INCOME TAX CHARGED AT BASIC AND OTHER RATES

HC Deb 07 July 1971 vol 820 cc1375-412

Mr. David Marquand (Ashfield)

I beg to move, Amendment No. 34, in page 29, line 8, leave out paragraph (a) and insert:

1. (a) in respect of earned income at such rate, to be known as basic rate, and in respect of investment income at such rate, to be known as the basic investment rate, as Parliament may determine; and.

Mr. Deputy Speaker (Miss Harvie Anderson)

I think it would be for the convenience of the House to discuss also the following Amendments:

No. 35, in page 29, line 14, leave out from beginning to end of line 18.

No. 37, in page 32, line 32, after 'basic', insert 'investment'.

No. 38, in page 33, line 10, leave out '30' and insert '20'.

No. 39, in page 33, line 11, at end insert: 'and the basic investment rate shall be 38.75 per cent.'.

Mr. Marquand

Our purpose in putting down these Amendments is two-fold. First, we hope that even at this rather late stage it will be possible to persuade the Government to be more forthcoming than they have been hitherto about the way in which they intend to operate the Clauses to which these Amendments refer. Secondly, we believe that although the new system of personal taxation set out in these Clauses is in some respects a step forward in comparison with the present system, it is a step backwards in other respects. We believe that our Amendments would retain the advantages proposed by the Government while at the same time eliminating the disadvantages. I should like to say something about both these reasons.

1 turn first to the question of information. There is wide agreement on both sides of the House, and indeed among an increasing number of outside commentators, that the House of Commons should be given more information than it has had in the past if it is properly to discharge its traditional function as the watchdog of the executive in economic and taxation matters. Both Governments have gone a long way to meet this point of view. The previous Government introduced a major change with the publication of the White Paper on expenditure. This Government carried that change further by setting up the Expenditure Committee, by publishing the two Green Papers on corporation tax and the value-added tax, and by setting up a Select Committee on corporation tax.

I would be the first to pay tribute to the Chief Secretary for the Government's innovations in this matter. But the very fact that the present Government, like their predecessors, have been more forthcoming than used to be the case in matters of this kind makes it all the more disappointing that in this and subsequent Clauses, which introduce a revolutionary change into the whole system of personal taxation, they have been so cagey about their precise intentions.

We accept that the Chancellor of the Exchequer cannot be expected to tell us in 1971 how he intends to manage the economy in 1973. No one expects a precise statement of the rates and levels of taxation which he intends to introduce in 1973, but I cannot see why the Chancellor of the Exchequer is unable to say approximately how large the slice of investment income which is to be charged at the earned income rate is to be, and at least approximately how great will be the differentiation between the earned income rate and the investment income rate.

In the debates in Committee which were taken on the Floor of the House, the Treasury Ministers explained their inability to give us this information as follows. The Financial Secretary said on 18th May: It would not have been possible for any Government to have undertaken the major administrative work that needs to be done and, at the same time, to have announced the rates. It is because one must do it in stages, and therefore inevitably introduce legislation in one year and in the subsequent year announce the rates, that it has become possible to do it, and this is the price one must pay for doing it. In other words, he implied that the reason the Government were unable to say how large the slice was to be and how great the differentiation between earned and investment income was an administrative reason. There was some obscure administrative obstacle which prevented him disclosing that information to the House. But he did not say what the obstacle was.

Later, the hon. Gentleman gave a different reason. He implied that he was reluctant to divulge this information, not on administrative grounds but because of the need for flexibility in matters of demand management. He said later in the same speech: In this scheme the reform has such an impact on demand management that it would have been impossible for my right hon. Friend in any sense to have committed himself as to the higher rates of tax, the starting point for the investment income surcharge or the level of surcharge."—[OFFICIAL REPORT, 18th May, 1971; Vol. 817, c. 1125.] But the basic rate for earned income also has a major significance for demand management—indeed, I would have thought it had much greater significance for demand management—yet the basic rate for earned income is spelt out in the Bill. It is to be 30 per cent. The Chancellor has said that his commitment to 30 per cent. is not inflexible and that in 1973, when he enacts the changes foreshadowed here, he may have to vary the rate according to the circumstances prevailing at that time. If it is possible for the Chancellor to say that the basic rate for earned income is to be 30 per cent., subject to the proviso that it may have to be changed to a different figure at a later stage if the economic circumstances dictate such a change, why cannot he do the same for the surcharge rates? What is the difference between the two?

