still not clear what taxation will replace the three-day sickness provision. I understand from the right hon. Lady that the general fund of taxation will bear it, and what I want to know is the technicalities of the selective increase in Income Tax.
At what level of Income Tax will the whole of the increase be clawed back? Am I right in thinking that only someone whose marginal rate of tax is the standard rate will lose the whole of the increase, or will a lower level be applicable? Any 946 person whose whole income is earned will be subject to earned income relief. Therefore—this is a well-known error in the public mind—although the standard rate is 8s. 3d. in the £, the number who actually pay it is relatively limited because the great majority of people who earn the incomes which involve the standard rate have taken from it two-ninths in earned income relief.
Therefore, will a family man paying the standard rate, but subject to the two-ninths earned income relief, have the whole amount clawed back? This is of considerable importance. If it is only when he reaches the standard rate that the whole amount is clawed back, the great majority of families will gain from the Bill and only the person with a substantial amount of "unearned income "—to use that unfortunately legal but absurd phrase —will have the whole amount clawed back at the standard rate. If a family man receives only earned income, then it will be only when he pays a substantial amount of Surtax that he will reach the equivalent of a standard rate.
Therefore, the Government, who have brought forward this great idea of selectivity, must say exactly how it will work and at what level of income all the money will be clawed back, and also, perhaps, how much will be clawed back at the average level of income. Perhaps they would also tell us whether, for incomes paying tax above the standard rate—in other words, those of Surtax payers— more than the total amount will be clawed back.
We are entitled to a clear exposition of how this technique of selectivity, upon which they have put so much emphasis, will work. I have read and re-read the Budget statement about this and I am still not clear. I hope that the Minister can help me.

§ Mrs. Hart
I can help the Member to a certain extent, but he will recognise that a great deal of what he raised is a matter for the Chancellor of the Exchequer or the Chief Secretary to the Treasury rather than for me. Some of these questions were discussed in Committee on the Finance Bill a week or so ago, particularly the point about Surtax-payers and the general question of claw-back. I shall not go over the ground which was covered there.
947 As the Chancellor made clear—and this is one of the aspects of the taxation problem—increased family allowances and the claw-back system mean that a small number of people, 300,000, will now become liable for tax who were not liable before. The problem here, however, is not so serious as it is supposed to be by some because the number who will gain from family allowances will far outweigh the number of those who will now pay the tax. No one paying standard rate will suffer claw-back. This means that standard rate taxpayers will pay exactly the same in extra tax as they receive in family allowances.
I cannot answer the hon. Member exactly for one has to set up an hypothesis of a particular family, with a particular number of children, in particular circumstances, with particular obligations before one can decide on the precise tax liability irrespective of the amount taken back for family allowances. So I can give only a rough figure. The breakeven point is just around average earnings. Below that there is a paring down to a point at which the whole of the full value of the family allowance is kept. Beyond that point are the poorer families we are trying to help who are at or just below supplementary benefit level. Above that, varying amounts are taken back according to the particular wage level within the income bracket.
I hope that that will assist the hon. Member, but, I fear, not entirely.

§ Mr. Worsley
The right hon. Lady said that the break-even point is at the point of average earnings.

§ Mrs. Hart
Around.

§ Mr. Worsley
Around that point. The tax paid at that level is considerably lower than standard rate because it is standard rate less earned income relief. The right hon. Lady started by saying that the amount for those paying standard rate of Income Tax would break even exactly, but in the second part of her speech she said that the average earner broke even at that level.

§ Mrs. Hart
First, I was talking about the small number, the 300,000, brought into tax for the first time. The second part of the question is that earned income relief is, of course, taken into 948 account in clawback. I have been given an example which penhaps will help the hon. Member. It depends so much on particular circumstances, the particular tax liability and dependants of all kinds.
Take the example of a man with three children without any unexpected tax liabilities or commitments of any kind. He would cease to get any of the value of the increase in family allowances on earnings of around £1,252 a year. One can give only that kind of break-even point in those sort of terms. Otherwise, one has to take the assessment of each individual taxpayer into account in addition to the size of family. One cannot make a generalisation.
The position of the Surtax payer was made clear in Committee on the Finance Bill. My right hon. Friend the Chief Secretary made clear that some Surtax payers will find that the reduction in their tax allowance will take from them as much as, or more, than they receive from the whole of the family allowances net; that is, after tax. The point at which this happens is about £10,000 a year. Up to that point the Surtax payer is a little better off from family allowances, but above it it would pay him to give them up altogether. He can do this by sending the family allowance book back to the Family Allowances Branch of the Ministry in Newcastle and saying that he does not want the allowance. The office can send him a letter of acknowledgment which he can show to the tax office as proof of non-receipt of family allowances. The tax office will then not make any reduction of tax allowances in respect of the family allowances which he has given up.
I am sorry that I cannot give a more precise answer to the particular question about the break-even point, as the hon. Member would like me to do. I think that he will appreciate why this is impossible and why one can generalise only very broadly about the break-even point.

§ Mr. Worsley
I thank the right hon. Lady for the care she has taken in answering these difficult questions. The very complexity of her answers has indicated how complicated the scheme is and has thrown a great deal of doubt on its effectiveness as a means of doing the job.

§ Mrs. Hart
If it were done in another way, by means-testing family allowances, the complexity would probably be a hundred times greater.

§ Mr. Worsley
In all seriousness, I ask whether the right hon. Lady will consider setting this out in a publication, or in some other way, in more detail, so that we may be able to follow it. There has been a discussion in the Finance Bill Committee and we have had a discussion here, but it would be a great help to many of us, if she is advocating this particular technique of selectivity, if she were to produce a paper showing how this is working out.