§ I come now to the more important changes in taxation. I had, first, to consider whether such concessions as I can make should be concentrated on the direct or the indirect side. Clearly, remissions in either field would in themselves be desirable. But I believe that direct taxation should this year have priority. This is bound to a large extent to be a matter of judgment, although I can give at least one powerful empirical reason for the choice.
§ The continuing rise in incomes and prices means a more than proportionate increase in the yield of income tax—so that the real burden of the tax rises—without anything like a corresponding increase in the yield of the specific indirect taxes such as those on alcohol, tobacco, petrol or vehicles. The result is to bring more and more people into tax and to increase the real burden on small as well as large incomes, while, at the same time, the real weight of specific taxation on goods and services declines with changes in the value of money.
§ If there were no tax changes in this Budget the proportion of total tax receipts from direct taxation would rise from 56½7 per cent. last year to 58.7 per cent. in 1970–71; and the proportion contributed by specific duties and taxes would fall from 32.2 to 30.4 per cent. If earnings rose only at the same rate as last year about 1 million additional people would be brought within the tax field, and the effective rate of tax on a married man with two young children and average industrial earnings would rise by about 11 per cent. I see neither justice nor logic in allowing this development to continue unchecked.
§ Indeed, a major issue confronting me has been whether I should merely give priority to direct taxation reliefs, within a limited framework, or whether I should endeavour to raise substantial new sums in indirect taxation in order to make larger direct taxation reductions. I have decided firmly against this latter course. 1243 With the more traditional forms of indirect taxation it is difficult to avoid regression, and impossible to achieve a worthwhile switch without a significant effect on the retail price index. I believe that in the present climate this would be both economically and psychologically wrong. I wish neither to give any excuses for still further wage increases nor to give any stimulus to an inflationary mentality.
§ I therefore propose to introduce a Budget which will in no way, either directly or indirectly, do anything to raise prices. Apart from the minor changes I have already described, I have, as a result, no proposals to put before the House in regard to the rates of Customs and Excise duties—including purchase tax—or vehicle excise duties. I cannot reduce them, if I am to give priority to direct taxation relief. But I do not think it right to increase them.
§ Somewhat different considerations apply to the selective employment tax. It does not share the regressive qualities of many traditional indirect taxes, and its effect on the retail price index is very much smaller. We now have Professor Reddaway's extremely valuable report on the distributive trade. [Laughter.] Hon. Members opposite were keen enough to press for it before they did not like what they read in it. This report shows many of the criticisms of the tax to be unfounded. It shows that in both the retailing and wholesaling sectors of the trade S.E.T., possibly associated with the progressive ending of resale price maintenance, has led to an appreciable increase in productivity in addition to that which would have occurred in any case. Thus, one of the main objectives of the tax, to make more labour available for manufacturing industry, has been realised.
§ We can go further than this; since Professor Reddaway reported, the provisional figures for employment in June, 1969, have become available. They show for the first time a substantial increase in numbers employed in manufacturing industry combined with a continued fall in the number employed in the main industries which bear the tax. The architects of the tax can, therefore, feel with some justification that the structure they designed, and upon which I have built, has a basis whose soundness has 1244 been tested and substantiated by objective and empirical inquiry.
§ Nevertheless, I have to bear in mind both the problems of the construction industry and the fact that the tax has borne two successive and heavy increases in the past two years. I have, therefore, decided that here, too, it is right to leave rates unchanged.
§ Professor Reddaway has also made some criticisms of the way the tax works in certain areas. He drew attention to two principal anomalies. The first arises from the liability of wholesalers to the tax while manufacturers' wholesaling activities are exempt. The second anomaly arises from the exemption of the self-employed from the tax. To take action to deal with these two anomalies—the one reducing, and the other extending, the scope of S.E.T.—would amount to a major refashioning of the tax.
§ I have come to the conclusion that I should not embark on such a task this year. Professor Reddaway indicates that he will have more to say about the self-employed in later reports, and I think that it would be wise to wait for this before taking a decision on so important a matter. Since I am not proposing to increase the rates of S.E.T., or to bring in the self-employed, this means that I can make no concession to the wholesalers.
§ The cost of exempting the wholesalers would be about £50 million a year, and I cannot afford to forgo this revenue if I am to meet claims upon me in other fields for which, as I see it, a still stronger case can be made out.