Even if it is impossible for the Chancellor to say what the rate is to be for investment income, I cannot see why it is impossible for him to say what the size of the slice is to be. If he were to tell us the size of the slice without telling us the extent of the differentiation in rates, he would disclose nothing that might impede flexibility in demand management, yet it would give us an opportunity to judge the significance of the proposals in the Bill a great deal more thoroughly than we have been able to do in debates on Second Reading and in Committee.

The size of the first slice of investment income which is to be exempted from surcharge makes a major difference to the new system and to our attitude to it. If the first slice is to be large, then in our view it suggests that the Government will eventually be driven along the path which many of their own supporters wish to force them to pursue towards complete abolition of the distinction between earned and investment income. In our view that would be an intolerable path to tread and we would oppose it utterly. On the other hand, if the first slice of investment income were very small, and if the reason for exempting small investment incomes were simply an administrative one, we should perhaps have some doubts about it; but our opposition would not be anything like as passionate. This makes a major difference to our attitude to this whole chapter of the Bill, and it is very unfortunate that the Government so far have been so cagey about their intentions. I hope that the Chief Secretary, whose record on the question of opening up Treasury operations to the public gaze has been remarkable, will feel able in his reply to be a little more generous in regard to the information which he and his colleagues are able to give.

Mr. Gower

Does the hon. Gentleman not feel that the formula in the Amendment is somewhat inconsistent with his last point about equalising rates when he suggested that some supporters of the Government wanted the same rate for investment income as the basic rate?

Mr. Marquand

As I was seeking to argue, it depends on how large the first slice is. Let us suppose, for the sake of argument, that the first slice which is exempted from the surcharge were to be £5,000 a year, a very large slice. Then the Government would be subject to immense pressure from their supporters, who would say, "If you have exempted £5,000 of investment income from the surcharge, what is the point of having a surcharge at all? Surely you should abolish the surcharge altogether because that would Le the logical thing to do. Maintaining the surcharge creates all kinds of anomalies.' That would be their line of argument.

But if the first slice were a small one and if the Government were able to demonstrate that the reason they had adopted it was simply that there were administrative difficulties in collecting the surcharge from the recipients of small unearned incomes, that would be a different matter. The argument that might come from the benches opposite would then be very much less formidable. That is all I am trying to establish. It makes a fundamental difference how large the first slice is to be.

The second reason why we put down the Amendments is that we wish to retain what we see as the advantages of the new system while eliminating what we regard as the disadvantages. We accept that the new system has advantages. We accept that the unification of income tax and surtax will enable a smoother progression. That is a point of view which my hon. Friend the Member for Heywood and Royton has pressed for many years. We also accept that the abolition of the present cumbersome system by which a standard rate is combined with earned income relief will eliminate some of the misunderstandings which at present cause many people to believe that they pay a higher rate of tax than they are paying in fact. These are undoubtedly advantages.

Most of my hon. Friends would probably say that the advantages are not quite as earth-shattering as some Ministers appear to believe, and we are rather sceptical as to whether they will, by themselves, generate the extra dynamism and initiative which some of the more naive supporters of the Conservative Party appear to believe. Nevertheless, we accept that they are advantages and we want to retain them.

From our point of view, however, it is a major disadvantage that the Government apparently intend to erode the distinction between earned and investment income, which has been one of the cornerstones of our taxation system since 1907.

If the Amendments were accepted, the existing discrimination in favour of earned income would be retained. The rate for unearned income would be 38.75 per cent. so that the differential in favour of earned income would remain as great as it is at present. Secondly, it would mean that the withholding tax on dividends would be at a rate of 38.75 per cent. instead of at 30 per cent., as is foreshadowed in the Bill. Thirdly, one of the Amendments would mean that at the bottom end of the income tax scale one would pay 20 per cent. instead of 30 per cent. We believe that this would make the taxation system more progressive and would reduce the disincentive effects at that end of the scale, which are at least as serious as the disincentive which is sometime alleged to exist at the higher end of the scale.

I should like to comment briefly on these three points. The Committee stage debates revealed what is, in any case, well known: that we on this side of the House believe as a matter of principle that income from work ought to be treated more favourably than income from property. However, I do not intend to go into the somewhat theological arguments for and against that proposition which detained us in Committee because it would be profitless to rehearse them yet again. Both sides of the House know where they stand on that point.

