HC Deb 13 May 1969 vol 783 cc1228-309

3.48 p.m.

The Chairman

The first Amendment selected is Amendment No. 1. Henry d'Avigdor-Goldsmid.

Mr. John Pardoe (Cornwall, North)

On a point of order. I am sorry to take up the time of the Committee at this stage, but I have two points of order that I particularly want to raise.

The first relates to the Clauses at the head of the Order Paper—Clauses 7, 8 36, 38, 43 and 44, and Schedule 6. I am aware that we have already voted on their being committed to a Committee of the whole House, and that one speech was allowed against, but, as a humble back bencher, I still have no idea as to how the decision was reached, and I would like to have an explanation.

The Bill has 53 Clauses and 21 Schedules, which include many of great importance to my constituents. Of a total of 74 Clauses and Schedules, only seven have been selected for debate in Committee on the Floor of the House—

The Chairman

Order. The hon Gentleman is seeking to argue the Motion already disposed of in the House. The House has resolved that these Clauses and Schedule 6 shall be taken on the Floor of the House. They are in the Orders of the Day, and we must proceed with them now.

Mr. Pardoe


The Chairman

Order. I hope that the hon. Gentleman will not enter into argument on this point.

Mr. Pardoe

I merely seek enlightenment, Mr. Irving, for the benefit of my constituents. If I do not know how the decision was reached—and we have never have a word of explanation—how can they know?

The Chairman

Order. The hon. Gentleman cannot seek the answer in Committee.

Mr. Pardoe

On my second point of order. I am well aware that I am not entitled to question your selection, Mr. Irving. But I seek enlightenment as to how it happens that when there are 12 Amendments on the Notice Paper to Clauses 7 and 8, six in the names of myself and my hon. Friend the Member for Colne Valley (Mr. Richard Wainwright) and the rest in the names of Conservative Members, the Conservative Amendments have been selected and the Liberal Amendments have not. I realise—

The Chairman

Order. We cannot discuss this matter in Committee. A number of the hon. Gentleman's Amendments are out of order. If he would care to consult me privately, I shall try to help him.

Mr. Pardoe

Further to that point of order. I have already taken the advice of the Table Office, which is the only office to which a back bencher has access. I am reliably informed that that is very much open to dispute.

The Chairman

Order. The hon. Gentleman is really challenging the selection of the Chair. If he wishes to consult me privately, I shall be happy to see him.

Sir Henry d'Avigdor-Goldsmid (Walsall, South)

I beg to move Amendment No. 1, in page 13, line 39, leave out '41.25' and insert '38.75'.

I am grateful to the representative of the Liberal Party for allowing me to open the debate.

The Amendment is in the names of my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod), some of my hon. Friends and myself. By this cabalistic means, the party to which I am happy to belong wishes to indicate its desire that the rate of income tax should be reduced by what is commonly known as 6d.

When the Chief Secretary to the Treasury announced on 6th May the decision that some Clauses were to be taken on the Floor of the House, as reported in c. 408–409 of HANSARD for that date, I felt that his statement did not receive the consideration it deserved. I was rather surprised that my hon. Friend the Member for Cities of London and Westminster (Mr. John Smith) found it necessary to object, and divided the House against the Motion. If he had won that Division the effect would have been to return the entire Bill upstairs.

Despite the many very interesting interventions he made last year, I am surprised that my hon. Friend wishes to revert to the conditions upstairs, which at times I found comparable to a magistrates' court in Calcutta a century or so ago, and just as likely to produce a bad result.

In his speech of 6th May, my hon. Friend had his adverbs a bit wrong. I do not comment on where he received his education. He referred to … a Committee of 30, of which perhaps 12 will be Opposition Members. They will consist of a Whip, three Front Bench spokesmen and four crypto-Front Bench spokesmen …"—[OFFICIAL REPORT, 6th May, 1969; Vol. 783, c. 409.] I suppose that I come under the last of those headings, but my hon. Friend has his adverbs wrong. He is a crypto-Front Bench spokesman although at present he sits on the back benches—

The Chairman

Order. I am having difficulty in relating the hon. Gentleman's remarks to the Amendment.

Sir H. d'Avigdor-Goldsmid

I would like to make it clear that I am a crypto-back bench Member, resting temporarily on the Front Bench. I would say that I was a pseudo-Front Bench spokesman, were it not for the fact that the transparency of my disguise would deceive no one.

The theme for our debate on income tax is best set by an item I saw on the Exchange Telegraph tape on 8th May, headed: Wife threw tax forms on the fire". A gentleman who found himself in trouble in the bankruptcy court had said: I just don't understand the forms they send me and my wife throws them on the fire. It's no use getting angry with her: she just throws a tantrum and makes things worse. I do not want to draw any parallels, but I cannot help feeling that some of the troubles with which we are now beset, to which reference was made at Question Time, might owe something to the Chancellor, whom we are pleased to see here, perhaps throwing a tantrum in Bonn last autumn. I gather from the Answer given by the hon. Gentleman at Question Time that the price we are to pay for that will be hard and disagreeable.

In moving that we should take 6d. off income tax I am aware that this involves a notional liability of £280 million to £300 million. This would include the consequential reduction on the allowance rates. It may seem a very large figure, but I hope to satisfy everyone that, in view of the wide range of the Chancellor's forecasts, and the wide range of error which they contain, a mere reduction of £300 million is really nothing to speak of. In Table II of the Financial Statement and Budget Report 1969–70, we see that there is a transfer to the credit of the National Loans Fund of £2,457 million, which is a staggering figure.

I would be more impressed with it were I not also conscious of the forecasting errors, which have been conveniently summarised for us in Table 12 of the some document. For instance, last year the Inland Revenue fell short by £126 million on its forecast whereas the Customs and Excise was no less than £589 million in error. I am aware that of that £589 million. £330 million represented import deposits, which, although they had been in print, were not included in the right hon. Gentleman's Budget Statement.

4.0 p.m.

Still, the discrepancy is very large and it suggests that something is wrong with Government forecasting. As the right hon. Gentleman, in his Budget last year, took no less than £923 million from the taxpayer, to which he added a further £250 million on 22nd November, and as he now proposes to add a further £340 million, it suggests that we need attach no great weight to his Budget judgment. No doubt he has to worry about whether he should extract £300 million or £350 million, but I am not impressed by the fact that this Amendment would deprive him of about £300 million of notional revenue.

I say "notional revenue" because I see no reason to suppose that we will not have a shortfall this year as we did last year. If we look at the results for 1968–69, both income tax and surtax show a considerable shortfall. Against an estimate for that year of £4,401 million the out-turn was £4,337 million, which is £64 million difference, that is about 1½ per cent. Some people may say that beating the income taxpayer is flogging a dead horse. I would not use that language, because it is one thing to flog a dead horse, which is a harmless perversion, although the noise may irritate the neighbours, but it is quite another thing to flog a dead-beat horse. This is not only cruel, but it is also useless, because it may irretrievably damage the horse for the future.

Finally, if anyone indulges in that habit, he gets into trouble—if he is a jockey with the stewards, or if he is not competing in races, with the R.S.P.C.A., and very properly. In continuing the ridiculously high indirect taxation rates the Chancellor is flogging not a dead horse but a dead-beat horse, and the consequences are not always the best that can be devised.

Why has this situation developed? If we compare 1964, the last year of Tory rule, with 1968, about 2 million more people have now been brought into taxation. During the years of Tory government we were able to relieve a number of people of tax, but now 2 million more have been brought in since 1964. Direct taxes on personal income which represented only 9.7 per cent. of expenditure in 1964, have risen to 12.9 per cent., that is, they are about one-third higher.

If we include the employees' contribution to insurance schemes they have gone from 14.7 per cent. to 18.9 per cent., an increase of about 30 per cent. As 2 million more people are brought into the Chancellor's net, it is no wonder that there is very wide resentment. Further, and these are the really damning figures which were brought out by my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) in the Second Reading debate, the proportion of rates and taxes and contributions paid in the domestic product has risen from 33.8 per cent. in 1964 to 42.3 per cent in 1968. It will be higher this year, because we do not yet know what contribution is to be exacted in consequence of the rise in pensions forecast for the end of the year.

No accurate forecast can be made for 1969, because we are still without that information, but I am confident that it will certainly not show any reduction on the 1968 figures, but will be higher. In other words, we may well be in a situation where 45 per cent. of the gross domestic product will go in rates, taxes and contributions. This is a fantastic sum for a Western nation.

What is the reaction? The effect of this has been that very large numbers of taxpayers have gone overseas. I am more concerned with the lot of those who stay at home and pay the taxes. I find that a study of the financial advertisements sometimes gives one quite a good idea of what people are doing with their money. Clearly, financial advertising in the Sunday papers is not cheap; clearly, it is worth while incurring the expense of these very large, full-page advertisements to gather the various crumbs from the taxpayers.

These advertisements are not directed to surtax payers. They are directed more to the more unsophisticated element. Some of these advertisements are really grotesque. Only 10 days ago there were several advertisements in one very important paper. One offered, as its main attraction, spread over a half page, an improvement in the capital value of the £ of 125 per cent. since 1st January, 1967. In very small print it advertised a yield of 1.2 per cent. This was a very respectably presented appeal. There were others which, to my mind, were less respectable. Another sought to protect one's £ in a growth equity plan. This advertised no yield whatever.

There was a third which simply said that if one had invested £100 with the firm on 6th March—

Sir Gerald Nabarro (Worcestershire, South)

On a point of order. As this speech is to set the tone and the tenor of the debate, and, I fancy, the rules of order for the remainder, can you rule, Mr. Irving, whether it would be in order for me to follow my hon. Friend on the intricacies of investments in unit trusts and their presentation in Sunday newspapers?

The Chairman

Order. I think that the hon. Gentleman probably realised that I was listening with particular care to his hon. Friend. I am having a little difficulty in relating the hon. Gentleman's remarks to the Amendment, which deals with a reduction in the rate of income tax. He may well be producing the link in the moment. Perhaps he would help me.

Sir H. d'Avigdor-Goldsmid

I am grateful to you. Mr. Irving, because despite what my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) thinks, this is very germane to my argument, which is that the mounting weight of taxation has made people, particularly the relatively modest earners, feel desperate. They are, therefore, particularly prone to accepting the lures of what I would say is less than scrupulous financial advertising. This theme is worth developing, whatever my hon. Friend thinks, and I hope that you will bear with me for a few minutes while I do so.

The particular item to which I was animadverting, spoke of an opportunity in the U.S.A. and indicated that £100 invested on 6th March, 1964, would have been worth £238 on 1st May, 1969. There was no price to put on units and no yield advertised. This is something approaching the technique of the South Sea Bubble.

There was another which, in my opinion, put all the rest into the shade. This was headed: How to make a small fortune on the stock market. It said that the equity unit had increased in value 226 per cent. in less than six years. No yield was indicated, for the good reason that none was offered. Unsophisticated investors are being invited to put their funds, and modest funds at that, into the keeping of those who do not see any obligation to offer investors any income. My information about this advertisement is that these so-called units were sold by high-pressure methods—

The Chairman

Order. The hon. Gentleman is not making the link between what he is saying and the Amendment very clear. I think that he ought to come more clearly to the Amendment

Sir H. d'Avigdor-Goldsmid

The point I am trying to make is that some very expensive advertising is being carried on, to appeal to small investors, and it is being done because these investors feel that they do not have a chance under present taxation of accumulating any funds. I do not see that that is at all divorced from the Amendment which has to do with the growth of taxation, and income tax. I am suggesting that a market for these attractions is found because the small investor with some funds, seeking financial independence has no encouragement to find it within the confines of our present taxation system.

That is why they are driven to pursue illusory, in many cases, capital gains. I hope that you, Mr. Irving, will allow me to complete the point. It will not take long. I should like to have the opportunity of making it clear that this is the sort of distortion in the economy which comes from a very high and unrelenting tax system.

My information is that the loading charge—the amount taken by the promoters—is 85 per cent. of the first year's premium, 39 per cent. of the second year's premium and 25 per cent. per annum thereafter. This advertisement appears in a reputable paper No yield is advertised, and, therefore, I have no comments to make about that, but it suggests to me that people must be greatly pressed to think that they will make money out of a scheme sold in that way.

This is the distortion which comes into the economy through high taxation for people who live here. Some people move, and on international comparisons, which are always misleading, but which still stand up to pressure, a married man with two children under the age of 11, which is a reasonable unit to work on, earning £2,500 pays 22.1 per cent. of his income in taxation in the United Kingdom and 8 per cent. in the United States. If he is earning £5,000—and he is still not in the surtax range but is an income tax payer—he pays 28 per cent. in the United Kingdom and 14.9 per cent. in the United States.

It is not worth dealing with the situation in other countries—there are always balancing factors—but the fact remains that, for the rising young man with a career to make, there are great attractions in being subject to United States and not United Kingdom tax procedures.

Professor Henry Johnson—

The Chairman

Order. General references may be made as incidental to the main argument, but by his Amendment the hon. Gentleman seeks to reduce the standard rate of income tax. He is a long way from it.

Sir H. d'Avigdor-Goldsmid

I am directing my argument, Mr. Irving, to the taxpayer who pays the standard rate. I have kept away entirely from the taxpayer who pays above the standard rate—in other words, the surtax payer. I respectfully submit that that is perfectly fair.

Professor Henry Johnson, in his inaugural lecture at the London School of Economics—it goes back a year or two, but it was quoted by Samuel Brittan in an article in the Financial Times—said: 'In the modern world a university education is an internationally transferable item of human capital; but in Britain educational policy makes the State bear the cost of it, while the country relies on a combination of state administration of low salary scales for educated people, and steeply progressive income taxation, to recoup the cost'. But the cost is only recouped from those who stay. The brain drain is very difficult to analyse, but, according to the Jackson Report, quoted in The Times of 12th January, 6,200 engineers, technologists and scientists left in 1966 with 2,000 to 3,000 doctors and teachers. I hesitate to suggest that the brain drain has dried up since. I should have thought that if figures were available they would show that its intensity was being maintained—in other words, youngish people with a career to make are seeking it abroad.

This is not confined simply to the managerial classes. I was told by someone who is intimately connected with a very large vanadium works in South Africa that he is having no difficulty in recruiting welders here. We know the extent to which our own nuclear energy programme is held up and distorted by the absence of welders. Welders are not suratax payers, and they are going to South Africa. This is the sort of distortion caused in our economy by continuously high taxation.

4.15 p.m.

I do not need to rub in too hard today's wretched trade figures. The Financial Secretary had a fairly tough time at Question Time, and I should like to leave him in peace for a little longer. However, the badness of the trade figures reflects the fact that there is no improvement in the financial condition of the country, despite the vast efforts which have been made for the betterment of our balance of trade. I am sure that this goes back to the question of incentive and taxation.

I have suggested that we are losing people to overseas countries who would make a great contribution to our economy. Estimates have been quoted that the people who have gone overseas would have contributed £50 million a year in taxation to our economy. I know that this point falls more under a later Clause and I will not develop it, but in this country the income tax payer finds it impossible to acquire a financial independence for himself. He does one of two things: either he is tempted to go in for the hairbrained financial schemes which are so widely advertised, or he decides to go overseas, a decision being taken all the time. The many individual decisions which are taken add up to the sort of trade figures with which we are confronted monthly.

We suggest in the Amendment that the rate of income tax should be reduced by 6d. not because there is any real hope of the Government's accepting it, but as an indication of the view of our party that the present punitive rate of taxation are the main obstacle to the growth and development of our country and that to maintain these rates indefinitely can do us no good. It has done us no good over the five years that the Labour Party has been in office. It shows no sign of having solved any problems for us.

The poet whose name I share said: Ill fares the land, to hast'ning ills a prey, Where wealth accumulates, and men decay". Perhaps I shall be allowed to add to that: That land fares worse in times like these, where taxes mount and men go overseas.

The Chairman

May I point out to hon. Members, although no doubt they know it already from the list of selection, that we are taking at the same time Amendment Nos. 2, 3 and 4.

Mr. Robert Sheldon (Ashton-under-Lyne)

We have heard from the hon. Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) a further extension of the mythology of high taxation and the supposition that this is one of the main rather than one of the minor aspects of the brain drain. There are so many areas in which misconception arises that I have been tempted very strongly to ask my right hon. Friend the Chancellor of the Exchequer to conduct the kind of research into taxation that I have been pursuing for some time. I should like to refer to this point in my remarks.

One matter which I wish particularly to take up at the beginning of my speech is the effect on risk taking which is so often stated to be one of the damaging effects of high rates of income tax. Like most hon. Members, I agree that the level of good risk taking is probably lower in this country than it should be.

The argument is used that a person who spends £1 in trying out a risk has only 1s. 9d. in the £ left to him if he pays income tax and surtax if he is successful in his venture, whereas if he is unsuccessful he will lose the £1. According to the argument, the odds are weighted against him. If that were the only factor, it would be a serious one and one which, despite any commitments we might have to our philosophy of taxation, we would have to take note of and change drastically.

In my view, however, that is a false comparison, because the person who pays high rates of taxation is able to balance out the risks in which he is unsuccessful against the income which he receives. It is very rare to find somebody gambling with the whole of his wealth on one venture. To do so would in nearly all cases be an example not of good risk-taking, but of foolish risk-taking.

The ordinary person with a modicum of prudence takes his risk with the kind of money that is related to his income. From what I see of what goes on among those who take this risk, they take a risk which is balanced by a similar kind of income which is taxed in the same way. Therefore, any risk capital which is unsuccessful is a taxable loss. That is what happens in the real world in nearly all cases.

Clearly, income tax, like any other Government measure, cannot satisfy every case, but it satisfies the most important and the most frequent cases. That should be our aim. Therefore, I do not think that as a result of the Clause the amount of good risk-taking will be much less than it should be. There are, of course, other reasons, but I do not regard that as a particularly valid reason.