§ Professor Reddaway did, however, make one important suggestion the acceptance of which I am glad to be able to announce. He considered that it would be preferable for the tax to be related to earnings rather than be expressed as so much per head. With the introduction of the earnings-related national insurance scheme it will be possible to move over from a flat rate to a graduated system, under which the Inland Revenue will be able to collect the tax as a percentage of the total payroll.
§ At the same time, we shall be able to collect the tax on a genuinely voluntary—[Laughter]—genuinely selective basis and dismantle the cumbrous, although not expensive, machinery of collecting 1245 the tax from all employers and then refunding more than half of it. These reforms, when implemented with the earnings related pensions scheme, will reduce somewhat the burden of the tax on those industries where earnings are below average and will relieve manufacturers from the obligation to provide an involuntary loan to the Government.
§ There is one concession, outside the scope of Professor Reddaway's first report, which I feel I should make. The House will recall that last year we effectively exempted film production from the scope of S.E.T., and I was urged by a number of hon. Members to treat the live theatre in the same way as the cinema. These representations have been reinforced by the recent report published by the Arts Council on the state of the commercial theatre.
§ Accordingly, I now propose to exempt the production and staging of plays, but not the managing of theatres, and thereby to reduce the disparity of treatment between the commercial and the subsidised theatre. The cost will be about £500,000 in a full year. I shall be consulting representatives of the theatre interests about the exact form of the Order which will give effect to this.
§ Having dealt with the indirect taxes whose rates I propose to leave as they are, I can now address myself to the question of direct taxation.
§ Industrial Buildings
§ I begin with a change which will benefit industry. I have spoken earlier of the need for a good level of manufacturing investment, and of my own belief that the prospects are reasonably encouraging. However, investment in industrial buildings shows signs of increasing less rapidly in the immediate future, and there is some unused capacity in the construction industry, particularly in the less prosperous parts of the country.
§ I therefore propose a short-term stimulus to investment in industrial buildings. The rate of initial allowance for tax purposes will be increased from the present 15 per cent. This will apply to expenditure incurred on the construction of an 1246 industrial building after 5th April, 1970, and before 6th April, 1972. The new rate will be 30 per cent. in the country generally, but 40 per cent. in both development and intermediate areas. The 40 per cent. rate will also apply to Northern Ireland.
§ The reason for the two-year limit is, first, that this very heavy rate of tax alowance would not be justified in different circumstances, and, second, that I wish industrialists to move quickly to take advantage of the temporary opportunity to write off much larger amounts of the cost of new construction in the first year. The annual allowance, which governs the amounts which can be written off against tax in subsequent years, remains unchanged. The cost to the Exchequer in the present financial year is nil, but I would expect companies' future tax liabilities as a result of work undertaken this year to be reduced by about £30 million. I would, therefore, expect to see some significant stimulus both to investment and to activity in the construction industry.
§ Age Exemption
§ I now turn to taxation on persons. I begin here with a modest, but, I believe, worthwhile concession to the old. I propose to make a substantial increase in the income limits up to which people of 65 or over qualify for age exemption. Last year's Finance Act raised these income limits from £415 to £425 for single people and from £665 to £680 for married couples. These increases took account of the increases in national insurance retirement pensions which were payable in 1969–70. The increases I now propose for 1970–71 will go considerably further than the £15 for single people and £25 for married couples which would be broadly necessary to reflect a full year's increases in national insurance retirement pensions. I propose an increase of £50 to £475 for single persons and one of £60 to £740 for married couples.
§ For persons with incomes somewhat above the exemption limit there is a marginal relief under which the tax bill is not to exceed 45 per cent. of the income in excess of the limit. This figure will now become 50 per cent. for the marginal relief might otherwise in some cases run 1247 up well into the surtax scale. Even with the 50 per cent., there will in most cases be some benefit up to an income of £577 for the single elderly, and £994 for the married. One hundred thousand will be entirely freed from tax, and another 300,000 will have their liability reduced. The cost to the revenue will be nearly £8 million for a full year.
§ Additional Personal Allowance
§ I propose to correct what I think is an injustice in the tax system affecting certain women who have single-handed responsibility for young children. At present, a single man—that is, a man who is entitled only to the single personal allowance—can claim an additional personal allowance of £100 if he is entitled to child allowance for a young child resident with him; so too can a widow. But in the case of a woman who is divorced or separated from her husband, or unmarried, there is a further condition for the allowance. She must either be totally incapacitated or engaged full-time in earning her living throughout the income tax year.