The second reason why we believe that discrimination in favour of earned income should be retained is that it is clear that property incomes go preponderantly to the wealthy. If the first slice of investment income which is to be exempted from the surcharge is a large one—from what Government spokesmen have said, we have every reason to fear that it will be large—the taxation system will become even less progressive than it is, inequality in our society will be increased and social divisions will be magnified.

The only hard, tangible argument which the Government have advanced for eroding the distinction between earned and investment income is that to do so will encourage savings. It is, in any case, a dubious proposition that blanket encouragement to savings should be given through the taxation system. The Royal Commission on the Taxation of Profits and Income looked at this matter in the 1950s. In its final report in 1955 it said at paragraph 76: There is only one thing that remains to be said with regard to personal savings. If life assurance relief and the relief for national insurance contributions are retained, and if superannuation relief is developed to what we regard as its logical conclusion, we think that the tax system will be making as much concession to savings as it is reasonable or proper that it should. However desirable for economic reasons the encouragement of personal saving, measures adopted for its encouragement should lie outside the sphere of the income tax system, to the general equitable principles of which differentiation measured by saving is not, as we have said, either easily or closely related. In our view, that argument is as forcible as it was when the Royal Commission put it forward. In any case, it is not clear that increasing the rate of return on savings, which is the object of this change, will necessarily increase the level of savings. There is no exact correlation between the rate of return on savings and the level of savings. People save for all sorts of different reasons. One cannot say that, because the rate of return is increased, the level of savings will necessarily rise. Moreover, from the point of view of economic management, what counts is not simply the level of individual savings but the extent to which the community as a whole forgoes consumption in favour of investment. It is only worth while to stimulate savings by means of tax concessions if savings increase by at least as much as the tax yield is reduced. There is no evidence that this will happen as a result of the change which the Government are proposing in this Clause.

It may be that as a result of exempting the first slice of investment income from the surcharge, savings will go up by a certain amount. But the Government have given no proof that the extent to which savings will go up will be as much as or greater than the extent to which the revenue will go down and, if the loss of revenue is greater than the increase in savings, from a demand management point of view we gain nothing.

I want now to say a word or two about the point concerning the withholding tax, to which I referred earlier. The effect of the Bill as it stands is that the withholding tax on dividends will go down from the present standard rate to the proposed basic rate of 30 per cent. That means that the recipient of dividend income will be in a significantly better position than he is at present from the point of view of the cash that he holds in his hand. It seems to us quite unjustifiable that the change should be made in this way. There will be a significant loss to the Revenue and a gain to the taxpayer in terms of view of cash flow for which there is no conceivable justification.

There is also a narrower point in this connection which was raised in Committee and which the Financial Secretary was good enough to say that he would look at again. I should like to ask the Chief Secretary what the result has been of his hon. Friend's researches. The point concerned accumulation trusts. In Committee on 14th June, the Financial Secretary said: To the extent to which—I think I must limit it to this—the reduction is from the standard rate of 37½ per cent. to a new basic rate of 30 per cent., this gives benefits to accumulation trusts which may not subsequently be recouped when money is then paid out by the trustees, and I certainly will look at that…. Without in any way minimising the administrative difficulties, I will look at this point again to see whether there is some possible loss of revenue of a size which would make it appropriate for us to legislate to cover the case."—[OFFICIAL REPORT, Standing Committee H, 14th June, 1971; c. 522–3.] I should be grateful if the Chief Secretary would tell us what the result of that second look has been.

Finally, we propose to lower the starting rate of personal taxation from 30 per cent. to 20 per cent. I do not think that there can be any doubt that the disincentive effect of the very large jump which the present system involves is considerable. The point at which many taxpayers begin to pay tax happens, for other reasons, to coincide—or almost coincide—in many cases with loss of benefits of one kind or another. It is now well established that the net result is that in some cases the marginal rate-of-tax-cum-loss-of-benefit experienced by people who are starting to pay tax can be very much higher than it is for the highest surtax payer. In our view and in the view of many authorities much more expert than I am, this has a disincentive effect. Indeed, we all know from the experience of talking to our constituents that it is at this point that the shoe pinches hardest in our system. We believe, therefore, that there is a powerful case on economic grounds for having a starting rate of 20 per cent. instead of 30 per cent.