Sir Tatton Brinton (Kidderminster)

The hon. Member's argument seems to me to be that there are circumstances in which a capital loss made by a private individual can be set off for tax purposes against his annual income. I am not aware of any such circumstances. Will the hon. Member elaborate, or have I misunderstood?

Mr. Sheldon

The hon. Member will surely be aware that any entrepreneur who undertakes an associated business, or even a particular kind of transaction or deal, or who shows initiative in his ordinary business, would be able to offset that loss against the income derived from a similar kind of profit. This possibility would be open to him

Sir Cyril Osborne (Louth)

The hon. Member says that a man who risks £1 to gain the extreme 1s. 9d. profit is, therefore, betting against himself to the extent of about 11 to 1. He then said that the person in question was making profits on another deal to offset the loss on the first deal. How can the hon. Member assume that someone who is stupid enough to make a loss on one deal will make a profit on another?

Mr. Sheldon

I am talking about the real world, in which a person who pays income tax and surtax at this kind of level does not risk all his capital on one venture. This does not happen frequently in the real world. What is necessary is to quantify for each individual the level at which he takes the kind of good risk which one hopes that he will take, which can be of benefit both to the individual and his firm and, ultimately, to the country.

The point made by the hon. Member for Walsall, South about the need to encourage the young man is something to which we all pay lip-service, but it must be remembered that one feature concerning that young man is that his income is not very great. In these debates we tend frequently to overlook this. If his income is not very large, the tax which he would pay would not be likely to be large. Therefore, when he takes the risk that we hope he will take if he has a good idea or a new method of manufacture, distribution or anything else, it must be remembered that the operation of the income tax lever such as I have described does not harm him so much because his income tax is not so high.

Mr. John Hall (Wycombe)

Would not the hon. Member agree that the young executive in, say, the £2,500 a year middle rank or above is likely to be taxed more heavily in income tax alone in this country than in comparable industrial countries overseas? That is one reason why he would go abroad. Is not the second reason that the young man who believes his potential earning power to be considerable would not stay here when he knows that he would be heavily penalised by realising that potential?

Mr. Sheldon

He may go abroad for all sorts of reasons—to get advantages in terms of the work he is doing or because organisations abroad might appear to him to be better than those in this country—but the Jones Report showed that he is not likely to do it for income tax reasons. I thought that knowledge of the level of income tax in other countries had become so diffused in the House of Commons and in this country that we would not be having the same discussions as we had last year and the year before.

We now have the figures. In the highest surtax levels—although we are not concerned with surtax in this debate—the argument that we are highly taxed is true, but in the middle range we are not so heavily taxed. It would be a great help to improve the quality of debate by understanding some of the obvious things that we should by now have absorbed, so that we may then discuss some of the more important and possibly more controversial matters which occupy our attention at this stage on taxation.

For the young man the income tax disadvantage of taking risks is very much reduced, because he is likely to have neither much capital nor income. Therefore, the disincentive effect for him of taking risks, because he has a low or modest level of income tax as compared with the surtax payer, is much less of a disadvantage in taking the risks that we hope he will take.

On the other hand, the wealthy man who has sources of income—I do not say in 100 per cent. of instances, but in the large majority of cases—is able to offset his losses against his other income. For these reasons, we must understand that although there are certain big disadvantages of income tax, this does not happen to be one of them.

It is just as well that this argument should be conducted on a rather higher level than sometimes we have had in the past and that some of the important contributions to this study should be absorbed by Members of the House of Commons, otherwise we will never improve taxation as we would all like to do.

That leads me to the rôle of the Treasury in carrying out the further investigations. If I believed that those investigations were no more to be understood than the investigations of the past, I would see no case for urging my right hon. Friend the Chief Secretary to carry out the kind of research activities which I am encouraging him to undertake. There would be no point in it. If the results of the investigations did not enter our heads, there would not be the improved level of discussion which could result in decisions beneficial not only to those who pay tax, but to the country generally. It is only by absorbing some of these elementary facts that we can make progress in our understanding of the value, as well as the limitations, of the use of income tax as a tool for raising revenue.

I believe that there is a legitimate area of research into income tax. The Treasury has shown itself to be very slow in understanding how it should become involved. A large number of private research efforts have been carried out with modest budgets, nothing like the kind of budgets that my right hon. Friend, if he felt more seriously about this than has been felt about it in the past, could bring to bear. He has great resources not of money alone, but of experience.

The P.E.P. report on personal taxation incentives and tax reform by Brown and Dawson was a useful study, but its value is limited by the personal experience and understanding of the people concerned The Inland Revenue has the great advantage that it has an experience which is unrivalled in the country. No one can match the Inland Revenue in its depth of understanding of taxation and the rôle of income tax. If the Inland Revenue saw it as its duty to explain to the country how disincentives operate, then we should be able to have much more informed debate. This has been done by other people who have not had the resources of the Department of my right hon. Friend.

I will refer briefly to the letter which I have received from the Chief Secretary, and which I have his permission to quote. I wish to express by gratitude for the full reply. This is the first document to take the argument substantially further forward, and for this I am very thankful. After quoting six other kinds of research and saying that they are subject to certain limitations, which I accept, the Chief Secretary, referring to the results of previous research, says this: This is all very discouraging: it does not get us very far. Nevertheless, we have felt it worthwhile to spend some time on a feasibility study of our own, to see if we could find a way out of the difficulties which have beset previous investigators. My right hon. Friend then goes on to say how the feasibility study was carried out. I am grateful for this; it is more than any previous Chancellor of the Exchequer or Chief Secretary to the Treasury has ever undertaken in the past.

4.30 p.m.

Mr. Patrick Jenkin (Wanstead and Woodford)

The hon. Gentleman will have heard the exchange between the Chief Secretary and myself at Question Time. May we assume that the hon. Gentleman has no objection to the letter being made available to the Committee? Would it be possible for it to be duplicated quickly so that hon. Members in all parts of the Committee may have the benefit of the Chief Secretary's wisdom?

Mr. Sheldon

I have explained to my right hon. Friend the Chief Secretary that I have no objection. I would be happy to see the letter placed in the Library, or made available to hon. Members, as it takes the argument a little further forward, which is valuable.

The Chief Secretary goes on to say: My conclusion, therefore, on the basis of the results of previous studies and of our feasibility study is that there is little point in commissioning further research work, until a way can be found of isolating the effects of taxation from other factors which condition the behaviour of taxpayers. I had hoped for something better. A feasibility study suggests that a junior civil servant was given the task—and I do not say this disparagingly—of trying to find out his own opinion on the extent of the further information and understanding which could be obtained. I am thinking of more than this. We need to bring in people who have carried out this kind of investigation. I am not saying that the right people are those who started the feasibility study. May I ask when the feasibility study got under way?

I may be doing my right hon. Friend an injustice, and, if so, I apologise, but I am not fully convinced that it was much more than a one-man effort rather than organised teamwork to discover the relationship between incentives and taxation, which my right hon. Friend the Chancellor of the Exchequer used so prominently last year in his Budget speech as one of the main reasons why he had to make an encroachment upon indirect taxation instead of on direct taxation.

When making a decision involving the use of many thousands of millions of pounds, even although the arguments may not be conclusive, even marginal assistance from research work is of value. We should be trying to understand how the system operates, and it is worth spending a tiny fraction of that vast sum of money to try to get such an understanding. I plead once again with my right hon. Friend to make an examination of the possibilities for further research on the incentive effects of taxation.

The common criticism, which I am sure we shall hear ad nauseam from hon. Gentlemen opposite, is that the Labour Party is the party of high taxation—

Sir G. Nabarro

Very true.

Mr. Sheldon

The hon. Gentleman says that it is very true, but he makes the allegation without understanding the causes behind the rise in income tax from 7s. 9d to 8s. 3d. in the £.

The Labour Government is a different kind of Government from a Tory Government, with different objectives. One objective which is not shared by hon. Gentlemen opposite is that we think that in an expanding society public expenditure commands a high place. Had we been able to rely on the general buoyancy of revenue caused by inflation and growth, more revenue would have come from income tax without it being necessary to raise the rates. With general rising prosperity producing a greater amount of revenue, there is no difficulty in raising the amount of money needed for increased public expenditure.

We are committed to increased public expenditure. This is one of the distinguishing factors between us and the Tories. There are not too many important points of principle—not as many as I would like to see—dividing the two parties, but this is still one important area of difference between us. One factor behind the rise in income tax is that we have given high priority to public expenditure, and the other is that the growth rate has been slower than we had hoped for.

If either of those factors had been absent there would have been no need to increase income tax. With slow growth income tax rate could have been maintained with less public expenditure. A much higher level of taxation was necessary to cover the slow growth and the need for greater expenditure on the public services. It is because we have not had both these items that we have had to increase income tax.

Ideally, we want a prosperous economy so that we can get back to the idea that income tax provides by far the greatest bulk of the revenue. Income tax is the fairest tax. It is only when one gets to such levels as they are at present that one needs to think seriously about other forms of taxation. We have therefore been forced to consider all sorts of other forms of taxation, whether it be S.E.T., value-added tax, or whatever it may be, because we are not getting enough by income tax and because the economy is not sufficiently buoyant.

One reason, among many, why we need growth in this country is that we need growth for public expenditure so that we may reduce taxation. We should depend more on income tax as the fairest kind of tax that exists, without having excessively high rates which themselves lead to problems. Another reason is that when one gets to the situation that one is not relying upon income tax quite so heavily as on other taxes, just because the level is high, then one starts to take into account other kinds of taxation which are not so fair and which do not redistribute income in the way in which I should like to see it redistributed.

One of the results over the past three or five years is that, so far from there being a redistributive effect due to taxation, it has gone the other way. There has been an increase of wealth at the higher levels and a reduction at the lower levels. This is directly attributable to being unable to make income tax the main redistributive weapon which it ought to be.

To take the figures between October, 1964, and October, 1968, the situation has changed a little since then, but not sufficiently to vitiate the figures which I shall seek to give. We see from the Financial Times index, in relation to 500 shares during that period, that there was an increase of 52 per cent. With capital gains tax at the highest level of 30 per cent., there was a capital increase of 37 per cent. The ordinary person, during those four years, could make 37 per cent. tax-paid. During the same period average earnings rose in real terms by 28 per cent., retirement pensions by 33 per cent.

As I have said, average earnings rose by 28 per cent. and retirement pensions by 33 per cent. They are not the best investment. There are better investments in such things as chattels, artistic properties and real estate.

The importance of this is that it shows that in a period where the Government were committed to greater redistribution there was not the extent of redistribution which was to be expected since we were unable to use the redistributive effects of income tax because the levels of income tax were so high. This is the interesting happening over the last four years. All the other measures brought in by the Government which were of value in trying to increase the redistribution of wealth were not sufficient to compensate for the lack of redistributive effect caused by the inability to use income tax in the way in which it should have been used.

One great hope is that during a period of greater growth we can once again come to place reliance upon income tax, which is a fair tax in its redistributive effect as being the best kind of taxation open to us in a society in which, unfortunately we still need to raise large sums of money so as to provide services for people who require them.

[Mr. HARRY GOURLAY in the Chair]

4.45 p.m.

Sir G. Nabarro

My Amendments Nos. 2 and 4 have been linked with Amendments Nos. 1 and 3, which have been set down by my right hon. Friend (Mr. Iain Macleod). The essential difference between us is that my right hon. Friend seeks a reduction in the standard rate of income tax from 8s. 3d. in the £ to 7s. 9d. in the £, or from 41¼ per cent. to 38¾. per cent. I seek a reduction from 41¼ per cent. to 37½ per cent. I am a little more "bullish" in my approach to direct taxation than is the remainder of my party.

This is the fourth consecutive year in which I have been privileged to set Amendments on the Notice Paper to reduce direct taxation. In 1966, I was rather a pariah in that the majority of my party did not come with me. In 1967, the majority of my party were with me and in the ensuing two years they were with me although there were marked differences in effect.

What every speaker in ever debate on income tax places insufficient emphasis upon is the extraordinary buoyancy of the tax to raise more and more money every year. My hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid), in opening the debate, alluded to the yield of income tax in 1968–69 at £4,437 million and seemed to be a trifle disconsolate that it was £64 million short of estimate, and ought to have been £4,401 million I do not castigate the Chancellor for that. It was an extremely accurate estimate, having regard to the amount raised by the income tax.

What appeals to me at the moment is the incredible buoyancy of the income tax which is to be expected in the fiscal period which we are dealing up to 5th April, 1970. The year 1969–70 is estimated to increase by a further 12½ per cent. or £544 million to £4,881 million. And it is only a couple of years ago that, in a debate on the Finance Bill, I alluded to a figure of £3,600 million.

Although the Chancellor says that he keeps the rates of income tax constant he always neglects to observe—as has every Chancellor to whom I have ever listened over the last 20 years—that whereas wages rise apace, and more and more wage and salary earners are brought into the income tax net progressively at the higher rates of tax taking year with year, he will always get a big upsurge in income tax collected without moving the rates upwards.

I come to the speech of the Member for Ashton-under-Lyne (Mr. Sheldon). His speech was characteristic and not dissimilar to his annual speech on the income tax, notably on two grounds: first, for its longevity and, secondly, for its muddleheadedness. He is the leader of that back bench school of thought which has groped for office in Labour Governments, but which has never achieved it. It is the school which says that there is no relationship between levels of direct taxation and incentives.

Whatever may be said about the right hon. Gentleman the Chancellor of the Exchequer, he has enough commonsense to know that that argument is quite false. I have followed for many years the Chancellor's speeches on the influence of income tax and surtax and have always been impressed that the one member of the Labour Cabinet since 1964 who understood that there was some relation between direct taxation and incentives was the Present Chancellor of the Exchequer.

No doubt that derives from the fact that he has much personal experience, not of business or commerce or trade or industry but of authorship, from which he has earned large sums of money—

Sir Derek Walker-Smith (Hertfordshire, East)

And from jolly good books.

Sir G. Naborro

I agree: splendid books. I always recommend "Mr. Balfour's Poodle" to any serious student of politics—

The Chancellor of the Exchequer (Mr. Roy Jenkins)

indicated dissent.

Sir G. Nabarro

I am sorry that the right hon. Gentleman dissents. He should rise in his place, prinking and preening that I recommend his authorship. I earn royalties for him in this respect, since I am not ashamed to say that I recommend his authorship. It is splendid. He has earned a lot of money from it in in his time and he understands the influence of direct taxation.

The right hon. Gentleman brought it out in a curious way in his Budget speech this year. In a passage dealing with income tax, he said: I referred last year to the fact that, whatever the evidence or lack of it, high direct taxation is widely believed to be disincentive, and that this could have a stultifying effect on the development of the economy. That was one reason why, with considerable difficulty, I avoided increases in direct taxation last year, and why I am not proposing any now. Indeed, I have carefully considered whether, even in a year as difficult as this, it would be justifiable, for incentive reasons and for the encouragement of savings, to mitigate slightly the rates of tax on high earned income."—[OFFICIAL REPORT, 5th April, 1969: Vol. 781, c. 1031.] That is the lie direct to the speeches year after year of his back bench friends. The right hon. Gentleman concedes, though not as powerfully as I plead, that there is a relationship between the levels of direct taxation and incentives, throughout our competitive society.

I hope that the Committee will not waste too much time on this letter written by the Chief Secretary to the hon. Member for Ashton-under-Lyne, trying to search out those imponderables, said to be incentives or otherwise, connected with levels of taxation. They cannot be established, any more than it can precisely be established why people emigrate. Some emigrate because they want a sunny clime, some because they think that their children will get a better schooling in South Africa or Australia, some because they prefer the societies being established there. Many go because levels of taxation are less onerous, but not, by any means, the majority. Studying why people emigrate—their personal idiosyncrasies and preferences—seems an unrewarding theme and a waste of the time of Treasury officials. Although I shall read the letter alluded to by the hon. Member with great interest as an academic exercise, I do not attach much importance to it.

I want to make two major points, the first of which stems from the speech of my right hon. Friend the Member for Enfield, West, which I have often read in the intervening years, because it is an excellent speech, on 6th June, 1967. In considering income tax, the Committee should have some regard to what my right hon. Friend said two years ago. He began: We come now to what we regard as the most important Amendment. My right hon. Friend was quite unequivocal about it. They were the Amendments about income tax and surtax. My right hon. Friend has been utterly consistent in everything that he has said in the House, at party conferences, in speeches in the country and in his newspaper articles in supporting the belief that, as a first priority in dealing with taxation when we resume the reins of Government, we must reduce the rates of income tax and surtax.

My right hon. Friend went on: The first question is whether there is a need for a reduction in personal direct taxation such as we propose. The Chief Secretary, speaking on the Second Reading of the Bill on 2nd May, addressed himself directly to this point. He gave the figures of total taxation, and he included social service contributions and local rates, as a percentage of the G.N.P. at factor cost. That is fair enough. He then used the average figure for three years—1963–65. But this enabled him to use two Tory years to counterbalance the additional taxation which was imposed in 1965. If we look at the individual years, we clearly see why an Amendment such as we propose is necessary. Taking the Chief Secretary's points alone, in 1964 the percentage figure for the United Kingdom"— that is, the added effect of the aggregation to tax gathered as compared with the G.N.P.— was 32.3; in 1965, 34.6; in 1966, 37.6; and estimated for 1966–67, 38.2, and for 1967–68, 39.1."—[OFFICIAL REPORT, 6th June, 1967; Vol. 747, c. 877–8.] I have no further figures for 1968–69. I am told that it is now well past 40 per cent.

Mr. Patrick Jenkin

I believe that the figure is now 42.8 per cent.

Sir G. Nabarro

I did not have that figure, and I am grateful to my hon. Friend. It is 42.8 per cent., no doubt due to the fact that, in March, 1968, in a full year taxes were raised by £923 million and, in November, 1968, by a further £250 million; although those figures did not apply in total to the year 1968–69, they would undoubtedly have had an influence in raising the level to 42.8 per cent.