§ I think that this extra condition is difficult to justify, particularly where the mother cannot take a full-time job because of her responsibilities for the child. I propose to abolish the condition of full-time work or total incapacity for those single women who have sole responsibility for a young child. I see no reason in equity why these women should be treated differently from widows or from men in a comparable situation. The change will also be a small simplification of the tax system. I estimate that the number of women benefiting will be about 100,000 and that the cost of this concession will be about £3½ million for a full year.
§ Dependent relative allowance income limit
§ I should also mention that, as I announced in reply to a Question on 29th October last year, I propose to increase the dependent relative allowance income limit. This allowance is given in full where the income of the dependent person does not exceed a certain limit. This limit will be increased from £245 to £260. P.A.Y.E. codings for 1970–71 have already been worked out on this basis.
1248§ Surtax
§ I now turn to a surtax point. There is an increasing and heavy administrative cost in collecting surtax from the steadily rising number of small payers at the lower end of the scale. Over the past seven or eight years the total number of surtax payers has almost doubled, and if nothing was done there would be nearly 600,000 surtax payers for 1970–71 compared with 286,000 for 1961–62. As things stand, it would cost £850,000 to collect £4 million of surtax from those with surtaxable incomes between £2,000 and £2,500, a collection cost of no less than 21 per cent. This compares with an average collection cost of 1.5 per cent. for Inland Revenue receipts as a whole.
§ Apart from other considerations, I cannot justify this degree of administrative cost for such a small amount of revenue. In the longer term, we must find more radical solutions, and study is being made of possible alternatives, but as an immediate remedy I propose to exempt from surtax persons with surtaxable incomes not exceeding £2,500. I cannot, however, afford to give relief all the way up the surtax scale.
§ I am, therefore, reviving the sort of arrangement which applied in the early days of the tax. Surtax will be charged only when surtaxable income exceeds £2,500, but when it does it will be imposed, at the same rates as at present, on the excess over £2,000; thus, only the smaller surtaxable incomes will benefit from the new exemption limit. To avoid anomalies where individuals have a surtaxable income somewhat above £2,500 there will be a tapering relief under which the surtax charge will not exceed 40 per cent. of the income over £2,500. Thus, someone with a surtaxable income of £2,600 will pay £40 surtax instead of his present liability of £62 10s. At £2,682 of surtaxable income—and I must stress this—the marginal relief will run out and the normal basis of computation will take over. The figures I have given are for surtaxable income, that is after allowing for any deductions due for earned income or personal allowances.
§ I estimate that this new arrangement will free from surtax about 185,000 people, something like one-third of those who would otherwise be liable for 1969–70. Most of these will have mixed 1249 incomes, partly earned and partly from investments. Of those with wholly investment incomes many will be retired or widowed. There can be few who are capable of working but choose to live solely on investment incomes at the range affected.
§ The cost, including the cost of the marginal relief, will be about £5 million for a full year. The change will mean a staff saving of about 325 in the Surtax Office over the course of this year and about 360 next year; and there will also be a useful saving of work in income tax offices.
§ As one of the reasons for the new arrangements is the administrative saving, they will apply for 1969–70 surtax, that is, the surtax payable on 1st January, 1971, on the basis of 1969–70 income. Thus, the staff saving will be realised as soon as possible. This is a form of retrospection to which I think there will be little objection.
§ Income Tax Allowances
§ I come, finally, to the one major scheme of tax remission which I am able to propose. I said earlier that I would be proposing fiscal changes to take effect now which would involve a full year cost to the revenue of rather more than £200 million. The immediate measures I have just outlined will lead to a net loss of revenue of about £45 million a year. Therefore, though I have not felt myself rigidly pinned down to a precise amount, I have found it necessary to think in terms of a scheme whose annual cost would be of the order of £170 million.
§ This would be enough to allow a cut of about 4½d. in the standard rate. A cut of 6d. in the standard rate without any corresponding reduction in the reduced rate would cost about £225 million in 1970–71. I do not, however, believe that this would in any case be the right way to proceed. It would take no one out of tax, and it would give no benefit to those not already paying at the standard rate. On the other hand, it would, of course, give very great benefits to those with large incomes. It is the most dramatic, but also the most regressive, of all income tax changes.