It would also help make the taxation system more progressive than it is at present. The change would not be inconsistent with the new system that the Government propose. Largely for procedural reasons in terms of tabling an Amendment, we have proposed a basic rate of 20 per cent. One could still have 30 per cent. as the basic rate, but with a lower rate of 20 per cent. for those starting to pay tax in a certain band of income. We think that this is a constructive proposal, and we hope that the Government will consider it favourably.

I suspect that even the force and power of my arguments may be insufficient to persuade the Chief Secretary to change his mind about the need to retain the present differentiation between earned and unearned income. I hope, however, that he will be a little more generous with information and more forthcoming on the point about the starting rate than Ministers have been hitherto.

5.45 p.m.

Mr. Gower

The hon. Member for Ashfield (Mr. Marquand) suggests lower- ing the rate from 30 per cent. to 20 per cent. I do not know whether the hon. Gentleman has made any estimate in gross figures of the consequences of that change.

Mr. Marquand

I am sorry. Perhaps I should have detailed that point at greater length. Our Amendment is misleading to this extent. We have said that the basic rate should be 20 per cent. which rather implies that the vast majority of taxpayers should pay income tax at 20 per cent. instead of at 30 per cent. That is not our intention. Our intention is that taxpayers entering the tax net should pay at the rate of 20 per cent. instead of 30 per cent. and, therefore, that the rate should be lower for a narrow band at the beginning.

Mr. Gower

That may be the case, but that is not what the Amendment says. The hon. Gentleman has moved an Amendment to do one thing and, in his speech, has described something completely different.

Mr. Barnett

No.

Mr. Gower

The hon. Gentleman—

Mr. Barnett

Where does it say that the 30 per cent. rate covers a particular band—and, if so, what width?

Mr. Gower

I am saying that the hon. Member for Ashfield did not give any indication of the consequences of reducing the rate from 30 to 20 per cent.

The hon. Gentleman devoted the greater part of his speech to the encouragement of savings. However, he underestimates the size of the task of increasing the number of those who save regularly. That is a very difficult job in the inflationary society in which we have lived for some years. What is more, the hon. Gentleman underestimates the degree to which saving is desirable. Clearly, it is very desirable that we should increase significantly the number of those who are disposed to save. It is not an easy job. My right hon. Friend the Chief Secretary spent a great deal of time before becoming a Minister thinking about one or two aspects of the problem. During the term of office of right hon. and hon. Gentlemen opposite, the hon. Member for Ashfield will have learned how difficult it was for the previous Administration to persuade the people to increase the contribution made by savings on a national scale.

The hon. Gentleman went so far as to suggest that there may be little or no relationship between the rewards of savings and the amounts of saving. I hope that I do not do him an injustice. He seemed to imply that he could find no relationship between the two. I should think that there is ample evidence that this is not so. Indeed, the whole story of building society rates is based on their experience that, unless they keep their rates to their investors at certain levels, they lose to alternative forms or saving offered by other agencies. It is a constant battle for the building societies to sustain a satisfactory level of income unless they adjust their rates to attract the saver.

Despite the moderation with which the hon. Member for Ashfield has worded his proposal, I think that he is underestimating both the need for saving and the size of the task which confronts successive Governments of both parties if we are to succeed in future in encouraging a more formidable contribution from savers and significantly enlarging the numbers of those who save.

It is for that reason that I welcome the design of this valuable change which is likely in the years ahead to help to achieve an object which is close to the hearts of many hon. Members on both sides of the House. The obvious advantage of this basic rate is that it will be less likely to create in the minds of a large number of people the apprehension that they are paying an excessive amount of tax. This is extremely valuable. The hon. Gentleman referred to people being discouraged from extra effort at work by this feeling. We have often met constituents who have said that they have been dissuaded from extra efforts—through overtime and other forms of work—by this feeling. I believe that this change will go a long way to lessen that danger. It is in that spirit that I certainly welcome the change.

Mr. Heffer

I should like to make a few comments on the points made by the hon. Member for Barry (Mr. Gower).

First, the hon. Gentleman's point about savings had very little validity. The suggestion is that, as a result of reducing the level from 38.6 per cent. to 30 per cent. for unearned income, those who receive this extra relief will use it for additional saving. There is no guarantee that this will happen. There is no guarantee that this money will be ploughed back into further investment. No one knows precisely what will happen.