So we have succeeded—if "succeeded" may be used ironically—in raising the relationship between total taxation and gross national product from 32.3 in 1964 to 42.8 in 1968–69—a rise of 10 points in five years. I hope that the Chancellor will contradict me if I am wrong, but these are published figures and they give the lie direct to the hon. Member for Ashton-under-Lyne, who seemed to contradict the Tory propaganda—propaganda based on fact—that the Labour Party is eternally the party of increased and increasing taxation, whereas Tories have demonstrated, over all the years that they have governed, that they are the party of reduced and reducing taxation.

Of course, throughout all those—[Interruption.] The hon. Member for Ashton-under-Lyne will have noted that I listened to him in complete quietness. If he wants to conduct a conversation, perhaps you, Mr. Gourlay, would ask him either to conduct it in whispers, or to leave the Chamber and hold it in the Lobby—

Colonel Sir Walter Bromley-Davenport (Knutsford)

Does my hon. Friend realise that the hon. Member is so thick-headed that he did not even hear what my hon. Friend just said? Would he shout it and hammer it home into the hon. Member's head?

Sir G. Nabarro

I do not propose to raise my voice, but merely to appeal to the hon. Member's good manners.

Of course, we are pleading, first of all, for a reduction of direct taxation, but it would be apposite to point out the levels by which other forms of taxation have risen pari passu with the increase in direct taxation in recent years. I am not solely concerned with the rate of income tax, but with the revenue from the income tax and the fact that that has gone up by £1,200 million per annum in less than three years. Since 1964, purchase tax and petrol, tobacco and alcohol duties have risen by £1,200 million a year, vehicle licences by £180 million a year, gambling revenue by £80 million, S.E.T. by £615 million a year, corporation tax by £500 million a year, estate duty by £15 million a year, and capital gains tax by £130 million a year. So every form of taxation has shared this advance.

I say that direct taxation should be the first to be made the subject of reduction. Inevitably, the Chancellor replies, year after year, "Oh, but I cannot afford to reduce taxes in any sphere without a reduction in public expenditure." I remind the Chancellor and all my right hon. and hon. Friends, in case the figure has escaped their memories, that, between 1969 and 1970—three years—the steel industry will have cost the taxpayers £1,500 million as an aggregation of, first, compensation paid for steel assets, second, loans to the steel industry, third, the payment for steel industry losses, and, fourth, alleged investments for the future. All that was totally unnecessary. Had the industry not been nationalised, it would have cost the taxpayers nothing. I go no further than that today, because that is an incontrovertible argument.

I am deeply divided from my right hon. Friend the Member for Wolverhampton, South-West (Mr. Powell) about the place of savings in our national economy, and I fancy that most of my hon. Friends are as well. I had expected that, due to the extremities of our national economy this year, there would have been really imaginative proposals to collect much greater savings from every section of the community. Savings are very debilitating at present. Last year, National Savings showed a surplus of about £70 million.

I take the Financial Secretary's point in my adjournment debate on this matter a few weeks before the Budget, that perhaps we did not get as much from National Savings as we might have done because there was such a tremendous upsurge in subscriptions of funds to unit trusts, but my point today is that, from the date that the Tories came in, October, 1951, until the date when they went out, October, 1964, there was a splendid upward curve in the aggregation of savings from all sources, personal, corporate and the remainder.—Before you interrupt me, Mr. Gourlay, I shall relate this directly to the income tax.

Every Chancellor since the beginning of time has claimed that he could have savings or tax revenue. It goes against the grain to quote from one's own speeches, but it is important for the Chancellor to note what I said in 1967. I declared: In parenthesis, I would refer to every Chancellor since Sir John Anderson, which is a quarter of a century ago. Mr. Hugh Dalton, Sir Stafford Cripps, Mr. Hugh Gaitskell, Mr. R. A. Butler, Mr. Harold Macmillan, Mr. R. A. Butler, Mr. Derick Heathcoat Amory, my right hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd)—they should all be my right hon. Friends, of course, in the last three or four creations—and then my right hon. Friend the Member for Barnet (Mr. Maudling), were all unanimous in one material regard, and this policy has been enunciated by the present Chancellor since 1964. I was referring to the right hon. Gentleman who is now the Home Secretary—if he still is the Home Secretary—and I went on: He has always said, 'If I cannot have direct taxation revenue, I will accept savings as an effective substitution'. His predecessors all said the same thing. But does this Chancellor practise it? Of course not."—[OFFICIAL REPORT, 6th June, 1967; Vol. 747, c. 886.] We were then debating the Finance (No. 2) Bill and what I said then still stands.

Savings have stagnated during the last three years and the Blue Book "National Income and Expenditure, 1968" illustrates the position clearly. When the Tories came to power in 1951 the aggregation of all savings—personal, company, public corporation, central Government, local authority and the rest—as delineated in the table on page 8, were £2,794 million.

For the information of the House I will give all the figures up to the present time, and they are listed in millions of pounds. In 1952, savings totalled £2,219; 1953, £2,320; 1954, £2,688; 1955, £3,182; 1956, £3,607; 1957, £3,737; 1958, £3,628; 1959, £3,925; 1960, £4,760; 1961, £5,026; 1962, £4,993; 1963, £5,412; 1964—when the Tories left office—£6,502; and then, for three years, there was a plateau under Labour, with the figures running at £7,294 in 1965, £7,390 in 1966 and £7,122 in 1967. The figure for last year is not yet available.

That plateau in savings is the reason why direct taxation cannot be reduced. Public expenditure has been rising apace. We are budgeting this year for £16,500 million, the biggest in history. Savings have stagnated at a plateau for the last three years and the only way we will get off that plateau is by having a General Election.

I believe that this is the principal reason why there has been no reduction in direct taxation, though it is the inclination of the Chancellor to do something about this. I believe that instinctively he wants to do so, and I only hope that he has not got a trick up his sleeve; for example, the use of the Budget surplus next year to reduce income tax and surtax in the hope that, by taking that step before the next General Election, it will save his party from the chopper. It will not.

Mr. Samuel Brittan, economics editor of the Financial Times, wrote on 7th November, 1968: The level of personal taxation has become a major political issue in this country in a way it has not been for many years. The Conservatives are pledged to bring it down and as Mr. MacLeod's Conference speech indicated, Conservative plans are in practice based on a switch to indirect taxation … I am proud to quote that view of my right hon. Friend and I am delighted and gratified to be identified with him. There is not a twitter of discord between us this afternoon, although I have always tried to be a little ahead of him as part of my duty as a back bencher. I recall Mr. Butler, now Lord Butler, saying, in effect, in 1950, "The rôle of the hon. Member for Kidderminster," as I then was, "is eternally to scout ahead of his party." That is what I am doing

I hope that my right hon. Friend will be the Chancellor of the Exchequer before this calendar year is out. I repose the utmost confidence in his sagacity, perspicacity and financial skill. I leave him with the thought that 9d. is eternally better than 6d. to the hard-pressed taxpayer of this country.

Mr. Joel Barnett (Heywood and Royton)

The hon. Member for Worcestershire, South (Sir G. Nabarro) showed, by his typical arrogance and extravagance as well as by his inability to distinguish the truth, that he does not deserve to be taken seriously in the Committee on this or any other topic.

Sir G. Nabarro

Arrogance and extravagance?

Mr. Barnett

That one cannot take the hon. Member seriously is illustrated by his reference to a Treasury document which, on a previous occasion, he described as a Budget leak. His exaggeration does however help to expose the irresponsibility of the Opposition Front Bench, the occupants of which have expressed views which are not only irresponsible but dishonest and economically disastrous. [Interruption.]

The policy of hon. Gentlemen opposite is dishonest because they must appreciate that in current circumstances their alternative proposals would merely substitute increased prices for taxation. That would occur by one means or another They know this to be true, and I should be glad to hear the right hon. Member for Enfield, West (Mr. Iain MacLeod) attempt to deny it. Their proposals are, therefore, dishonest. They would be economically disastrous because the right hon. Member for Enfield, West must know that to reduce direct taxation now, at a time when consumption at home should not rise, would mean economic disaster.

Worse still is the manner in which hon. Gentlemen opposite debate the general question of direct and indirect taxation. The Conservative Party is debating the subject in the country in a way which is doing the maximum possible harm to public life.

Mr. Julian Ridsdale (Harwich)

Is it not perfectly fair to refer to reductions in taxation if, at the same time, one refers to one's intention to reduce Government spending, which is the biggest factor in consumer expenditure?

Mr. Barnett

I will leave the hon. Gentleman to pursue that argument in the company of his hon. Friend the Member for Worcestershire, South, because it is a level of argument which suits them both.

5.15 p.m.

The main trouble with the argument being adduced by the Opposition, both here and elsewhere, about the levels of direct and indirect taxation is that it tends to distort the position and make a responsible and reasonable discussion of the subject impossible. It obscures the real problem. This is particularly so when the hon. Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) and some of his hon. Friends constantly reiterate the claim that direct taxation is the cause of emigration from these shores, a trend which most hon. Members would like to stop.

One would hope that when discussing an important topic like emigration hon. Gentlemen opposite would refer to the relevant documents. I particularly have in mind the Blue Paper, Cmnd. 3417, "The Brain Drain"—known as the Jones Report—a non-party document which dealt with the whole question of emigration and why it occurs. The Jones Committee was not a party body. It was comprised of distinguished people like Dr. F. E. Jones, Professor J. G. Ball, Dr. E. F. Brookman and Professor Lord Jackson. They discussed the matter rationally and quietly and arrived at some interesting conclusions.

Sir Arthur Vere Harvey (Macclesfield)

Would not the hon. Gentleman agree that the emigration avalanche has occurred because the Prime Minister gave an election pledge that there would not be a general increase in taxation?

Mr. Barnett

That question is typical of hon. Gentlemen opposite.

Sir A. V. Harvey

It is also true.

Mr. Barnett

I shall quote from the Jones Report to prove to the hon. Gentleman that there are many other factors. The Jones Committee considered the reasons why people emigrate, and, contrary to what the hon. Gentleman said and to what others have tried to pretend, it did not find that taxation was the major, or even a substantial, reason for this trend. For example, one major reason was the level of gross salaries. Paragraph 74 of the Jones Report pointed out, after quoting various salaries paid both here and in the United States: Thus, the qualified man starting his career in the United States is paid around three times as much as his counterpart with similar qualifications and in a similar post in the United Kingdom. Perhaps hon. Gentlemen opposite are not interested in that reason why people emigrate in view of their party interest in taxation matters.

The Report brought out another important factor, which is the bias in America towards younger executives. It said in paragraph 75: The United States salary structure is, by comparison, heavily biased towards the younger man. There the final salary is often no more than double the starting salary, partly because the starting rate is high, but largely because progress depends more heavily on merit measured by results and there is less of a long, slow climb up an incremental ladder which is fairly common in the United Kingdom. That is another reason why there is emigration.

In paragraph 83 the Report said: It is popularly believed that income tax plays a dominant part in the decision to emigrate from Britain. This is a half-truth. I have never denied that there is some truth in the taxation argument. I merely stress that those who suggest that the whole problem revolves around the question of direct taxation are doing a disservice to a reasonable discussion of this matter.

Mr. Michael Noble (Argyll)

Is the hon. Gentleman suggesting that people in the income brackets he has in mind and who realise that they may get three times their present gross salaries by emigrating are not also capable of calculating the other relevant statistics?

Mr. Barnett

Of course they are capable of doing that, but if the right hon. Gentleman will read the Jones Report he will find in the 22 recommendations that the question of taxation does not ener into the argument. However, that is not to say that the levels of taxation—I shall come to this matter in more detail later—at the highest margins are not a factor.

I am trying to point out that distorting the case and pretending that emigration is substantially due to the level of taxation wilt ensure that we never get a realistic review of the taxation system and never find precisely what we need to do and what the Government have done about these recommendations in the Jones Report. This constant reiteration that emigration is due to the level of direct taxation is not doing any good either to the country or to the young executives that we are losing. I have never argued that the high level of taxation may not be a disincentive.

It is difficult to be unemotional about direct taxation. For example, we are not the highest taxed country in the world, although hon. Gentlemen opposite would probably not accept that. However, I am sure that the right hon. Member for Enfield, West will accept it, because it happens to be a fact.

Equally, the constant argument is put that as a nation our public expenditure is more than that of any other nation. This, again, is not true.

When considering direct taxation opposed to indirect taxation, we need to consider, first, whether it is a disincentive, and, second, to what extent it is a disincentive against any alternative. It is no use saying that all we need do is knock 3d. or 6d. or even two shillings off the standard rate of tax to solve the great economic problems of the nation. This is not so, but this is the emphasis that is being given in this debate and throughout the country.

Mr. John Hall

The hon. Gentleman is being a little unfair. The Amendment merely suggests a certain decrease in taxation so that we can have a wide-ranging debate on the effect of tax as a whole. No one suggests that merely reducing the rate by 3d. or 6d. in the pound will have all the desirable effects that we would wish.

Mr. Barnett

If the hon. Gentleman is saying that the impression given to the country and in this debate is to give a more direct emphasis to the Amendment and not a proper and serious argument on the lines on which we are led to believe the Conservative philosophy is based, I am prepared to accept it, but I am not sure that it is true. I do not wish to be unfair to the hon. Gentleman. Some hon. Gentlemen opposite have not been terribly fair either to my right hon. Friend the Chancellor or to the Labour Party's philosophy on taxation, so I hope that the hon. Gentleman will forgive me if occasionally I am a little unfair. It is because I have been treated unfairly so frequently by hon. Gentlemen opposite.

When discussing the problem of disincentive, we must consider how much of a disincentive is the present level of direct taxation or any feasible alternative.

My hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) said that there has been inadequate research on the subject. That is true. In a debate in 1967 I referred to the Report of the British Royal Commission on Taxation of 13 or 14 years ago which found that the high level of taxation was not a disincentive. The right hon. Member for Enfield, West, having a copy of a more up-to-date Report of the Canadian Royal Commission, quoted a passage from it to show me that it had found that there was a disincentive. He obviously had not had time to read the whole report. The right hon. Gentleman quoted from page 163, which related to the conclusions of the Royal Commission. If the right hon. Gentleman cares to go through the whole of the Canadian report, he will find that wherever it talks about disincentives it says that it "thinks" or it "believes" that there is a disincentive, but it has not based it on any kind of research. Indeed, the only evidence to which it refers is on page 78: What evidence there is suggests that taxes have relatively little impact on the size, skill and industriousness of the labour force. I do not know whether the right hon. Gentleman would like to reconsider the extract that he quoted from that report. I do not say that in an attempt to prove that there is no disincentive in the level of direct taxation. I am saying that there is inadequate research so far to show the level of disincentive.

My hon. Friend the Member for Ashton-under-Lyne referred to the P.E.P. Report by Brown and Dawson in January, 1969. That report considered most of the research that there had been and analysed it. It did not do its own research; it analysed all the research that there had been. This is a very good pamphlet which I certainly recommend. The only conclusion it could reach was one of agnosticism. At best it decided that any feasible alternative system of direct taxation would or might bring about an increase of 1 per cent. in total output. But it is a guess.

Mr. John Nott (St. Ives)

I think that the hon. Gentleman is guilty of the same error of which he wrongly accused my right hon. Friend; namely, misquoting a particular P.E.P. pamphlet which he has in front of him. The 1 per cent. to which he refers was derived from the American survey on top salaries in the United States. It is right that he carried on and drew his own conclusions on the 1 per cent., but that 1 per cent. was related to top salaries in the United States. Therefore, the hon. Gentleman is not quite accurate in what he said.

Mr. Barnett

The survey on top salaries in the United States estimated the amount of increased output to be higher than 1 per cent. Taking all the various pieces of research, including one on pay-as-you-earn when it was first brought in, the report found—and it was no more than a guess—that it was about 1 per cent. Certainly 1 per cent. is worth having, but the report made clear that it could not be obtained by a simple reduction in the level of direct taxation. Something much more fundamental is needed.

The Canadian Royal Commission found that by reducing the average level of taxation—not just the marginal rate of taxation—there could be a positive disincentive to work by people wanting to take more leisure. There was no evidence from any research that a simple reduction in direct taxation, such as the Amendment seeks or as has been suggested generally, would produce the incentive which is so frequently suggested in this House and elsewhere.

If we were to go for a simple reduction in the highest levels of direct taxation, the only alternative being to cut public expenditure by the methods suggested by the Opposition Front Bench, we should increase costs to many sections of the community, or increase indirect taxation, which would equally increase costs. To do it in that way could have harmful effects on equality, which is certainly vital to me, on getting even the tiniest amount of incomes policy, and it would have a most serious inflationary effect on the economy generally. If there were a reduction in indirect taxation by means of a price increase along the lines suggested, whether by a value-added tax or by reduced Government expenditure, the net result would be what I have described.

5.30 p.m.

From all that I have read, and from the research which has been carried out, it is by no means clear how much of a disincentive it will be but it is pretty clear that there will be some disincentive at the highest marginal level. When I say "pretty clear", I am falling into the error of making a statement without having the evidence to support it, because I know many people at the highest level of taxation who work just as hard as they ever worked, and equally one knows of others who do not.

But that is not necessarily due to the level of taxation. It may be for other reasons. It may be because people have reached the age at which they feel they want to take things much easier, or because they do not want to move from one part of the country to another, or to another part of the world, often because their families do not want them to make such a move. There are many reasons for what they do, but I start from the assumption that at the highest level there is probably some disincentive. We cannot deal with this problem within the context of equity merely by making a simple cut in the level of direct taxation. I refer again to the P.E.P. document which discusses a proposal for a negative income tax, and I hope that we shall be able seriously to consider this. Under this proposal welfare payments would be combined with P.A.Y.E. Surtax would be abolished, and the income tax and surtax structures would be amalgamated. It would do away with earned income relief, and there would be a lower level of tax for earned income, which would result in a simplification of the tax structure.