§ Another approach is a straightforward increase in income tax allowances. The difficulty here is that the increase in allowances either has to be so small as 1250 to make little impact or becomes prohibitively expensive. An increase of £50 each in the single and married allowances, for example, would cost £465 million. Such an arrangement would also involve some but not all of the effects of a standard rate cut. It would enable some people to be taken out of tax, but it would allow no further concentration of the benefit at the lower end of the tax-paying scale, and it would give benefits up the whole length of the income scale.
§ This, is of course, inherent in many schemes of direct tax remission, and I certainly do not take such an enthusiastic view of the virtue of taxpaying as to regard this as bad in itself. But this year I feel that I should concentrate a large part of the limited remissions, which alone are prudent, upon those at the lower end of the scale. These are the people most affected by price increases, and some of them are likely to be left behind in the present rapid round of wage increases.
§ I therefore conclude that it is best to proceed by a substantial extension of the methods which I used last year, that is, operating on both the personal allowances and the reduced rate. I propose large increases in both the single and married allowances. The single allowance will go up by £70 to £325; the married allowance by £90 to £465. I have deliberately decided upon the differentiation in favour of the married. This will help to redress the balance between the two allowances, which has gone rather against the married man in recent years; and it will give greater benefit where, on the whole, responsibilities are greater.
§ To keep the cost within acceptable limits and produce the effect I intend, this will, however, involve the elimination of the reduced rate band—a step further along the road I took last year. I certainly do not regard this as in itself desirable. It means that, in future, when people start to pay tax on earned income they will do so at just over 32 per cent.—the standard rate less the earned income allowance. But I regard it as a worth-while price to pay for raising the threshold a substantial distance, and securing a significant benefit for a large number of people as well.
§ I mention, in passing, that the disappearance of the reduced rate involves 1251 a change from 50 per cent. to 55 per cent. in the figure which governs the marginal relief associated with what is known as the small income relief. This is the relief which gives the equivalent of earned income relief on the investment income of a taxpayer under 65 whose total income does not exceed £450.
§ I will now endeavour to describe the effects on earned incomes of the scheme I propose. For single people and earning wives—for the maximum wife's earned income allowance will be increased with the single allowance—the tax threshold will be raised from £328 a year to £418 a year. At this point, the relief will amount to £21 a year. It will then fall to almost exactly nil at about £660 of earned income a year. I say "almost exactly nil", because for single standard rate payers there will be a nominal loss of 7s. 6d. a year, which at 1¾d. a week, is so small that, because of the tolerances in the P.A.Y.E. system, in many cases it will not, in practice, be collected.
§ Married people, as I have said, do considerably and intentionally better. For a man with two young children the threshold for earned income will be raised from the present £724 a year to £840. At this point, the benefit will be £27 a year. It will then fall to £7 17s. 6d., at about £1,060 a year, and will then continue at that figure indefinitely. For married men liable to surtax, there will be an additional benefit, rising to £10 at the maximum, resulting from the widening of the diffential between single and married allowances.
§ For a married man with one child or without children the maximum benefit will occur somewhat lower in the income scale, as will the fall to £7 17s. 6d., but the continuance of the benefit at this figure will apply equally. With more than two children it will correspondingly occur higher up the income scale, and the same continuance will, of course, also apply.
§ Under this scheme, almost 2 million people who would otherwise have paid tax in 1970–71 will be freed entirely. Of these, more than 700,000 will be single; about 800,000 working wives; and over 400,000 married men. In addition, about 11 million will get the continuing benefit of £7 17s. 6d. and 4 million taxpayers will get more than that. I estimate the full 1252 year cost at £175 million and the cost in the current year at £139 million.
§ The introduction of the scheme means a lot of recoding work for tax offices. New tax tables will also have to be produced. As a result, the new arrangements cannot take effect until the first pay day after 5th July; but P.A.Y.E. deductions after that date will take account of any income tax overpaid in the first three months of the year.
§ Rates of income tax, surtax and corporation tax
§ It will be apparent from what I have already said that the Resolutions to be put before the House will provide that the standard rate of income tax should be renewed at 41.25 per cent. and that the same surtax rates should apply for 1969–70 as for 1968–69; but, like the standard rate of income tax, the surtax rates will now be expressed as percentages. The Resolutions will also provide for the renewal of corporation tax at its present rate of 45 per cent.