Concerning general savings, the hon. Gentleman overlooked the interesting fact that the savings of the masses are increasing. The reason is that people are living in a period of fear about the future more than they have felt since the end of the Second World War. That is the basic reason for working class people being more careful and keeping a little money aside. They fear unemployment and the future with this Government. This is a paradoxical situation. One would imagine that in this period of inflation there would be less saving; but there is more saving because of the situation into which we are being led by the Government.

We ought to look closely at the Government's proposals The idea that those receiving unearned income should have the same taxation as those with earned income is a philosophy which we ought not to accept. It is totally alien to the ideas of taxation which we have had for a very long time. It means that those with better positions in society, those who can afford to invest, particularly those with large sums of money, will be receiving a greater benefit than those who do not have large sums of money to invest. That is the philosophy of right hon. and hon. Gentlemen opposite. It is perfectly understandable. This is what it is all about. I must say that they help their friends; they do look after them. I regret that sometimes we did not look after our friends quite as well as they look after theirs.

Mr. Marquand

We have more friends.

Mr. Heffer

We certainly have. That is all the more reason that we should look after more of them.

I understand that the drop will be to 30 per cent. or thereabouts and that there will be an investment surcharge. We have no idea what the investment surcharge will be. We do not know when it will begin. I think that the Chief Secretary has a lot to explain this afternoon. He must give us a clear understanding of precisely what is in the Government's mind and what they are playing at in this regard.

Lastly, we are in a difficult situation because we do not know exactly what we are discussing. It is almost like putting one's hand into a mystery bag and not knowing what will come out. It is like many other things which the Government do. There is a great deal of mystery surrounding all kinds of things. We heard a bit of a mysterious story this afternoon about who said what and who did not in another matter. The Chief Secretary must explain this mystery to us.

I say without fear of contradiction that if the British people fully understood what was involved and just how much the Government are helping their friends at the expense of the ordinary taxpayer they would certainly build up the Labour majority in Macclesfield a lot higher than it will be at the next by-election.

6.0 p.m.

Mr. Maurice Macmillan

In moving this group of Amendments the hon. Member for Ashfield (Mr. Marquand) said that there were two purposes to them. One was to get the Government to be forthcoming—a plea which has just been echoed by the hon. Member for Liverpool, Walton (Mr. Heffer)—and the other was to do what he referred to as retaining the advantages and eliminating the disadvantages of this group of Clauses. I noticed that he did not specify his bottom slice of income which would attract 20 per cent.

The hon. Gentleman said that we had been cagey about these Clauses. His argument boiled down to the fact that he was concerned about the size of the slice of income. He admitted that it was not reasonable to expect my right hon. Friend to specify in advance the rates or the level of taxation, but he wanted to know the approximate size of the slice.

The hon. Gentleman referred also to the possibility of specifying the basic rate for earned income as 30 per cent., and asked what was the difference between this and other rates. The difference is that the basic rate, as the Chancellor made clear, is the present standard rate less earned income allowance and, therefore, is the basic rate for earned income. It is an expression of fact which exists, whereas the surcharge cannot be related to any existing rate of taxation, nor can the size of the slice of income.

Mr. Marquand

I know that the Chancellor said that. I heard him say that during the debate, and I re-read it when preparing for this debate. But what we cannot see is why the hon. Gentleman cannot say what the difference between the investment income rate and that basic rate is going to be. The basic rate may not be 30 per cent. at the end of the day. It may have to be varied, because circumstances change. I do not see why that makes it impossible for the Government to level the extent of the gap between the earned income rate and the investment surcharge rate.

Mr. Macmillan

It is because the surcharge is a new concept, and, as my right hon. Friend has made clear, he will decide its level in the context of the situation next year. The basic rate is not a new concept. It is simply a translation of the existing standard rate, less earned income allowance, into a straight percentage figure rounded off.

We cannot go any further than we have gone in these debates, which I know will not satisfy the hon. Gentleman, which is to say that the Chancellor will decide on the rate of the surcharge and will, when this Measure becomes law, settle the size of the slice of investment income which is taxed at the basic rate. Various reasons have been given—the administrative one, the need to keep flexibility for demand management, and so on. My right hon. Friend, and I agree with him, regards this as a necessary freedom of action which he must retain.