In that way we could begin to devise a tax system which would be a reasonabl and feasible alternative to the present system. It could be an equitable system, and it could provide for sufficient incentives to enable us to get that 1 per cent. increase in output—more than £300 million a year—which is not to be sneezed at.

There is a strong argument for setting up a Select Committee to consider the whole question of negative income tax, because there are many aspects of it which need to be examined, and which could be examined, much more closely in a Select Committee than they can be on the Floor of the House. It would be much better to discuss what is involved in that way rather than have to listen to the exaggerated arguments so frequently advanced by hon. Gentlemen opposite about the difference between direct and indirect taxation, which means that we are not able to have the sort of rational discussion which will lead us towards a system of taxation which will provide some incentive and at the same time be fair.

Mr. John Boyd-Carpenter (Kingston-upon-Thames)

The hon. Member for Heywood and Royton (Mr. Barnett) began his speech in a somewhat irrascible vein, as I think he subsequently admitted. He used the oldest, and I think most ineffective, of Parliamentary techniques, that of setting up a complete distortion of the other side's case and then showing great skill in knocking it down. So far as I know no one has suggested that a high rate of personal taxation is the sole cause of the brain drain, or the sôle disincentive operating in our economy. Our contention is that it is one of those, and a substantial one, and, perhaps more important, the only one which it is in order to discuss on this Amendment. This is all that it is necessary for us to argue.

Again, having accused, somewhat arrogantly my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) of arrogance, the hon. Gentleman went on to say that it was irresponsible and dishonest of my right hon. and hon. Friends to put down this Amendment because in the present state of the economy we must know it to be impracticable. This approach shows the difference between the hon. Gentleman and his colleagues and those of us on this side of the Committee. It is because the economic situation is so bad, and because we believe that excessive rates of personal taxation have contributed to that badness, that it seems to us not only right but necessary to press this contention this afternoon.

We are, after all, not, as the hon. Gentleman was suggesting, only doing this irresponsibly in Opposition. It is on record that Conservative Governments reduced the standard rate of income tax from 9s. 6d. to 7s. 9d., and the modest Amendment moved by my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) is wholly in line with the consistent approach of hon. Members on these benches that excessive personal taxation is damaging to the economy, and that the worse the position of the economy the more urgent it becomes to put it right. It ill becomes the hon. Gentleman to accuse us of irresponsibility and dishonesty when the increase in taxation for which his right hon. Friends have been responsible is a plain violation of the pledges on which they were elected. I do not know whether I am allowed to quote the Home Secretary today, but he was, after all, Chancellor of the Exchequer for three years, and he was Chancellor within forty-eight hours of this quotation which I propose to give the Committee. At Cardiff on 14th October 1964 he said: The whole basis of our case is that in creased social expenditure"— and it was increased social expenditure-about which the lion. Member was talking— will be financed out of the growing expansion of British industry. If we are bandying charges of irresponsibility and dishonesty across the Floor of the Committee, they might more properly be addressed to those who, having obtained power on the basis of a pledge of that kind, proceed to violate it, rather than to those who urge consistently in opposition what they achieved consistently in Government.

The hon. Gentleman went on to cite foreign practice and dispute the statement, which so far as I know no one had made, that we were the highest taxed people in the world. On this Amendment there is no argument, even if we believed it, which it would be open to us to deploy on that issue, but where there is a distinction between our practice and that of the rest of the world is precisely in the field of this Amendment—the degree, intensity, and progressiveness of our system of personal taxation. And here we are undoubtedly right out ahead—or right behind, according to one's point of view—of our competitors in the rest of the world.

I rely for that proposition on an Answer which the Minister of State to the Treasury was good enough to give me on 28th January of this year, following on one which one of his predecessors had given me about three years previously. I asked what proportion of his income above certain quite high levels was retained by a married man with two children, earned income only, in the United Kingdom and in four of our principal competitors. The Answer is to be found in the OFFICIAL REPORT for 28th January.

The right hon. Gentleman, who is a member of the Cabinet, will appreciate the significance of £8,500 a year. No right hon. Gentleman on the Treasury Bench can regard that as an excessive salary. Take, first, the level of £8,500 a year for a married man with two children, earned income only, in the United Kingdom. On his income above that level he retains 39.9 per cent., whereas his United States opposite number retains 63.2 per cent., and his French opposite number retains 66.9 per cent. In fairness, I must point out that the Japanese are slightly worse off at 36 per cent., but in the other countries a considerably higher proportion is retained. But when we get to the figure which the Chancellor has thought it appropriate at this moment for the chairmen of nationalised industries—£15,000, I understand, is the present figure, though only on an interim basis, because it is due to rise—

Sir G. Nabarro

It is not good enough for Lord Melchett.

Mr. Boyd-Carpenter

As my hon. Friend says, it is not good enough for Lord Melchett, but it is the figure applicable for the rest of them. I again quote the figure. I do not think that it is an excessive one for a chairman of a nationalised industry. The point is that the Government cannot say that it is an excessive salary for a man in a responsible position. An Englishman retains 15.5 per cent. of the tranche of his income above that level, whereas his American opposite number retains almost exactly three times as much at 45.6 per cent., the Frenchman 58.6 per cent., the German three times as much at 48.6, and even the Japanese twice as much at 31 per cent.

As our practice is so out of line with that of our major competitors, at least the onus of proof lies on those who say that what we are doing is right and everybody else is wrong. The Chancellor can hardly dispute that on our economic performance over the last few years it would not look to an objective observer as if our system was noticeably more efficient; it would not look as if our own economy had progressed because of our progressive system of taxation better than the economies of the other countries I have mentioned. The point is not the totality of the burden of our taxation, though we are in the higher brackets, but the extreme penal levels of taxation on the higher brackets of personal incomes.

Though to the great majority of our fellow countrymen figures of this sort seem enormous, these high salaries are earned for only a limited part of a man's life. They are almost certainly the sequel to a prolonged and arduous educational training process. They generally involve a very high intensity of work, which is difficult to maintain to an advanced age. They are, therefore, not the income a man will enjoy throughout his life. They are the income of his prime, though he has to provide out of them for his retirement and perhaps pay for the liabilities incurred during his training. These tax rates are dangerously high and indubitably quite different from those imposed by other countries.

The Chancellor, in the passage which has been quoted, prided himself in his Budget speech on not increasing direct taxation. In real terms in an inflationary situation, if the existing levels are simply maintained, it is raised every year. A great many people maintain their income in real terms, which means increasing it in money terms. But as our graduated tax system is expressed solely in money terms, straight inflation, leaving a man in money terms no better off, exposes him year after year to actually higher taxation.

Therefore, the Chancellor must face the fact, that, despite his generous protestations, by his inaction he has in fact maintained direct taxation on incomes at a level higher than last year. A good deal of thought is being given to this in other countries. I do not know whether the Chancellor has studied the proposal now being put forward in Holland. One of the parties in the Dutch Government—I think it is the Liberal Party—

Mr. Pardoe

Hear, hear.

Mr. Boyd-Carpenter

The Liberals in Holland have this great difference from the hon. Gentleman—they are in government.

Mr. Pardoe

If the right hon. Gentleman would study the Amendments which are on the Notice Paper in my name he would see that I go even further than he and his right hon. and hon. Friends in my effort to lower direct taxation.

Mr. Boyd-Carpenter

In that case, I welcome the hon. Gentleman with the enthusiasm with which anybody welcomes a lost sheep returning to the fold. The hon. Gentleman would be more effective in doing this if, like the people of the same name in Holland, he was in office. The Liberals in Holland are considering a plan to relate the grading in their personal taxation system to the cost of living so that when the cost of living rises the point of graduation in the tax rises moves automatically up in accordance with that. Therefore, in real terms there would not be an automatic increase as there is here when the rates are kept stable.

5.45 p.m.

That is complicated. It is obviously much easier to use a judgment and to lower the standard rate, which is what the Amendment proposes. That a country like Holland with a noticeably successful record in economic management ever since the war—it is one of the success stories of Europe—should be contemplating this is an indication that the idea embodied in the Amendment is well worthy of the Chancellor's consideration.

Finaly, it is very sad that the Government should, despite all they said, have raised taxation either openly in some years or in effect in others. They did this despite their fine words, and I ask the Committee to note the elegance of the language: The commitments of the Labour Party's policy, provided they are not all rushed through in the first year, which nobody has ever suggested"— that is true— can be carried out comfortably without any question of an increase in the tax burden. On the contrary, they should leave room for substantial tax reductions. That comes from the Chancellor's book "Labour's Case", Chapter 8.

Sir D. Walker-Smith

It is a pleasure to speak in support of the Amendment so persuasively moved by my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) and so powerfully reinforced by my right hon. Friend the Member for Kingston-upon-Thames (Mr. Boyd-Carpenter). I am not without a certain warmth of sympathy for the Amendment so forcefully and characteristically spoken to by my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro), who is never one to do things by halves.

Sir G. Nabarro

What the hell does that mean?

Sir D. Walker-Smith

It is meant kindly, I assure my hon. Friend.

It is characteristic and deplorable that in this fifth year of Labour government there is no suggested remission in the Finance Bill of the standard rate of income tax. It is characteristic and wholly deplorable that in the fifth year of Labour government the standard rate is higher than when Labour came to power.

It is significant and sad, though wholly comprehensible, that the surmises that people made before this year's Budget, in the fifth year of a Labour Government, were not at all directed to the possibility or extent of any tax remission, but wholly directed to the possibility of an increase in the standard rate of income tax. So abject in spirit have some taxpayers become under the repeated punishment that they suffer from successive Labour Budgets that in some quarters there was relief and even, I believe, gratification that things were no worse—relief and gratification that there was not an increase in the standard rate, rather as if the prisoner on the scaffold said, "Thank you" to the executioner on learning that he was not to be drawn and quartered as well as hanged. I believe that the people should never get themselves into this abject and apologetic position. It is getting perilously near the attitude of the mental patient who, when asked why he hit himself so hard and repeatedly on the head, said that it was so nice when he abated the vigour of the blows.

The British people have a long and not very enviable reputation for cheerfulness and placidity under heavy burdens of taxation. It goes back two thousand year, to Tacitus's description of the Ancient Britons in his "Life of Agricola". He said that the Britons "were a people who cheerfully complied with the imposition of taxes". It is a characteristic on which Chancellors of the Exchequer—and I am bound to say in fairness not only of the Socialist persuasion—have traded for many years. It is a good thing to be cheerful but not to be passive or complacent under the burden of taxation, still less fatalistic or masochistic. Taxpayers and those who represent them should be vigorous and vigilant, inquisitive and interrogatory. They should press for the answers to fundamental questions. Is the level of taxation justified? Is its incidence sensibly balanced? Does the return to the taxpayer remotely compensate for the exactions to which he is subjected? Is the severity of the tax self-defeating in its effect on production? Those are not very difficult questions in the present context, and I offer no prizes for the answers. The answer to the first three questions is "No" and the answer to the last "Yes".

Two propositions stand out: first, whether or not we are the most highly taxed country, we are certainly a greviously over-taxed society; and, second, direct personal taxation is unduly burdensome. An overtaxed society is a devitalised society, and a devitalised society is a demoralised society, a society robbed of "the native hue of resolution", and of the vigour and creative energy requisite for production and expansion.

The hon. Member for Ashton-under-Lyne (Mr. Sheldon) said that the inability to reduce taxation was in part due to the failure of the economy to expand. But it might be put the other way round. There is a clear link between them. Surely part of the reason for the failure of the economy to achieve the requisite rate of growth under this Government and of the failure to expand or even maintain our share of world markets is linked to the taxation system, and particularly to direct taxation.

For a Government in time of peace not to reduce direct taxation is a clear sign of failure. For a Government in time of peace to increase direct taxation should be unthinkable, and I am not thinking merely in terms of the breach of faith which the Government's action in raising taxation has constituted. One attaches perhaps a little less importance to that than one would otherwise do because only a very naïf elector would have believed such a pledge, considering the source from which it emanated and the background against which it was given. [Interruption.] Not all the electors, unfortunately, have the perspicacity of my hon. Friend. There is a large proportion of naïf electors.

Mr. Roy Roebuck (Harrow, East)

What about those in Hertfordshire, East?

Sir D. Walker-Smith

They are sagacious and consistent. Three hon. Gentlemen opposite and one member of the Cabinet can testify as defeated Labour candidates in Hertfordshire, East to the sagacity of the electors there. A static position—and a fortiori an increase—in direct taxation contradicts the fundamental assumption of an expanding economy that such money as is necessary for public purposes should be obtained, without tax increases, from the growth of the economy. It goes further than that. As my right hon. Friend the Member for Kingston-upon-Thames said so well, in times of inflation, to maintain the level of taxation is to increase it, in fact if not in form.

The Government cannot justify their taxation rates on the ground of value for money, certainly not in the three primary fields of public expenditure—on the repayment of debt, on defence, and on the Welfare State. In the repayment of debt, because it is a bad Government, it has to borrow more and borrow dearer. In defence, although we pay so much, the Government are in full retreat everywhere from their responsibilities. In the Welfare State, anybody who thinks that every penny of hard-pressed taxation which goes in the payment of student grants in the contemporary context is value for money is pursuing a very peculiar process of thought.

The Government are wholly incapable of containing taxation, and they appear to be completely indifferent to the need to minimise direct taxation. That need primarily arises in its most peremptory context among executives, managers, foremen and skilled workers in industry. But it does not stop there. In a sophisticated society, for growth in the economy we need a firm infrastructure of the services which can be provided by professional and self-employed people—by engineers, surveyors, architects, chemists, geologists, and so on. The burdens on these people are even heavier than the burdens on those directly employed in industry because they have less alleviation from pension schemes or what are called fringe benefits.

Some help was given by the Conservative Government in Section 21 of the Finance Act, 1956, but much of the benefit of that Act has been eroded by the processes of inflation. The Financial Secretary gave the figures in answer to a Question of mine on 18th March; in effect inflation has already lowered the ceiling of benefit by over 25 per cent. in little over a decade. I am told that a self-employed man may have to earn twice as much as an employed industrialist to fare as well, having regard to the superior pension arrangements of the industrialist. I mention the self-employed man simply because he is a particularly striking example, and his case is not often made. But the case is a general one, the stultifying effect of uncurbed direct taxation on creative energy and economic effort.

There seems to be in the corridors of power in Whitehall all too little awareness of the necessity of fashioning taxation so as to minimise the burdens on production. One has the impression all over the world of finance ministries bending their energies to the dual basic tasks of keeping taxation as low as possible and of extracting the minimum of taxation required with a view to the minimum burden which can be imposed on productive industry. But that is not the impression which one gets of the approach of the troglodytes in Treasury Chambers. Even under Conservative Chancellors of the Exchequer a reminder of this basic truth is necessary, and I ventured to give one in the debates on the Finance Bill of 1961.

Under Labour Chancellors of the Exchequer, alas, the position is much worse and at times seems to go beyond hope, even with so basically able and confident a Chancellor of the Exchequer as the present one. At any rate, he started with a certain obstinate confidence. The obstinacy remains but the confidence is perhaps less conspicuous than it used to be.

6.0 p.m.

I remind the House of one of the more colourful predecessors of the right hon. Gentleman in his high office who, like him, was at home in the literary world—Sir Francis Dashwood, who, in the eighteenth century, was a very incompetent Chancellor. However, he had the saving grace of modesty. He went on record as saying, "People will point at me and say, 'There goes the worst Chancellor of the Exchequer who ever appeared.'" If the right hon. Gentleman goes on as he is now, he will challenge Dashwood for that dubious distinction— always assuming that the position has not been pre-empted by his right hon. Friend the Home Secretary, if he is still his right hon. Friend. The right hon. Gentleman can emulate Sir Francis Dashwood in his modesty and make a sincere, if tardy avowal, of error and failure, and render the signal service of resigning and taking all his colleagues with him. If he cannot bring himself to do that, he can render a more immediate, if lesser, but still significant service by accepting the Amendment.

Mr. Roy Jenkins

I hope that it will not be thought that if I say a few words now it is an indication that I wish to bring the debate to an end; far from it. I think that it would be reasonable if I were to take up at this stage some of the points which have been raised.

I enjoyed listening to the right hon. and learned Member for Hertfordshire, East (Sir D. Walker-Smith), whose insults were couched in a most agreeable manner. I am not sure whether he will take my intervention as a sign of obstinacy, or confidence, or modesty. It is merely a sign of a desire to help the House.

The hon. Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) moved the Amendment in an extremely engaging and interesting speech. He began with a strong attack on his hon. Friend the Member for the Cities of London and Westminster (Mr. John Smith), but he moved from that on to a thoroughly relevant, though perhaps not totally developed, argument about advertisements in newspapers which indicated that, as a result of high rates of taxation, people were being gulled into investing theft money in very doubtful schemes.

I do not wish to pronounce on the advertisements, which I have not studied as closely as the hon. Gentleman; I am prepared to accept his view of them. But I am very doubtful whether a reduction in the standard rate of income tax, from 8s. 3d. to 7s. 9d.—and I am not as familiar with the decimal figures as I should be to use them completely freely—would mean that such advertisements had no appeal. The hon. Gentleman made his point by saying that these schemes reminded him of the South Sea Bubble. Whatever else caused people to invest in the South Sea Bubble, it was not a penal rate of income tax. It cannot be argued that gullibility necessarily goes in this way.

Referring to the total effect of the Amendment, the hon. Gentleman said that a reduction of £300 million was nothing to speak of. There are variations in estimates. I have always been the first to tell the House that in putting forward more detailed forecasts—and forecasts are different from estimates—than have ever been put forward before I was aware that there would be wide margins of error.

There are margins of error in estimating the yield of taxation. The hon. Member for Worcestershire, South (Sir G. Nabarro) pointed out that the margins of error in relation to the total yield of income tax had not been very high in the past year. If, on this basis, the Opposition were to take the view that "a mere reduction of £300 million" is nothing to speak of then I do not think that this would inspire great faith in their financial administration.

I do not believe that that is the view of the right hon. Member for Enfield, West (Mr. Iain Macleod). He wishes to approach these matters carefully, although with all the commitments that he is building up, it will need more than care to bring them into line with each other.

The cost of the Amendment would be very substantial. The hon. Member for Walsall, South gave it in broad terms. The 6d. reduction in the standard rate would cost £177 million. The reduction in the reduced rate, which I suppose would be intended to go with this, would cost £135 million and the reduction in the rate of surtax, covered by an official Opposition Amendment to Clause 8, which I will mention for the purposes of arithmetic only, would cost £28 million, making a total of £340 million An Amendment tabled by the hon. Member for Worcerstershire, South and the hon. Member for Dudley (Mr. Donald Williams) would, as usual, be a good deal more extravagant.

This figure of £340 million would be a very sizeable amount to put into consumption. I know that the whole of it would not go into consumption, but a very sizeable part of it would undoubtedly swell total consumption. I take great note at present of the need to increase the total of savings and I endeavoured to explain in my Budget speech and in the winding-up speech my attitude on this point. I believe it to be a sensible one and I am not sure how far the right hon. Member for Enfield, West would disagree with me.

Savings are very valuable. Savings, when we can get them, are a substitute for taxation. It would be running contrary to all sense to assume in advance that a high proportion of taxation remissions would find their way into savings. Some proportion might do, but it would be a fairly small proportion, and there can be no doubt that a large part of this £340 million would find its way into consumption.

I know of no Government, trying to deal with a balance of payments problem, prepared to tackle the problem in this way. The United States Administration, committed to dealing with inflation and balance of payments problems, came in hostile to the surcharge on taxation, yet has felt it necessary to keep that surcharge and to increase the squeeze. I know of no Government in the world which believes that the balance of payments problem can be cured by increasing consumption. That is what the Amendment in the name of the official leaders of the Opposition asks us to do.

Mr. Michael Alison (Barkston Ash)

Would the Chancellor not admit that he proposes, with his revenue surplus, to hand back to lenders, through maturing gilt-edged securities, at least as much money as we suggest he should give back to the taxpayer?

Mr. Jenkins

The hon. Gentleman knows that this is an extremely complicated matter, how to make the best use of a Government surplus so as to maintain an effective monetary policy. I intend to use it in a way which will maintain such a policy, and not in a way which would defeat the objectives of taking money out of the economy by fiscal means.

My hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) raised the question of detailed research into the effect of direct taxation upon incentives, about which he has had an interesting correspondence with my right hon. Friend the Chief Secretary. I am all in favour of research, and of being informed as closely as possible on all these matters. However, I am bound to say that I think my hon. Friend exaggerates the potentialities of research, social and economic, if he thinks that it will provide us with a final and definite answer to the problem of taxation.

Most of the inquiries which have been conducted, starting with the Radcliffe Commission, and going on to other subsequent inquiries, have tended to shine a little light into what were previously dark corners, but they have certainly not been able to illuminate the whole scene. They always give inconclusive results and that is because all human beings operate under a mixture of motives.

It is never possible to say whether a man's action is determined by questions of taxation incentives, and if so to what extent. It may be a contributory factor, it may be a large or a small factor. We will never get an answer from research which will enable us to construct a profile of taxation on which any Chancellor could put before the House a scientifically correct profile of taxation, with which all sensible men would agree, leaving no room for rational disagreement.

It would be a very bad and dull thing for the House of Commons if this was so. This will always have to be settled on the basis of a balanced judgment, on the basis of conflicting considerations, and there will always be a good deal of argument between the two sides, whoever is sitting on this side, as to exactly what is the right balance.

[Mr. GEORGE ROGERS in the Chair]

Mr. Sheldon

I accept that there is unlikely to be a complete answer, but my right hon. Friend did say that there had been some shafts of light as a result of certain investigations. All I am asking is that that kind of shaft of light should also come from within the Treasury.

Mr. Jenkins

The Treasury always sends out clear beams of light, in all directions, on all issues. I am anxious that the Inland Revenue, which is more directly concerned with this matter, should contribute to these shafts of light. It would be a great pity, a great mistake, for us to think that we can ever get a clear answer which solves all our problems in this way. There will still be a substantial area of dispute and of human judgment; this is inevitable and right.

On the general level of taxation, I noticed that the right hon. Member for Enfield, West, in a commendable article in the April issue of The Banker, disposed of one or two illusions which may still be prevalent among those few hon. Members opposite who do not read all numbers of The Banker. Putting a somewhat different point of view from his hon. Friend the Member for Worcestershire, South he said: We started from the premise"— he was referring back to an earlier part of his argument— that in order to achieve a vital economy, taxation must be cut. But let us be clear what this does and does not mean. It does not mean that by international standards, the proportion of income taken by taxation in the United Kingdom is above average. On the contrary, if anything, it is below average. It does mean that we tax the wrong things in the wrong way. The right hon. Gentleman was committing himself, fairly and honestly, to the proposition that what he wants is a redistribution of the tax burdens, possibly a marginal lowering if he can secure it. The remarks of some of his hon. Friends on public expenditure are not very helpful to this point of view. Broadly speaking, he was accepting the point of view that we do not devote an excessive proportion of our national income to taxation nor do we devote an excessive proportion to public expenditure. That is an important proposition to establish, and I am glad that he put it so clearly.

Sir G. Nabarro


Mr. Jenkins

I was dealing with the right hon. Member for Enfield, West who, it may surprise the hon. Member to know, I regard as a more responsible spokesman of the party opposite than is the hon. Gentleman—

Sir G. Nabarro


Mr. Jenkins

—and who has a slightly greater respect for facts, and perhaps a slightly different approach to them.

This is a different approach from that of the hon. Member, to whom I will give way as I am about to refer to him. He said, "Let us have direct taxation reductions as the first priority, but let us accompany them with every possible indirect taxation reduction as well." If the hon. Member means what he says—unless he wishes us to be a country with a notably lower level of public service across the whole range than other comparable countries—he means a redistribution of the burden of taxation.

Sir G. Nabarro

Selective quotation is an old trick of the Chancellor's—I have known him long enough to realise that. [HON. MEMBERS: "Oh."] it is an old trick. Of course, the proposition he has put to the Committee is correct, if the gross national product remains fairly static. But the effect of Tory policy would be to cause the economy to grow, and in those circumstances, the percentage taken in taxation would not show the continuous upward curve that I demonstrated in my speech. That is what the Chancellor conveniently left out.

Mr. Jenkins

I am interested to hear the hon. Member talking about old tricks. I think we know what he means by that—

Sir G. Nabarro

I know what the right hon. Gentleman means.

Mr. Jenkins

I am also interested to see that the right hon. Gentleman did not rise to his feet, because I do not think that this is really a relevant point. All economies grow at different rates, some faster some slower. The right hon. Gentleman was not talking about a particular position, he was taking a broad view of how we compared with other countries. He made a fair point which I have quoted, and I do not wish to carry it any further except to say that the right hon. Gentleman was clearly dealing with a big shift in direct taxation and not with some sudden panacea for escaping from our difficulties.

The right hon. Member for Kingston-upon-Thames (Mr. Boyd-Carpenter) took account of that point. He went on to say that on the basis of international comparisons, our direct taxation rates were appallingly high.

Mr. Boyd-Carpenter

Not only appallingly high, but excessively progressive.

Mr. Jenkins

The hon. Member for Walsall, South made a comment with which I agree, broadly speaking. He said that international comparisons are always misleading. Those were his exact words, and as a general rule there is something in that. International comparisons can be pushed too far. I am not suggesting to the right hon. Member for Kingston-upon-Thames, or to the Committee, that our direct taxation rates are not, in some respects, more progressive and heavier than those in other countries. It is certainly possible to exaggerate this picture.

It is easy to pick out different statistics. The Leader of the Opposition did this two or three months ago. It is possible to get a more balanced picture by looking at certain other things. I agree that figures are bound to some extent to be selective, but we have had great use made of selective figures inside and outside the Committee by hon. Members opposite, and it is necessary to give certain figures now to put the matter in slightly better perspective.

Let us take the marginal rate of tax applying to a married man with two children under 11, all of whose income is earned, which I think is exactly the type of individual whom the right hon. Gentleman chose for his comparisons. It is relevant to take the marginal rate of tax because if one is dealing specifically with the incentive point the marginal rate of clearly of great significance in determining how a person reacts. Taking the marginal rate first for a person with what one might regard as above middle executive income of £5,000 a year, and with these family circumstances, one finds that the United Kingdom, so far from being way out on its own in charging higher marginal rates of tax at £5,000 a year, is at the lower end of the scale.

At £5,000 the marginal rate of tax for the individual I have defined is 36.7 per cent. in the United Kingdom. In Sweden, it is 57.1; in Holland, 53.3 per cent.; and in Australia, 56.4. In South Africa, which the hon. Member for Walsall, South specifically mentioned as a beckoning country from the point of view of taxation, though perhaps not from all other points of view, it is 44.9 per cent. In New Zealand, it is 66 per cent., and in the United States, with which I will deal more fully in a moment, it is 28.2 per cent.; it is significantly lower in the United States. In Germany, it is 36.4, which is only 0.3 per cent. lower than in the United Kingdom, and in Canada it is 36.1 per cent. The one economy in which it is strikingly lower is France, where it is 22 per cent.

But it is also worth noting—

Sir T. Brinton

Has the right hon. Gentleman the corresponding figure for Italy?

Mr. Jenkins

I have not. I agree that the Italian figure would probably be at the lower end of the range, and significantly lower than ours.

Mr. Pardoe

These are interesting figures, but, so that we may get the statistics right, is the £5,000 comparison in the various countries merely worked out by relating the exchange rate to £5,000, or is it on the basis of how many people are above this figure and how many below it in the economy?

Mr. Jenkins

It is worked out on the basis of relating the exchange rate. That is one reason why these comparisons are not totally satisfactory, and why I began by saying that I had a good deal of sympathy with the hon. Member for Walsall, South, who said that one could push the comparisons too far. But they have been pushed very far by many hon. Members opposite, and it is therefore necessary to provide a good deal of corrective information.

I am grateful to the hon. Member for Cornwall, North (Mr. Pardoe) for raising precisely this point, because it will lead me in a moment to discuss the United States position, which is significant in this context.

But, first, I shall briefly look at the other end of the tax scale—not the £5,000 level but the level of a man on £700 a year—and shall give the figures for the same countries. In the United Kingdom the marginal tax rate at £700 a year for an individual with the family circumstances we have discussed is nil. In Sweden, it is 17.5 per cent.; in Holland, nil; in Australia, 11.1; in South Africa 1.2; and in New Zealand 21. In the United States, Germany, Canada and France it is nil. We find that there are a number of countries above us, while there could be none below us. This shows that looking not merely at the £5,000 position, but the position of a relatively lowly-paid worker, one can also greatly exaggerate the position.

I now turn to a comparison with the United States on a somewhat different basis, because I believe that it is misleading to do exchange rate comparisons with the United States without having any regard to the different purchasing power of money in the United Kingdom and United States, or the different pattern of incomes between the two countries. An income of £5,000 in this country clearly does not correspond to £5,000 translated into dollars at 2.40 dollars to the £. It is not the sort of income one would earn in the United States for doing the same work.

The interesting comparison is at the point at which in this country one enters the top 10 per cent. of income earners. There one finds that one's tax rate is 11.2, while in the United States it is 13.8 per cent. Those are average tax rates, not marginal. At the point at which one enters into the top 1 per cent. here it is 24.1 per cent., and in the United States it is 24.8 per cent. Because we have much more steeply progressive rates, as one goes up within the 1 per cent. the British rate becomes substantially above the United States' rate.

I am sorry to put these figures to the Committee at some length. I do not think that they prove the whole position; they do not prove that we have nothing to worry about as regards tax, but they show that we have listened to many selective figures from the other side of the Committee, and that one might put some other figures. [HON. MEMBERS: "Selective".] All figures in this matter are selective. I admit that absolutely frankly. But one would not gain that impression when figures are quoted by right hon. and hon. Members opposite with absolute authority, as though they dispose of the whole problem once and for all. I am putting figures forward to introduce a balance into the debate, and not to suggest that they prove the whole case. Had I thought that they did, and that our taxation system was perfect, I would not have acted as I have previously.

Hon. Members can argue as to the reasons, but it happens that it has fallen to me in the position in which we have found ourselves after devaluation to introduce one very heavy Budget and one fairly heavy Budget. In neither case did I make any increase in the rates of tax on earned income. I thought that right not because one can prove that it is essential on incentive grounds, but, because on balance of judgment, I thought that it was probably best for the working of the economy.

I would certainly not say that I regard it as a desirable aim of policy in all circumstances to preserve the present high rates of tax. Far from it, certainly on earned incomes. There would be much to be said for a reduction, but it is not a reduction which should be carried out rashly without regard to the country's financial and balance of payments circumstances, or to equity and the distribution of income and purchasing power throughout the community. It was clear that this year, with limited amounts of money at my disposal, I was right to concentrate the benefits I could give at the lower end of the taxation scale. That I did, and although there are difficulties about present tax rates I do not regret doing it.

I ask the Committee, when hon. Members vote—and I am not asking them to do so—to reject the Amendment.

6.30 p.m.

Mr. Iain Macleod (Enfield, West)

I rise because it is frequently convenient for the Committee that the Shadow Chancellor should follow the Chancellor, and sometimes vice versa, and in no way, as the right hon. Gentleman made clear, to close the debate. There are many points that hon. Members still wish to make.

Some people might say that in one sense today's appalling trade figures make the Amendment less persuasive. We have seen the Government's cherished three-monthly running average turn against us for the fourth month running. These are extremely serious matters, which cause the Chancellor, as they cause me, great anxiety. But I take the view that far from reducing the value of the Amendment the position today emphasises the need for a change of direction, a fresh start, and, in particular, for real attention to be given at last to incentives. With the advantage of devaluation all but gone, it is vital that we should have new thinking from the Treasury Bench.

My right hon. Friend the Member for Kingston-upon-Thames (Mr. Boyd-Carpenter), in an excellent speech, said perfectly clearly that whether we are right or wrong on this matter, we have put it forward consistently in and out of office. It is a matter of fact and not of debate that during nine out of our 13 years in power there were reductions in personal direct taxation, which is the subject of the Amendment. It is a matter of fact, and not of debate, that the rate came down from 9s. 6d. to 7s. 9d. We are not, therefore, putting a new doctrine before the Committee. We are putting one in which we believe firmly and in which we have shown that we are prepared to practise in office what we preach out of office.

The Chancellor said in his Budget speech, and he took pride a moment ago in saying, that he took 1 million people out of tax by concentrating—he was right to do this—the amount that he thought appropriate at the lower end of the scale. He did not mention, however, that 3 million had been added to the income tax list since October, 1964. Therefore, even after the present Budget, 2 million more people are now paying income tax.

The point has been made in many speeches—it was made first by my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) and it was referred to in a number of other speeches—that the buoyancy of the income tax is crucial in this regard. The simple fact is that unless we regularly reduce the rates of income tax, as we did, the total burden of income tax is bound to rise. That is what we are now seeing. That in itself is justification for the Amendment.

In any event, however strong, there is probably one point which is a little less formidable. Because this is our method of debate in the House of Commons, as it is the method of common law in this country, it is fair enough for the Chancellor, as I will show he has done, to try to pick on this point. It it rather as if one argued that last week's local elections on the basis of Sheffield alone were a great triumph for the Labour Party.

We have just heard the Chancellor say, "The figure which we are most concerned about is £5,000 a year, and what we are concerned about is the marginal rate."He went on to describe the position in the league of this country and a number of other countries.

It would have crossed the mind of anybody to ask why the Chancellor took the marginal rate and why he took £5,000. I will tell the Committee, because this is the only point and the only method that suits the argument which he has put before the Committee. There is a hiccup in the scale at this point and, because of earned income relief, the Chancellor of the Exchequer has just been able, in the most amiable way, to put over a piece of sleight of hand of which Tommy Cooper would have been ashamed.

I will fill in the picture that the Chancellor put before us. His figures were accurate. I do not dispute them—indeed, I have them before me. I thought that he would take this line, because it is the only conceivable one left to take, and I have some regard for the Chancellor's debating ability. So I worked out beforehand my answer to the speech that I knew he would make.

First, let us take the same figures for a married man with two childen under the age of eleven. My figures, as the Chancellor will know, are quoted from replies in HANSARD. Let us take the total tax paid in the four countries, the United Kingdom, West Germany, France and the United States. Let us not bother with this marginal relief point. What is the total amount which that man has to pay? In France it is £633, in the United States of America £745, in West Germany £1,063 and in the United Kingdom £1,401. So much for that.

Ah, but what is the percentage? In France it is 12.7, in the United States 14.9, West Germany 21.3 and the United Kingdom 28. But let us even take the Chancellor's point. Let us talk at £5,000 and ask what happens—this is the true question of marginal relief—to an extra £1,000 at that level. The Answer was given on 28th January, 1969, at col. 285–6, of the percentage taken in income tax and surtax or their equivalents from a married man with two children under the age of eleven: in France 27, the United States of America 28, West Germany 38 and the United Kingdom 43. Therefore, taking every point that the Chancellor has put before us, I can destroy, as I have done, every one of them.

Mr. Roy Jenkins

I made clear that one can bandy these figures back and forth. Will the right hon. Gentleman now explain why he deals exclusively with those four countries and does not take the others which I have mentioned, which are normally regarded as extremely successful, thrusting countries—Australia. The Netherlands, which the right hon. Member for Kingston-upon-Thames (Mr. Boyd-Carpenter) singled out as an example of a very successful economy, New Zealand and Sweden, all of which show that on the basis put by the right hon. Gentleman, this country comes out as having a lower rate than they have?