The Amendments taken together set out the skeleton of an alternative system of unification. Instead of the system that we have, which is constructed in terms of a basic tax, with an investment surcharge, the hon. Gentleman is putting it the other way round. He has a dual system, with separate rates of tax for earned and investment incomes. The "basic investment rate" would be the withholding rate—that is Amendment No. 37–and for 1973–74 would be fixed provisionally at 38.75 per cent., equal to the present standard rate, that is Amendment No. 39. The tax on earned income would start at 20 per cent.—that is Amendment No. 38–though the hon. Gentleman made certain qualifications to that, and I shall deal with those in a few moments. One consequence of the Opposition's scheme would be that there would be no slice of income charged at the lower rate. As the hon. Gentleman said, a scheme of that kind is contrary to the Chancellor's purpose, and the purpose of this side of the House, of reducing the differentiation between earned and investment incomes.

I could not help noticing that the hon. Gentleman used the word "erode", as though there were something time-hallowed and sacrosanct in the level of this distinction which has been a principle since 1907. I should not necessarily regard its age as being a guarantee of its relevance to any political objective of either side of the House.

I should like to say a few words about the cost, although I do not want to refine on this because the hon. Gentleman made it clear that he was not being specific about the level at which the 20 per cent. should apply. The extra yield, taking 1971–72 levels of income, which would come from charging investment income at 38.75 per cent. would probably be about £200 million. The cost of reducing the basic rate of tax on earned income from 30 per cent. to 20 per cent., at 1971–72 levels, would amount to about £1,800 million, but the hon. Gentleman said that it was proposed to do this only for an initial slice of income.

Mr. Marquand

I may have misheard the hon. Gentleman, but he seemed to say that he had made a judgment about the size of the slice, otherwise how can he tell what the increase in revenue would be from charging below the slice?

Mr. Macmillan

I made it clear that I was talking about the hon. Gentleman's proposal and comparing it with 1971–72 levels of income. What I was saying was that if there were no slice and the tax on earned income were reduced from 30 per cent. to 20 per cent., there would be a loss of revenue of £1,800 million.

Mr. Marquand

I should be the first to apologise if I have misunderstood the hon. Gentleman, but I thought he said that there would be a gain of revenue of a certain amount by charging all invest- ment income at the 38.75 per cent. rate, and he then said that there would be a loss through charging earned income at a lower rate. If the hon. Gentleman is in a position to say that there would be a gain of such-and-such an amount because of charging all investment income at 38.75 per cent., instead of charging only some investment income at that rate, he must have made some judgment about the size of the slice. If he has not done so, how can he make the calculation?

Mr. Macmillan

I am making no judgment about the size of the slice. I am saying what would happen if it were applied to the current situation before the proposals in the Bill were brought into action.

To take the size of the hon. Gentleman's slice at the bottom end of the band, a reduced rate of £260, charged at 20 per cent., carved out of the basic rate band, would cost the Exchequer about £500 million. I find this plea from hon. Gentlemen opposite that we should go back to a reduced rate band at the bottom end of the tax scale a little strange because, after all, it was their Government who, some time ago, eliminated the marginal rate of tax at the bottom end of the scale.

Mr. Barnett

Is it not intended, under the Government's proposals, that there should be a rate band all the way up the scale from 20 per cent. at different levels?

Mr. Macmillan

I was merely saying that I thought it odd that in Opposition—

Mr. Barnett

Answer the question.

Mr. Macmillan

—hon. Gentlemen opposite were proposing a course of action which they were hasty to reverse when they were the Government.

Mr. Barnett

Now answer the question.

Mr. Macmillan

In the course of these Finance Bill debates the Opposition have criticised our methods of unifying the tax structure, while welcoming unified taxation in principle. They have asked a number of questions, most of which we have not been able to answer, such as the question of the structure and the level of the slice of income to be taxed at the basic rate, and the investment income surcharge.

The hon. Member asked one specific question about an undertaking which my hon. Friend the Financial Secretary gave him in Committee. That concerns the effect of the withholding tax level on accumulation trusts. My right hon. Friend gave an undertaking that this would be looked at. I am sorry to say that I cannot tell him any more except that we are looking at it. It has proved a matter of some considerable complexity. It is just not possible to say anything more at this stage except that, if necessary, the Chancellor will bring forward proposals in due course. I am sure that the hon. Gentleman will accept that this is not an easy matter to dispose of.

The real point of dispute in this debate, as in previous debates, has been the propriety or otherwise of having a tax system unified at a basic rate with an investment income surcharge. The difficulty faced by hon. Members opposite is tailoring their remarks without knowing precisely what the surcharge will be. The implication in their speeches is that unless it is such as to represent a savage extra tax on unearned income, as they call it—investment income—they will be dissatisfied.

They have shown that they expect and hope that the first slice of investment income tax at the basic rate will be very narrow indeed, confined virtually to that chosen for administrative reasons. It is true that this shows a different approach to the need for saving, to the desirability of encouraging investment and allowing those who save and invest, up to a level which the Chancellor will in due course decide, to receive the benefits of the lower rate of tax.

This is not contrary to the Royal Commission's criticism of using the fiscal structure for encouragement of savings, although I admit that, from my previous activities in the Wider Share Ownership Council, I have never accepted the validity of that criticism anyway. But this shows a very different approach by right hon. and hon. Members opposite, which was made clear to us not least by the attitude of the hon. Member for Ashfield to savings, when his entire description of the effect of his Amendments on savings was couched in terms of demand management. He made it clear that to him it did not matter whether the money was withheld from someone and invested by taxation or by savings. It is because we are in fundamental disagreement with this point that I would urge the House to reject these Amendments.

Mr. Robert Sheldon (Ashton-under-Lyne)

The Chief Secretary said that the Chancellor would be bringing forward his proposals in due course. What we have particularly at heart is that we are asked to pass legislation without knowing the shape of that legislation, just because the shape of that legislation and the levels of taxation are so inherently bound up together.

Of course, many of my hon. Friends have viewed some of the advantages of the single rate structure with considerable pleasure. This is something which we have been advocating for years. What we do not wish to see, and what we are apprehensive about, is that, under the cloak of an attempt to produce a very useful reform of a single rate, an effort is being made to provide certain benefits for those people who, under this Budget and the various measures instituted by the Government, have already benefited considerably.

6.15 p.m.

The advantage of the single rate structure is obvious. In taxation, as in every aspect of life, it is foolish to let the person who is paying assume that he is paying more than he is in fact paying. It is foolish to let him assume that the standard rate is 8s. 3d. or, now 7s. 9d.—38¾ per cent.—when the true rate is much lower. That nonsense had to be ended. People had this wrong and thought that they were paying more tax than they were. Although the common commercial practice would be to get those who are paying to assume that they are paying rather less than they are, in fact they thought that they were paying more. This was a useful, though not shattering, reform, and I welcomed it in that light.

But I do not wish to see it being used to change fundamentally the balance between those people who work for their living and those who draw large levels of investment income. What we have seen today is a continuation of so many of our previous debates, when we are not even given to understand the choice that the change involves. This is what causes so much disquiet.

The Chief Secretary said today, as on previous occasions, that these are matters for which we have to wait. But I cannot help recalling that, on a previous occasion when a fundamental change in taxation was made—I am thinking of 1964, when the corporation tax was introduced—there was an undertaking by the Government of what that rate should be, so that the companies concerned should be able to make their calculations on the basis of the projected rate of corporation tax. No commitment was given as to the level of that tax, but it was said that, if the situation as it was at that time applied in future, the level of the tax would be so much. Despite all the explanations which the Government have offered, despite the explanation given by the Chief Secretary today, I have failed to understand why that same kind of undertaking could not be given now.

The Government know how much they intend to raise by income tax. They have a system in their mind. I fail to see why they should not say, on existing assumptions, that the level will be so much, the amount of the slice so much and the amount of the investment so much. On the basis that they are trying to get, out of the whole system of income tax and surtax, the same amount of money, broadly, as they are getting today, I cannot understand why they do not follow that useful precedent of 1964 to enable people who have to understand these matters to have the advantages of knowing the facts.

What caused me considerable anxiety was the statement by the Chief Secretary just now, when he described what he thought were the views of hon. Members on this side, that we wanted to increase savagely the extra tax on unearned income. I do not know what he means by this. The system of taxation which we left, roughly speaking the system which remains after the introduction of this Budget, was the one with which we thought we were not totally dissatisfied, although there would be changes all the time. But it is the Government who are introducing these changes.

What does the Chief Secretary mean when he says that the system is too savage? Is there to be a massive change in the system of payment, away from those who cannot avoid paying because their income is earned to those with unearned income? Is the hon. Gentleman aware that he is not attacking any new proposals from us because we are not making any? He is attacking the existing system, and it is that which the Government intend to change. In view of the fierce language he used to attack the present system, he is in duty bound to indicate the changes the Government will be proposing.