Mr. Macleod

Only if the Chancellor takes the specific point which he has made. On the marginal rate—the Chief Secretary made this point a year ago and gave precisely these figures upstairs on 13th May, 1968—it is perfectly true that New Zealand is 60 per cent. at that point. What matters, however, is the total paid, and that I have already dealt with.

Mr. Roy Jenkins

The right hon. Gentleman is wrong. The disposable income left after taxation—this is not a question of the marginal taxation—at £5,000 is quite a little higher in this country than in Australia, The Netherlands, Sweden and New Zealand, which follow afterwards. Indeed, the same thing applies not merely at £5,000, which, the right hon. Gentleman said, I deliberately chose because it was the only point of use to my argument, but at £7,000, too

Mr. Macleod

The Chancellor is picking again the countries—Australia and New Zealand—which seem to suit his argument at precisely that point. It is exactly this of which I am complaining. The main point is the amount of disposable income which is left in the countries to which I have referred.

We have heard from both the hon. Member for Heywood and Royton (Mr. Barnett) and the hon. Member for Ashton-under-Lyne (Mr. Sheldon) about the mythology which surrounds some taxation matters. I have made a point of saying in the article which the right hon. Gentleman quoted—I said it a year ago in the debate upstairs—that it is not true that we are the most heavily taxed country. I have often said this and I am happy to repeat it. I hold the view that the levels of personal direct taxation are far too high.

The Conservative Party takes great care to keep up to date with public opinion, and employs one of the nationally known polls to study the anxieties that people have. What has been fascinating to watch, and I assure the Committee that this is true, is that, whereas two or three years ago the question of taxation ranked about ninth out of ten, now it is right at the top. This is not a case of hon. Members on this side of the Committing, running after the people; if anything, it has been the other way round. We have punched this argument for a long time as hard as we can, and that shows that the argument is beginning to tell in the country.

There is clear evidence that the Chancellor recognises some of these points. In a speech to the London Labour Party conference on 13th May, 1967, which has often been quoted, he said: … we cannot be indifferent to the disincentive effect which very high taxation on earned incomes might have. The Labour Party is a party with an appeal to all income and occupational groups. No doubt that it tries to be, as we also try to be. But there is now a concern about taxation which did not exist five years ago, three years ago, perhaps even two years ago, and those who ignore this are political coelacanths and are entirely out-of-date and out of touch with the thinking of ordinary people.

May I give one more quotation from an article in the Daily Mirror by someone who will not be regarded as an authority by everybody on the other side of the Committee, although he is a colleague of theirs, the hon. Member for Bosworth (Mr. Wyatt). Talking about the disincentive effects of high taxation, he says: But we cannot blame big business for the idiocy. We must blame the Government and our own envious attitude towards those who are successful and make the nation's wealth.

Mr. James Dickens (Lewisham, West)


Mr. Macleod

I will give way to the hon. Gentleman in one moment; I wish first, to add this footnote.

The key words in what is said there refer to envy. The politics and the policies of envy are now completely out-of-date, and I believe, as the hon. Member for Bosworth says, that there is a new attitude towards wealth in this country.

Mr. Dickens

The hon. Member for Bosworth (Mr. Wyatt), the Daily Mirror and the right hon. Member for Enfield, West (Mr. Macleod) share one thing in common. They have supported economic policies which have made a rapid increase in the rate of taxation inevitable over the last four years or so. I put it to the right hon. Gentleman that the only way forward for this country is to broaden the tax base and to put a much higher rate of tax on capital.

In the Budget of 30 years ago, introduced by Sir John Simon, direct taxation took up 43 per cent. of all Exchequer revenue—

The Temporary Chairman (Mr. George Rogers)

Order. Interventions must be brief.

Mr. Dickens

Sir John Simon's Budget of 1939—

Sir Douglas Glover (Ormskirk)

On a point of order. We are in Committee and the hon. Member for Lewisham, West (Mr. Dickens) can try to catch your eye, Mr. Rogers, and make his speech. I do not see why my right hon. Friend should have to sit down for five minutes while he makes it.

The Temporary Chairman

I am sure that the right hon. Gentleman can defend himself.

Mr. Dickens

Sir John Simon's Budget of 30 years ago raised 43 per cent. of all Exchequer revenue from direct taxation. This year my right hon. Friend is raising less than 40 per cent. This is the case for broadening the tax base.

Mr. Macleod

It is something a little more than that. I will not take up all the hon. Gentleman's points. Unlike the Daily Mirror, I am in fierce opposition to the Government and to the Government's policies. The only point on which I agree with the hon. Gentleman is that we must have a wider base of taxation. I wish that I could take this point further without going out of order. He goes on to say that he would tax capital, but he knows very well that at this point he and I part company. This is a perfectly valid point, and one which I would have been happy to develop could I have done so without going out of order.

6.45 p.m.

The question of cost is always an inevitable problem for Oppositions. An Opposition of any party, in putting their point of view before the House in any year, would put forward commitments which they recognise in total are more than they could meet if they were in power. It is only fair to make that point, and it is not made for the first time. But it is right to press individual points one by one. The cost of this Amendment, to interpret it in the sense in which I interpreted a similar Amendment a year ago, would be £170 million. If we interpret it as running through the bands it would he roughly twice that amount, and that was the interpretation put on it by my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid).

I am not committed to the Chancellor's approach in the Budget any more than I am committed to his arithmetic, but if I were faced by a position in which I wanted to make the sort of reduction which I am now commending to the Committee, I would have preferred—and the Chancellor made this point absolutely fairly—a switch to indirect taxation if I had thought it necessary to cover that revenue. I think that is an honourable answer to the question of cost, which is always a difficult one for an Opposition.

What we wish to do is to put forward a marker. During nine out of the 13 years, either through the rates or through the allowances for eight years, and through surtax on one occasion, we made reductions in personal direct taxation. It is part of our plans that we shall do so again. For the purposes of this Amendment we have to work within the framework of the income tax system as it is, but we believe that there is a disincentive attendant upon the high levels of personal taxation. We believe that the amounts of personal direct taxation once one gets above a very low figure, are genuinely far too high.

We differ from the Government as to the economic effects of the incentives, but we hold our view at least as strongly as they hold theirs, and we would argue that all the events, including the trade figures this morning, show how desperately necessary it is to return to incentives, and so I recommend my right hon. and hon. Friends in due course to divide on the Amendment.

Mr. Pardoe

I support the Amendment, perhaps with a little reluctance, although with less reluctance having heard the speech of the right hon. Member for Enfield, West (Mr. Iain Macleod). Following the trailers in The Times that positively whetted one's appetite for Conservative tax reforms, I had hoped to hear announced today some radical and progressive measures, but all we have in the Amendment is a return to 1964, which does not seem to be a great step forward. This is not good enough. The difference between my attitude and that represented by the right hon. and hon. Members on the Conservative Front Bench is that they want to reduce the standard rate whereas I want to abolish it. I want to reform our direct taxation system. Present direct taxes are incomprehensible, are a hindrance to economic growth and are too high.

I believe that any tax should first of all raise revenue without unreasonable disturbance to taxpayers, industry and Government; it should be useful in steering the economy, particularly in regard to savings and investment, and helpful in its inevitable influence on social trends, and it is legitimate to use income tax for that purpose. It should, of course, be clear and should allow little opportunity for dishonesty.

What is wrong with our income tax is not only that it is too high, but that the taxes are divided into five incomprehensible schedules. We preserve the fiction that there is a standard rate of tax which applies to all the five schedules and which provides a common level of taxation. We know in fact that it does not do this, and we have to overcome all the problems created by this fiction by introducing a large and complicated array of allowances.

As a result, very few people actually pay the standard rate. The Amendment would reduce the standard rate from 8s. 3d. to 7s. 9d. But just as nobody who is earning his income pays 8s. 3d. now, so nobody under the Conservative scheme would pay 7s. 9d. or, indeed, paid that sum during the Conservative Administration.

I was not entirely surprised that the array of Amendments which I tabled were not selected, because they may well have seemed to be new taxes. They may look new but the figure of 32.08 per cent. is equivalent to 6s. 5d. in the £, which is what people pay on earned income.

The Chancellor said that he was not over-familiar with the new swinging percentages. Indeed, it is rather like looking at the "Miss World Contest" with metric sub-titles. The 4s. in the £ which we now state as being the rate of taxation at the lower level is 3s. 1⅓d. on earned income—15.55 per cent. The rate of 6s., which appears on my income tax return, is 4s. 8d. on earned income and represents 23.33 per cent. It is the high standard rate which makes our system so totally incomprehensible.

We propose to sweep away the whole of this gobbledy-gook and replace the existing five schedules of income tax and surtax by a system of income tax under four headings. They are not new taxes; it is simply a way of dividing them up. They are personal employment tax, personal business tax, personal property tax and company tax. The important point is that one would then be able to have different rates of taxation on each, instead of trying to maintain the fiction of the standard rate across the whole board.

The advantages are that the replacement of the standard rate with a whole system of complicated allowances by a gradual rate of tax related to income would allow tax returns to be simplified and made understandable, and would give greater flexibility, since we should be able to have different rates of taxation on all the different tax headings.

It follows that under this system there would be a clear separation between taxation on earnings, whether from employment or business, and taxation on investment income. I do not necessarily argue that taxes on unearned income should be higher than taxes on earned income. In one sense I should like to say that they should not, but we cannot make that break immediately. Therefore, we should begin at the lower level to attract small savers.

I recognise that there are disadvantages in the limitation which I have mentioned. It is likely that it is the very few people in the upper income groups who have the greatest proportion of their income surplus to their immediate requirements, which might be diverted into savings, and it must be made worth their while to save just as much as it must be made worth while for the lower income groups.

Under this scheme income tax on income from personal employment and business employment—that is from wages, salaries, pensions, and an individual's income from his profession or business—should be stated as the actual rate which we would pay. I should know what I had to pay on any extra £ earned. The Chancellor was right to stress the rate on the marginal income, the extra £1 that I earn by working overtime or by writing an extra article. That is where the disincentive creeps in and it is at that point we must make our reforms.

I believe that we should not start below the level at which it is economic to collect the taxes. But if one takes the Government's present lower level, the increase from that point is too rapid. It should not be by large steps since it is the large steps which provide the disincentives at the margins. It should be by not more than 5 per cent. at any stage. This would greatly diminish the slope or incline of the progressive tax scale.

The tax scale, after being increased by 5 per cent. at various levels, should reach a plateau. At the level at which 6s. 5d. now applies, the rate should remain the same up to perhaps £4,000, and perhaps even as high as £5,000. From then on there could be an increase of 5 per cent. at various stages. I do not wish to go into surtax since the Amendment is not concerned with that. These proposals would imply that men and women should be taxed separately. I realise the disadvantages and difficulties involved in that suggestion but these would at least be possible.

What about the tax on so-called unearned income? I repeat my reservation about referring to unearned income. A large amount should be treated as earned income. Beyond that stage there would have to be larger increases than is the case with earned income. Perhaps increases of as much as 10 per cent. at various stages.

I turn to the problem of the disincentive of direct taxation. Obviously, most hon. Members would accept that there must be some disincentive inherent in any direct tax system. But although most of us believe that taxes are too high, nevertheless, it would not cure the economic malaise from which the country has suffered for far too long if we reduced our total level of taxation. A comparison with other countries shows that in many cases the amount which is absorbed by the Government is lower as a proportion of this country's gross national product.

Anyone who promises substantially to reduce the total level of taxation in this country is a charlatan. He is more than a charlatan when he refuses to follow that promise by saying what public expenditure he will cut. The right hon. Member for Enfield, West was extremely sweet and reasonable. Far more than many of his colleagues, who are already giving the impression that they will knock 1s. off here and 6d. off there and will easily finance east of Suez escapades and return to the Persian Gulf and that they will pay for all this by having no subsidies for agriculture.

7.0 p.m.

This will not do. This kind of action by irresponsible Conservatives is disastrous for their party and the level of political debate. I would remind the Conservative Party that there is some conflict between what they now promise and what they accomplished when in power. Speaking in Ayr on April 12th, 1955, when he was Chancellor of the Exchequer, Mr. Harold Macmillan said: We believe in lower taxation. We believe in men and women keeping a larger share of what they earn … This is Conservative policy and this is a Conservative party. That is one firm statement of their tax policy, but it is far removed from remarks made by the right hon. Member for Barnet (Mr. Maudling) in London on 5th March, 1964, when he went out of his way to warn his audience that the cost of modernising and creating a more prosperous Britain meant … raising substantially increased sums from the taxpayer. The right hon. Gentleman went on: I must remind you that the cost is a heavy and a growing one. It would be idle, and indeed dishonest, to pretend that the money we need for houses, schools and hostels can be found without people having to pay more in taxes. That was said not from the Liberal or the present Government benches, but by the right hon. Gentleman who was then the Chancellor.

I agree that international comparisons may be odious or odourous, but if we compare one year with another when considering the Conservative record, we again see remarkable divergences between their promises now and what they achieved. I hope that the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) can throw some light on this. A single man who, in 1960, earned less than £1,250 and who had become richer to the average extent was actually paying a higher proportion of his income in tax in 1961–62 than in 1949–50. A family man with three children under 11 in that same situation, as long as his income was below the 1960 level of £2,500, also paid a greater proportion of income in personal direct taxation in 1961–62 than in 1949–50.

A large number of people with three children under eleven were earning less than £2,500 in 1960, yet they were all worse off in terms of direct taxation than when the Conservatives came to power. Even in 1962, under the Tories, direct taxes on individuals was still a very high proportion of total tax revenue. In the United Kingdom it was then 29.2 per cent., in Germany only 26.8 per cent., and in France—I know that there are special considerations there, such as the "money under the bed"—it was 10.8 per cent. That shows that, even in 1962, under the Tories, the percentage of total tax revenue from direct taxes was much higher than in some other countries.

I would also remind hon. Members of the Conservative Party that, far from having reduced the total level of taxation, particularly that on individuals, when they were in office taxes on personal income rose from £1,170 million in 1952 to £3,523 million in 1964, an increase of £2,353 million, or 200 per cent.—

Mr. John Hall

Perhaps the hon. Gentleman would say what was the percentage of the gross national product in both cases.

Mr. Pardoe

It is true that the percentage of the total taxation revenue as a proportion of the gross national product was lower, but that is not my point. I am supporting the Amendment.

I am merely talking about anyone who gives the impression that it is possible to reduce the total level of taxation, as many of his hon. Friends do round the country. I have been faced in recent weeks by a prospective Conservative candidate in my constituency who has promised the constituents of North Cornwall that no one earning under £1,000 will pay income tax at all under the next Conservative Government.

Mr. Nott

Coming back to the hon. Gentleman's original point, the reason that the Conservative Administration could reduce the standard rate of income tax from 9s. 6d. to 7s. 9d., which we did in 13 years, was the buoyancy of tax revenue. The reason that tax revenue was buoyant was that we had such high economic growth. This is an incontrovertible fact, so the hon. Gentleman must not mislead the House.

Mr. Pardoe

It is not I who is misleading the House. Conservative Members have been giving the impression that they, and they alone, are the elect of God in the matter of taxation. They are not. It may hurt hon. Gentlemen—particularly the hon. Member for St. Ives (Mr. Nott)—to be told this. He had better look at what some of his colleagues are saying in that part of the country and judge whether he can justify it.

The level of direct taxation today is too high and it should be reduced, by a transfer of the total burden from direct to indirect taxation. That means that we must have much better indirect taxes. It is one of the tragedies for any Chancellor who wishes to reform our tax system on these lines that he is equipped with such appallingly blunt weapons in indirect taxation, so that even when he invents new ones, they are even worse.

I am sorry that we could not debate the line of argument contained in the sweeping and radical Amendments which I have tabled, but they were based upon a report, whose words I would commend to the Minister of State. He may not be particularly keen on having his right hon. Friend quoted, but the right hon. Member for Sowerby (Mr. Houghton), Chairman of the Parliamentary Labour Party, in assessing the Liberal plan on taxation, said: The bold and comprehensive sweep of this plan leaves one somewhat breathless. I regard this as the most significant outline of major tax reforms published in recent years. It is a great pity that the Government have not been able to vote on that in this debate.

[Mr. SYDNEY IRVING in the Chair]

Mr. Michael Alison (Barkston Ash)

I thought the charming and perhaps significant thing about the speech of the hon. Member for Cornwall, North (Mr. Pardoe) was that he was shooting the first rounds of the General Election in North Cornwall. The Committee will have noticed that the enemy there is the Conservative Party and not the Labour Party. Indeed, the lie was given to all his speech when he introduced the prospective Conservative candidate there.

Let me back up that candidate in this respect at least—what he said about no taxes for those earning under £1,000 is already correct. The latest figures given in Economic Trends for February, 1969, on the incidence of taxes and social service benefits in 1967, show that the income after direct taxes and benefits as a percentage of original income for incomes up to £988—admittedly marginally less than £1,000—represents 106 per cent., so that one is a net gainer at £1,000 already.

Therefore, how much more likely is it that when the Conservatives return to power this process will be extended? So, on this point, I say good luck to the Conservative candidate—

Mr. Pardoe

That entirely depends upon how many children one has and also takes into account all the social benefits. This is not what the prospective Conservative candidate for North Cornwall said. And if the hon. Gentleman says that the major opposition in North Cornwall is the Conservative Party, I would only answer that if all his friends had managed to get rid of the Labour vote in their constituencies as I have done in mine, there would be no danger of Socialism.

Mr. Alison

I must confess that I echo those concluding words, but the hon. Gentleman is wrong on the earlier part, because my example referred to all households in the sample including all variations of adults plus children. It came from the comprehensive Table B of the latest issue of "Economic Trends", and it backs up what the Conservative candidate said. Good luck to him: I have no doubt that he will win. It is significant that the Liberal Party now reckons the people that it has to fear in the next election—as do the Socialists—are the Conservatives.

I should be grateful if the Minister of State would convey to the Chancellor my view that his right hon. Friend was in his most frustrating and tantalising rôle today—that of the broody hen which refuses to lay the egg. In this issue of direct personal taxation, he keeps making the most encouraging clucking noises about his sane and progressive views, but never settles down on the bed of straw and delivers the nest egg.

In his last Budget speech, in 1968, the Chancellor offered these remarkable words about direct taxation: … our direct taxation, on earned incomes is comparatively high. It may, indeed, be too high …"—[OFFICIAL REPORT, 19th March, 1968; Vol. 761, c. 276.] That was a polite way of saying that it was too high. He also said that it actually had a "stultifying effect" on the economy. He was thinking then not of taxation overall but of direct personal taxation.

Furthermore, as though to emphasise that this was not just a casual impression which he had received on arriving at the Treasury, in this year's Budget speech he again used the same remarkable word "stultifying" about the outcome in economic terms of the present high level of direct taxation. He made this broody hen speech this afternoon. Having made it clear that he thinks that personal taxation is too high and stultifies the economy, he prances up and down again on the bed of straw but he will not lay the egg. When will he do something about the level of direct taxation which he thinks is too high and stultifying?

I do not know whether the Chancellor has taken sides in the great debate about whether incentives one way or another really can be affected by the level of direct personal taxation. The Minister of State will know that there is a school of thought which alleges that, it direct personal taxation is on the high side, some people, to maintain their standard of living, will actually work harder. There is the countervailing case, that they will not bother to work harder, and that is not proven. I hope that the Government will make it plain which side of the argument they support.

7.15 p.m.

I believe that there can be no doubt, on the basis of the international comparisons that we have been considering, that it really is a disincentive to have such high levels of direct personal taxation. If one is to make a comparison, West Germany is perhaps the best country to take, since it must be our marker. It has had remarkable bouyancy in its economic performance, starting from a base much lower than ours in the post-war years.

In a booklet produced by the Industrial Policy Group a comparison is given in table 8 between marginal and average tax rates in a number of different countries, and the figures tally almost exactly with those quoted by the Chancellor today.

At every level of earned income above the level of £1,250 per year—which is about the average level of earnings in this country, which were running at about £23 a week at the latest count in October—and including the starting figure of £1,250 itself, the German average and marginal rates of taxation for a married man with two children are lower, and they are substantially lower the higher one goes. This must be a pointer, since Germany is our greatest economic competitor.

However misleading international comparisons may be one can nevertheless hardly avoid the general impression that incentives count for something, particularly when one considers the achievements in some continental countries. We need to conduct a serious investigation into the possible effects of incentives; an investigation in greater depth than that represented in the Chief Secretary's letter to one of his hon. Friends. My misgiving about the sort of investigations so far carried out by the Government is that they are extremely academic and relate to studies of incentives internally in various countries but do not relate to the comparative study of incentives across international boundaries.

It might be worth selecting a large international company for this study. Such an organisation must face the problem of adjusting its salaries and rewards to younger executives in a number of different countries. A firm like I.B.M. must undertake this type of operation, and must be well placed to judge comparative tax disincentives in countries using different tax structures. I do not believe that such a study has been conducted. There must be a relationship between the enormous buoyancy of some of these countries across the Channel and the comparatively low levels of taxation in those countries compared with our direct personal average and marginal rates of taxation.

The Chancellor asserted blithely in his second Budget speech—I have quoted the giveaway line in his first speech—that: So long as"— a man's— total earned income does not exceed £77 a week, it is … impossible for the ordinary man to pay as much as one third in tax on any part of his earnings, whether regular or overtime."—[OFFICIAL REPORT, 15th April, 1969; Vol. 781, c. 1031.] There must be as much comfort for the ordinary man in that assertion as there is in telling a life prisoner that it is unusual for a life sentence to exceed 25 years.

The shocking thing about the Chancellor's assertion is that the possible level should be anywhere near as high as one third; that he should regard anything approaching one third of a working man's income as a tolerable amount to pay in taxation, which was the implication of his statement.

I remind the Committee that if one goes downwards from the level of income quoted by the Chancellor when giving international comparisons—namely, from an income level of £5,000 a year—one finds that while at that level a married man with two children under 11 in the United Kingdom is paying substantially over one third in tax, if one goes down the scale to as little as £1,250, which is about the average wage, one finds that such a man is still paying one third, while his German counterpart is paying only 18 per cent. or less than one fifth. Thus the level of one third—which, for the lower income groups is too high—starts extraordinarily low down in the scale in the United Kingdom for personal earnings; it is not approached in, for example, Germany until one reaches the income brackets about £4,000 per year. That is why I say there is not much comfort for the working man in this country in the Chancellor's assertion that he cannot pay more than one third of his income in tax.

In considering the extremely serious effect that our high rates of taxation have, particularly on younger executives, it is interesting to note what Professor Merrett wrote in The Director, a magazine which is widely read by hon. Members, in the issue of February, 1968: … a relatively low net of tax remuneration (like relatively low wages in a factory) must be expected to result in a weakening of discipline. By that he meant people having a "why bother" attitude. He went on, when discussing incentives, to say that the argument cannot be deployed—to use the Army analogy—which says that if a soldier is paid a little more he will fight a little harder. The incentive argument is really that if one raises the whole scale of salaries or the pay of recruits, the sort of people one will attract into the Army will be of a higher calibre, which is what we want throughout industry in the country generally.

This is the real argument about incentives. We are really discussing the sort of people we can recruit into highly responsible and difficult posts. We are discussing the levels of necessary rewards, not only at the managerial level but indeed at the skilled level throughout industry.

Some suggest that it is irresponsible of the Opposition to be proposing a reduction in taxation which might cost the Chancellor as much as £350 million. This bring me to the point I made in an intervention when the Chancellor was speaking; that it is standing the argument on its head to say that when the Chancellor is acquiring a revenue surplus which by the end of March, 1970, will be £800 million—a large proportion of which will be applied to meet maturing gilt-edged securities held by the public—he cannot spare a bit for the taxpayer.

We have been told that a little of the surplus is to be drawn off to stoke up the sterling capital of the exchange equalisation account—which should, we hope, be run down as a result of taking in gold and foreign currency. That does not now look likely to happen rapidly; but in any case we know that a large proportion of the Revenue surplus will go to pay for maturing gilt-edged securities, particularly electricity stock and other issues which will be falling in this year.

We may thus assume that, say, £300 million to £500 million is being taken from the taxpayer explicitly to be handed back to the holders of gilt-edged stock which is maturing Some of that may be reinvested, but it is equally possible that if the money were instead handed back to the taxpayer he would not blow it all. If it is possible, therefore, to hand back millions of £s worth of taxpayers' money to those with gilt-edged securities which are maturing, it must in theory be possible to leave some of that money instead in the hands of the taxpayer.

The Conservatives are suggesting that £300 million or £400 million should be left in the hands of the taxpayer. And this makes sense. If when the gilt-edged securities fall in the Chancellor hopes to make some conversion issues—in other words, to persuade some of those with maturing securities immediately to reinvest in conversion stock—he will have to offer a much higher rate of interest. I suspect that the going rate, to be effective, will have to approach what the Chancellor proposes to offer to those who are prepared to start saving under his new contractual savings scheme, for which the grossed up rate for the standard rate taxpayer over a five-year contract will be 12 per cent.

If the Government had done the sensible thing they would have reduced the standard rate of taxation, as a result of which the grossed up return on, for example, the contractual savings scheme would then have to be very much less to make it attractive—because the lower rates of taxation would have affected the grossing up scale. For this reason we see no reason why we should not remit taxation, lower the standard rate, and not hand quite so much back to those whose gilt-edged stock is maturing. The Government could borrow instead.

This shows that it is a perfectly feasible proposition to cut back some of the money which has been taken from the taxpayer and, instead, to borrow money to pay back the maturing stock. Do not let us hear any more about tax remission being irresponsible or impracticable in a year with such an enormous Revenue surplus. The time has surely come to turn to incentives to meet some of our difficulties.

In an intriguing debate with Professor Galbraith in a television programme on 2nd July, 1968 the right hon. Gentleman said in relation to the 1968 Budget: The increase in taxation was very substantial indeed. This mainly arose out of the need to put, produce, the swing-round on the balance of payments which we were discussing earlier. It is clear that with the enormous increase of taxation in 1968 there was no such swing-round in the balance of payments which was the justification for the operation.

That being so, let us try an alternative. Ours is to lower rates of direct taxation, and to provide greater incentives so that the people of Britain may have a chance to pull on their boots and get the Government off their backs.

Mr. Nott

I regret that the hon. Member for Cornwall, North (Mr. Pardoe) is not in his place, because I intend to refer to him. His argument was completely demolished by my hon. Friend the Member for Barkston Ash (Mr. Alison) and I thought it a pity that a fellow Cornish hon. Member should have been made to look so foolish. Perhaps that is just retribution to the electorate of Cornwall, North for having returned a Liberal to represent them. I was interested to hear the hon. Gentleman refer to the Conservative candidate in his division. I would consider myself to be on a very slippery slope if I were ever to mention my political opponent in this House, or elsewhere for that matter.

We are considering today the effect of direct taxation upon incentives—how hard people are prepared to work, to save, to take risks and to accept promotion. In doing this one or two simple facts need to be mentioned before we start.

First, we ought to recognise that for over 95 per cent. of the population a far higher proportion of their earnings are taken from them in contributions, in rates and in indirect taxation than in direct taxation on their income. Any serious debate on average rates of tax cannot really be conducted without considering the total levies by the State upon its citizens. It is only at the margin that the effects of direct taxation so predominate. Thus, throughout my speech I will distinguish between the average and the marginal rates, concentrating on the latter.

I am glad to see that the hon. Member for Cornwall, North has now returned. Were it not out of order, I should repeat what I said at the opening of my speech.

Mr. Pardoe

I am sorry to have missed the hon. Gentleman's insults. They are always a delight. I had gone out to gather "Economic Trends" to prove that what his hon. Friend the Member for Barkston Ash (Mr. Alison) said was a load of codswallop.

Mr. Nott

I will not follow the hon. Gentleman by using an unparliamentary term of that nature.

Mr. Pardoe

It is not unparliamentary. It is Cornish.

Mr. Nott

It is interesting to note that his speech was loaded with inaccuracies. He now returns to the Chamber to express another view in thoroughly unparliamentary language.

I want to get back to my second point,—which has not so far been mentioned in this debate. It is often said that direct taxation in this country incorporates a highly progressive system. This is just not true of 98 per cent. of incomes. We have an income tax system which is only mildly progressive and an indirect taxation system which is highly regressive. The net result is that overall our taxation system, apart from that on the highest incomes, is generally regressive, not progressive as is normally claimed. It is the cash transfer payments, the tax allowances, the family allowances and the welfare benefits which make our global system so progressive in its incidence. It is virtually impossible to have a really meaningful debate on any real tax reform of tax reduction unless we consider the whole question of welfare benefits at the same time as direct taxation.

Thirdly, there is the favourite statement of the Government that many other Western countries—we heard this from the Chancellor today—are more heavily taxed than us. Though this may be true of certain countries and of average tax rates—indeed, in some cases, of total taxes, too—the point is none the less irrelevant. Britain could have the lowest taxes in the world and still be overtaxed in the important meaning of the term. The important question to be asked has to be a purely national one: have taxes in this country reached a level where they have become quite self-defeating? This, as the Chancellor said, is a political question which must ultimately depend on judgment.

The answer to the question can only be related to the peculiar characteristics and attitudes of the British people at one point of time. International comparisons are worthless in seeking an answer to this question. It revolves around the preferences of the British people and the opportunity cost of a different mix of policies. What is the nation's attitude at this point of time to saying, to consumption, to inflation, towards the rich and the poor? These attitudes are a by-product of our environment and of our history. It is completely pointless to my mind to compare our tax rates with the Germans. Therefore, I disregard the argument that marginal tax rates on our higher incomes appear to be the highest in the developed world, because it would be intellectually inconsistent to use this argument for the higher incomes and reject it on the issues as a whole.

Broadly, there are two schools of thought on incentives. First, there is the empirical approach which tries to deduce from studies of behaviour how the attitudes of people are affected by taxation. Secondly, there is the approach which is largely used by Professor Merritt and Mr. Monk—this is the approach of the Conservative Party—which adopts a logical attitude to the substitution effects of high taxation. Indeed, pure observation and aspects of the surveys mentioned by my right hon. Friend support the Conservative belief that our taxes have become quite self-defeating. Anyone who has looked at the many studies to which reference has already been made by the hon. Member for Ashton-under-Lyne (Mr. Sheldon), the hon. Member for Heywood and Royton (Mr. Barnett) and by the Chancellor, studies which ranged from the Royal Commission on the Taxation of Profits and Income onwards, is bound to conclude that the studies do not show—I think this must be admitted—that high taxation and disincentive go hand in hand. Indeed, many of the surveys are a real boon to a high-taxing Socialist Chancellor. But where the surveys contradict the comments made by the Chancellor are in four particular areas where both schools of thought—the surveys which have been made and also the attitudes of the Conservative Party and of Professor Merrett—come together and indicate agreement.

First, the surveys show that nearly all people in this country believe themselves to be more highly taxed than is the case. A major proportion of the working population probably believe that they pay the standard rate of 8s. 3d. on any increment of income while, astonishingly enough, the managerial class, if I can call it that, is even more mistaken on this point than the average factory worker. Secondly, it is also clear from surveys that jumps in marginal rates are frequent in our system and that people recognise a jump in marginal rates when and where it hits them.

Thirdly, the surveys show, and pure observation confirms this fact, that where disincentive really does occur is on the very highest incomes where marginal rates are very great indeed and also, finally, on the very low incomes where, for reasons connected with the present cash transfer and welfare benefits system, the marginal rates are also very high.

I want to deal then with these four major areas. First, how people can be made aware of what their actual average tax rate is. Secondly, how artificial jumps in marginal rates can be removed from out the system. Thirdly, how the greatest marginal rates on high income earners can be eliminated. Fourthly, how the high disincentive element in welfare payments which are all wrapped up with the income tax system, can be reformed. In choosing these four areas I do not mean to claim that it is not important for us to reduce the average rates of tax. Of course it is, and it can be done. But the four points that I have mentioned are of major priority.

It is hardly surprising, as the hon. Member for Cornwall, North rightly said, that people are confused about their average rates of tax since all the published rates relate to unearned income. It really is quite ludicrous that the standard rate of tax of 8s. 3d. is only relevant to the 1 per cent. of taxpayers whose income is entirely of an unearned nature. About 80 per cent. of the population, which has earned income only, never pay a marginal rate of 8s. 3d. It really was fantastic for the Chancellor in his Budget statement to claim that although this is a necessary reform it cannot be made for administrative reasons. One has to ask, who is running the country? Is it the Government or the Inland Revenue and the I.M.F.?

The Minister of State, Treasury (Mr. Dick Taverne)

The hon. Gentleman is right in saying that administrative reasons should not dictate these matters, but one must have regard to the number of civil servants who would be required to implement such a major administrative reform

Mr. Nott

I shall come to an even more radical administrative reform which would remove one-third of the Inland Revenue tomorrow. If the hon. and learned Gentleman allows me to get to it, I shall cover his intervention.

If we recognised that 6s. 5d. is the standard rate of tax on earned incomes the position would be made immeasurably clearer. It is the rate which applies to the massive proportion of our population. If all incomes were taxed at 6s. 5d. we would have a proportional system in this country, and a very good one at that. It is the allowances and the reliefs for children, for life insurance, for mortgages, and the rest, which make our system progressive in its incidence.

Coming next to the question of jumps in marginal rates, the fact is that the reliefs to which I have referred, children's allowances, mortgage rates, and more particularly the earned income reliefs, come in at special levels, and I agree with my right hon. Friend when he holds the Chancellor responsible for quoting the only income which it was possible to quote to support his case. At £4,005 half the earned income relief is lost, and the marginal rate suddenly jumps to 7s. 4d. At £5,001—and that is why the Chancellor chose £5,000—the marginal rate jumps to 9s. 1d. as surtax begins to bite, and thereafter there is a heavy jump to a marginal rate of 14s. 9d. at an income level of £9,945, where the remainder of earned income relief is lost. This, I think, is the second major area which needs reform—jumps in marginal rates.

At the highest income level the marginal rates are catastrophic. The law makes it virtually impossible for a person who has only earned income to receive an after tax income of over £10,000. That may not sound bad to hon. Gentlemen opposite, but when one goes on to consider that the only way in which someone can receive an after tax income of over £10,000 is if his income is unearned, then it is very strange indeed that a Socialist Chancellor should perpetuate a system which makes it possible to have a very high income only if one is in possession of inherited wealth.

Finally, I come to the poorer sections of the community whom our so-called progressive system of taxation is meant to favour. Of course it does not, because one cannot consider the income tax system in isolation from social benefits. What happens is that the lowest income earners can pay a proportionately equal marginal rate upon their increment of income to that paid by a man who is chairman of an international corporation. The lowest income earners can pay an effective tax at the equivalent of 15s. in the £, and I shall demonstrate how this arises.

Let us consider a man who receives £15 a week. I think the Chancellor took the example of £700 a year, which is about £14 a week. I shall take the example of a man earning £15 a week, as this is the average wage in my constituency. Although this man may not know it, he could be entitled at this level of income to a range of means-tested benefits, and he probably is. If his income were to rise from £15 to £18 a week, first he would lose 15s. worth of school meals, 13s. 4d. in rent rebate, if he happens to be in his own house he will lose 15s. in rate rebate, and have to pay an additional 2s. 10d. in the £ in graduated contributions. That is a total of 46s. a week on an extra income of 60s. a week, equivalent to 15s. 4d. in the £. In fact, some of the highest marginal rates of taxation are upon the lowest income earners.

The hon. Member for York (Mr. Alexander W. Lyon) is grinning. If he goes round his constituency, as I go round mine, he will find that there is widespread disenchantment among the best of our working population with the social welfare system. He will also find a growing tendency among the best people who are earning £15 to £18 a week to substitute extra leisure for extra work. I am only making the point that if someone is in receipt of social welfare benefits, and if on additional income he has to pay a marginal rate of transfer of 15s., that must have a highly disincentive effect.

It seems that our tax system has reached the end of the road, and that it is only the politicians who fail to recognise it. It convinces people that they pay far more in tax than is the case. It penalises the pace-makers of our society who earn the higher amounts, and also those who earn the middle range incomes, and it makes a mockery of wage-earners who genuinely have a desire to work.

I know the answer to this. It does not come from tinkering around with the standard rate of income tax, shifting the burden from one tax to the other. The only answer lies in a radical change in our whole tax and welfare benefits, system, so radical that the whole weight of British conservatism, with a small "c", will be against it, and against it, too, will be the vested interests of administration and of those who are rightly suspicious of simplicity.

Because the debate is drawing to a close I do not have time tonight to go into all the details, but the hon. Member for Heywood and Royton touched on the subject. The solution lies in either a guaranteed minimum income, or in a sensible form of negative income tax. For those who throw up their hands in horror and say that we cannot have a guaranteed minimum income or negative income tax, I would only say that we have both already but they are highly inefficient ones. In fact, we have a guaranteed minimum income through the social welfare system, and we have a negative income tax in the form of family allowances. The trouble is that these systems are badly organised, they are complicated, and administratively highly expensive.

I conclude by saying to the Minister of State that if he abolished the standard rate of income tax of 8s. 3d., which is relevant only to unearned income, and if he were to abolish all reliefs and allowances and have a proportional rate of 6s. 5d., and if he were then to pay out to every member of the community one single cash payment in order to make the system progressive, the whole of our tax system would be transformed. I do not want to minimise the huge complications of this problem, but unless this is done by a Government within the next few years, our tax system will get more and more complicated and more and more burdensome and the people will have more and more disincentive loaded on them by the method which we wield.

I hope that in due course some further thought will be given to this by both parties in the House.

Mr. Ridsdale

I support what was said by my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) and my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro), who have respectively suggested reductions of 6d. and 9d. in the rate of income tax.

The Chancellor of the Exchequer accused the Opposition of being irresponsible in suggesting reductions in income tax which might amount to anything from £177 million to £340 million. When he said that it went through my mind that those who are in the dark and irresponsible are the Chancellor of the Exchequer and the Government, who have increased Government spending by no less than £5,000 million and have got our economy into a straitjacket. Having done that they now accuse the Opposition of being irresponsible for suggesting a decrease of 6d. in the rate of income tax. Such a queer way of arguing must stem from a feeling of guilt.

I come to the question of to what extent income tax should be reduced. I was delighted that my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) said that the proposals of 6d. and 9d. were mere pointers. If we are to make our system of capitalism work and not have the system of Socialism in which the economy has been strait-jacketed for so long, there will have to be greater reductions in income tax, than have been pointed to.

I could not help thinking of the speech made last year at Morecambe by my right hon. Friend the Member for Wolverhampton, South-West (Mr. Powell), in which he proposed a reduction of 4s. in the £, and of Mr. Paul Chambers's suggestion of a reduction of 4s. in the £. There are two ways in which such a reduction could be achieved. One is the method proposed by my right hon. Friend the Member for Wolver-hampton, South-West—of reducing Government expenditure. However, my right hon. Friend did not propose cutting the social services. My right hon. Friend visualised the reduction being achieved by reducing investment grants, development area grants, the Industrial Reorganisation Corporation's activities, housing subsidies, the levy system, and the number of civil servants to the tune of 60,000.

Another way of achieving the reduction would be, as Mr. Paul Chambers proposed, to hold Government spending at its present level and gradually to increase production so as to reduce taxation. This was the method employed by the Conservative Government.

I want such proposed reductions greatly to be improved upon, because the proposals of 6d. and 9d. are mere pointers. Britain must face the reality that we cannot continue with these vast increases in Government spending, because with these vast increases we cannot raise through the capital market the money needed for investment in manufacturing industries. When investment is made by the Government in manufacturing industries, the Government's choices are wrong. Until, by reductions in taxation greater than the mere pointers of 6d. and 9d., the investor is allowed to be responsible for choosing his own investment and to use the market as a guide, we shall not get the investment going into the right manufacturing industries.

Sir H. d'Avigdor-Goldsmid

Despite your great vigilance, Mr. Irving, and that of your successors, we have had what can be described as a far-reaching debate. You did your best to curtail it, but perhaps your successors were less successful.

The great value of the debate has been that it has shown the difference in philosophy between the two sides of the Committee. We on this side are convinced that one of the things that is wrong with the economy is the absence of incentives We think that a reduction in taxation would produce a useful incentive. Hon. Members opposite who have spoken did their best to pretend that there is a strong argument against the giving of incentives by a reduction in taxation.

The hon. Members for Heywood and Royton (Mr. Barnett) and for Ashton-under-Lyne (Mr. Sheldon) made rather heavy weather of this and did not achieve any worthwhile result. We have a slight convert to our views in the Chancellor,

who is prepared to admit that there is an incentive quality about a reduction in taxation.

As this is the firm view of the Conservative Party, a view which, as my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) has stressed, we have pressed year in, year out, we think it right to divide the Committee on this and to vote in favour of the Amendment.

Question put, That the Amendment be made:—

The Committee divided: Ayes 166. Noes 223.

Division No. 212.] AYES [7.57 p.m.
Alison, Michael (Barkston Ash) Gower, Raymond Morgan, Geraint (Denbigh)
Allason, James (Hemei Hempstead) Grant, Anthony Morrison, Charies (Devizes)
Astor, John Grant-Ferris, R. Mott-Radclyffe, Sir Charles
Awdry, Daniel Gresham Cooke, R. Munro-Lucas-Tooth, Sir Hugh
Baker, Kenneth (Acton) Gurden, Harold Murton, Oscar
Bennett, Sir Frederic (Torquay) Hall, John (Wycombe) Nabarro, Sir Gerald
Bennett, Dr. Reginald (Gos. & Fhm) Hall-Davis, A. G. F. Noble, Rt. Hn. Michael
Berry, Hn. Anthony Harris, Frederic (Croydon, N. W.) Nott, John
Bessell, Peter Harris, Reader (Heston) Onslow, Cranley
Biffen, John Harrison, Col. Sir Harwood (Eye) Osborn, John (Hallam)
Birch, Rt. Hn. Nigel Harvey, Sir Arthur Vere Osborne, Sir Cyril (Louth)
Black, sir Cyril Hastings, Stephen Page, Graham (Crosby)
Blaker, Peter Hawkins, Paul Page, John (Harrow, W.)
Boardman, Tom (Leicester, S. W.) Heald, Rt. Hn. Sir Lionel Pardoe, John
Boyd-Carpenter, Rt. Hn. John Higgins, Terence L. Percival, Ian
Boyle, Rt. Hn. Sir Edward Hiley, Joseph Peyton, John
Braine, Bernard Hill, J. E. B. Pounder, Rafton
Brewis, John Hirst, Geoffrey Powell, Rt. Hn. J. Enoch
Brinton, Sir Tatton Holland, Philip Prior, J. M. L.
Bromley-Davenport, Lt.-Col. Sir Walter Hordern, Peter Pym, Francis
Brown, Sir Edward (Bath) Hunt, John Quennell, Miss J. M.
Bruce-Gardyne, J. Hutchison, Michael Clark Rees-Davies, W. R.
Buchanan-Smith, Alick (Angus, N & M) Iremonger, T. L. Renton, Rt. Hn. Sir David
Buck, Antony (Colchester) Jenkin, Patrick (Woodford) Ridley, Hn. Nicholas
Bullus, Sir Eric Johnson smith, G. (E. Grinstead) Ridsdale, Julian
Burden, F. A. Jones, Arthur (Northants, S.) Royle, Anthony
Campbell, B. (Oldham, W.) Jopling, Michael Russell, Sir Ronald
Carlisle, Mark Joseph, Rt. Hn. Sir Keith Scott-Hopkins, James
Clark, Henry Kaberry, Sir Donald Sharples, Richard
Clegg, Walter Kershaw, Anthony Shaw, Michael (Sc'b'gh & Whitby)
Cooke, Robert Kimball, Marcus Silvester, Frederick
Corfield, F. V. Kirk, Peter Sinclair, Sir George
Craddock, Sir Beresford (Spelthorne) Knight, Mrs. Jill Smith, John (London & W'minster)
Crouch, David Lambton, Viscount Speed, Keith
Cunningham, Sir Knox Lancaster, Col. C. G. Stodart, Anthony
Dalkeith, Earl of Lane, David Stoddart-Scott, Col. Sir M.
Dance, James Lewis, Kenneth (Rutland) Summers, Sir Spencer
Davidson, James (Aberdeenshire, W.) Lubbock, Eric Taylor, Frank (Moss Side)
d'Avigdor-Goldsmid, Sir Henry MacArthur, Ian Temple, John M.
Deedes, Rt. Hn. W. F. (Ashford) Mackenzie, Alasdair (Ross & Crom'ty) Thatcher, Mrs. Margaret
Donnelly, Desmond Maclean, Sir Fitzroy Turton, Rt. Hn. R. H.
Doughty, Charles Macleod, Rt. Hn, Iain van Straubenzee, W. R.
Drayson, G. B. McMaster, Stanley Waddington, David
du Cann, Rt. Hn. Edward Maddan, Martin Walker, Peter (Worcester)
Elliot, Capt. Walter (Carshalton) Maginnis, John E. Walker-Smith, Rt. Hn. Sir Derek
Emery, Peter Marples, Rt. Hn. Ernest Wall, Patrick
Errington, Sir Eric Marten, Neil Ward, Dame Irene
Ewing, Mrs. Winifred Maude, Angus Whitelaw, Rt. Hn. William
Eyre, Reginald Mawby, Ray Wiggin, A. W.
Farr, John Maxwell-Hyslop, R. J. Williams, Donald (Dudley)
Fisher, Nigel Maydon, Lt.-Cmdr. S. L C. Winstanley, Dr. M. P.
Fortescue, Tim Mills, Peter (Torrington) Wood, Rt. Hn. Richard
Foster, Sir John Mills, Stratton (Belfast, N.) Wylie, N. R.
Glover, Sir Douglas Miscampbeil, Norman TELLERS FOR THE AYES:
Godber, Rt. Hn. J. B. Monro, Hector Mr. Timothy Kitson and
Goodhart, Philip More, Jasper Mr. Bernard Weatherill.
Goodhew, Victor
Albu, Austen Grey, Charles (Durham) Newens, Stan
Alldritt, Walter Griffiths, David (Rother Valley) Noel-Baker, Rt. Hn. Philip
Anderson, Donald Griffiths, Rt. Hn. James (Llanelly) Oakes, Gordon
Archer, Peter Griffiths, Will (Exchange) Oram, Albert E.
Ashley, Jack Hamilton, James (Bothwell) Orbach, Maurice
Ashton, Joe (Bassetlaw) Hamilton, William (Fife, W.) Orme, Stanley
Atkins, Ronald (Preston, N.) Hamling, William Oswald, Thomas
Atkinson, Norman (Tottenham) Hannan, William Page, Derek (King's Lynn)
Bagier, Cordon A. T. Harper, Joseph Paget, R. T.
Barnes, Michael Harrison, Walter (Wakefield) Palmer, Arthur
Barnett, Joel Hart, Rt. Hn. Judith Pannell, Rt. Hn. Charles
Baxter, William Hazell, Bert Park, Trevor
Beaney, Alan Healey, Rt. Hn. Denis Parker, John (Dagenham)
Bence, Cyril Heffer, Eric S. Parkyn, Brian (Bedford)
Bidwell, Sydney Hilton, W. S. Pavitt, Laurence
Binns, John Hooley, Frank Pearson, Arthur (Pontypridd)
Blackburn, F. Horner, John Peart, Rt. Hn. Fred
Boardman, H. (Leigh) Houghton, Rt. Hn. Douglas Pentland, Norman
Booth, Albert Howell, Denis (Small Heath) Perry, Ernest G. (Battersea, S.)
Boyden, James Hughes, Rt. Hn. Cledwyn (Anglesey) Perry, George H. (Nottingham, S.)
Bray, Dr. Jeremy Hughes, Hector (Aberdeen, N.) Price, Christopher (Perry Barr)
Brooks, Edwin Hughes, Roy (Newport) Price, Thomas (Westhoughton)
Brown, Hugh D. (G'gow, Provan) Hunter, Adam Price, William (Rugby)
Brown, Bob (N'c'tle-upon-Tyne, W.) Hynd, John Probert, Arthur
Brown, R. W. (Shoreditch & F'bury) Irvine, Sir Arthur (Edge Hill) Richard, Ivor
Buchan, Norman Jackson, Peter M. (High Peak) Roberts, Albert (Normanton)
Janner, Sir Barnett Roberts, Rt. Hn. Goronwy
Buchanan, Richard (G'gow, Sp'burn) Jay, Rt. Hn. Douglas Robertson, John (Paisley)
Butler, Herbert (Hackney, C.) Jenkins, Hugh (Putney) Robinson, Rt. Hn. Kenneth (St. P'c'as)
Cant, R. B. Jenkins, Rt. Hn. Roy (Stechford) Rodgers, William (Stockton)
Carmichael, Neil Johnson, Carol (Lewisham, S.) Roebuck, Roy
Carter-Jones, Lewis Jones, Dan (Burnley) Ross, Rt. Hn. William
Conlan, Bernard Jones, J. Odwal (Wrexham) Rowlands, E.
Corbet, Mrs. Freda Jones, T. Alec (Rhondda, West) Shaw, Arnold (Ilford, S.)
Craddock, George (Bradford, S.) Kelley, Richard Sheldon, Robert
Crosland, Rt. Hn. Anthony Shore, Rt. Hn. Peter (Stepney)
Davidson, Arthur (Accrington) Kerr, Mrs. Anne (R'ter & Chatham) Short, Mrs. Renée (W'hampton, N. E.)
Davies, Ednyfed Hudson (Conway) Kerr, Russell (Feltham) Slater, Joseph
Davies, G. Elfed (Rhondda, E.) Lawson, George Small, William
Davies, Dr. Ernest (Stretford) Lee, Rt. Hn. Frederick (Newton) Spriggs, Leslie
Davies, Rt. Hn. Harold (Leek) Lee, Rt. Hn. Jennie (Cannock) Stewart, Rt. Hn. Michael
Davies, Ifor (Gower) Lee, John (Reading) Stonehouse, Rt. Hn. John
Davies, S. O. (Merthyr) Lewis, Arthur (W. Ham, N.) Strauss, Rt. Hn. G. R.
Delargy, Hugh Lewis, Ron (Carlisle) Taverne, Dick
Dell, Edmund Lipton, Marcus Thomas, Rt. Hn. George
Dempsey, James Loughlin, Charles Thornton, Ernest
Dewar, Donald Luard, Evan Tinn, James
Diamond, Rt. Hn. John Lyon, Alexander W. (York) Tomney, Frank
Dickens, James Mabon, Dr. J. Dickson Tuck, Raphael
Dunnett, Jack McCann, John Urwin, T. W.
Dunwoody, Mrs. Gwyneth (Exeter) MacColl, James Varley, Eric G.
Dunwoody, Dr. John (F'th & C'b'e) MacDermot, Niall Wainwright, Edwin (Dearne Valley)
Eadie, Alex Mackenzie, Gregor (Rutherglen) Walden, Brian (All Saints)
Edwards, William (Merioneth) Mackintosh, John P. Walker, Harold (Doncaster)
Ellis, John MacMillan, Malcolm (Western Isles) Wallace, George
English, Michael McMillan, Tom (Glasgow, C.) Watkins, David (Consett)
Ensor, David McNamara, J. Kevin Watkins, Tudor (Brecon & Radnor)
Evans, Fred (Caerphilly) MacPherson, Malcolm Weitzman, David
Faulds, Andrew Mahon, Peter (Preston, s.) Wellbeloved, James
Fernyhough, E. Mahon, Simon (Bootle) Wells, William (Walsall, N.)
Finch, Harold Mallalieu, E. L. (Brigg) Whitaker, Ben
Fletcher, Rt. Hn. Sir Eric (Islington, E.) Mallalieu, J. P. W. (Huddersfield, E.) Wilkins, W. A.
Fletcher, Raymond (Ilkeston) Mapp, Charles Willey, Rt. Hn. Frederick
Fletcher, Ted (Darlington) Marquand, David Williams, Alan (Swansea, W.)
Foley, Maurice Mason, Rt. Hn. Roy Williams, Clifford (Abertillery)
Foot, Michael (Ebbw Vale) Mayhew, Christopher Williams, Mrs. Shirley (Hitchin)
Ford, Ben Mellish, Rt. Hn. Robert Williams, W. T. (Warrington)
Forrester, John Mendelson, John Willis, Rt. Hn. George
Fowler, Gerry Millan, Bruce Wilson, Rt. Hn. Harold (Huyton)
Fraser, John (Norwood) Miller, Dr. M. s. Wilson, William (Coventry, S.)
Freeson, Reginald Mitchell, R. C. (S'th'pton, Test) Winnick, David
Gardner, Tony Morgan, Elystan (Cardiganshire) Woodburn, Rt. Hn. A.
Garrett, W. E. Morris, Alfred (Wythenshawe)
Ginsburg, David Morris, Charles R. (Openshaw) TELLERS FOR THE NOES:
Gordon Walker, Rt. Hn. P. C. Murray, Albert Mr. Ioan L. Evans and
Gray, Dr. Hugh (Yarmouth) Neal, Harold Mr. Neil McBride.
Gregory, Arnold
Clause ordered to stand part of the Bill.
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