The Chief Secretary spoke of the need for flexibility in relation to demand management and the necessity for freedom of action which the Chancellor is maintaining. This is all accepted and obvious. If we take the need for demand management to be the same as it is now and couple with it the Budget judgment, which we know to be erroneous, we are entitled to ask how much tax the Chancellor will need to raise.

What will be the level of the investment income surcharge and what are the other relevant details? I would be astonished to learn that the Chief Secretary did not have a close idea of these figures. A new tax system having been framed, he must have some idea of the figures, especially as he has denounced the existing system as a savage imposition. As on so many occasions when debating this Finance Bill, we are in need of more information.

A new system calculated on the basis of comparability must be capable of being justified intellectually, and in this instance it cannot be done by the Minister referring to X, Y and Z. We want some figures put into the equation because only by that means can the system be made to come alive.

We keep returning to this subject because of the fear that has been engendered by the sort of statements the Chief Secretary and his colleagues have been making. In view of the fundamental change that is likely to occur in relation to investment income, we fear that the earner of income will be placed in a declining position.

In his speech of 12th January the Chancellor of the Exchequer said in a message that obviously had deep implications for his period in office that steep personal taxation was, in his view, a major factor in the poor economic growth of the nation. Every Chancellor since the war has made an effort to discover the reasons for our poor performance in economic growth terms, but this Chancellor gave a commitment in terms that has not been given previously.

The level of surtax, which has been drastically reduced, the advantage given to those with large incomes, the advantage, still undisclosed, that will result from the change from the old system of unearned to earned income, along with the investment surcharge, is bound to put the earner of income in a declining and worsening position.

Let us be clear that the present view of the Government was not always the attitude of the Conservative Party. Conservatives brought about some of the biggest tax differences between earned and unearned income. For example, in 1952 they raised the tax distinction between earned and unearned income to the highest level it had ever been. They did so rightly, because there should be a great distinction between those who work for their living and those who enjoy inherited wealth. It is hard enough nowadays for ordinary men and women to earn a decent living, and they should be accorded the advantage of differential rates of taxation for their efforts.

When, in 1938, taxation went up to 9s. 6d. in the £ under the Tories, this distinction between unearned and earned income was enhanced. That was done by the Tories and I give them credit for doing it. Today we are witnessing the first fundamental change since long before the war in that system, to the detriment of the ordinary citizen. As a result, those who have will receive very much more than those who earn. This has been the message of this Budget, a message which is exemplified by this Clause.

The other advantages which the Government are giving to those with large and unearned incomes we can calculate. The one with which we are now concerned, however, we cannot calculate, and the Government stand condemned for their failure to provide us with adequate information on this issue.

Mr. Denzil Davies (Llanelly)

The real point of seeking to have a higher basic rate for investment than for earned income is to restore some equity and sense of justice into a Finance Bill that is extremely favourable to supporters of the Conservative Party.

By establishing in Clause 29 a basic rate of withholding tax which is based on the present standard rate, less earned income relief, and by then applying that rate to all kinds of income, earned or investment, the Government are conferring a major and substantial benefit on those who receive investment income. In terms of our present legislation, the effect of this will be for investment income to get the benefit of earned income relief.

Hon. Gentlemen opposite have been clear about the reason why they are taking this step. It is because they believe that investment income should not be taxed at a higher rate than earned income. We disagree with them philosophically, but like my hon. Friends, I will not argue about this theologically or philosophically because ultimately it is a question of priorities.

We must decide how much we want to allocate to public expenditure. Having taken that decision, we must decide from whom we will obtain the bulk of the money. We believe that it is more just and fair that those with the greatest wealth should make the greatest contribution to the national good, while people on lower incomes should pay less. Hon. Gentlemen opposite believe differently. They reduce tax on investment income and increase all sorts of charges and remove free school milk. They increase the means test on people who are less able to look after themselves. This clash of philosophy and priority will not go unnoticed in the country. My hon. Friend said that there was a bag here with something mysterious in it, but I beg to differ from him. There is nothing mysterious inside. The bag is full of goodies which will be distributed to the wealthy supporters of the party opposite.

6.30 p.m.

We have been told that one of the reasons for Clause 29 is the need for simplification, and no doubt we will be told this again before the debate is over. There may be some small simplification as a result of the establishment of one basic rate, but before we can decide whether that simplification is beneficial we should be told what it will cost the Treasury. Whatever else Clause 29 may do, it will cause a loss of revenue. In most cases, when Clauses involve a loss of revenue that loss is listed in the red book. In this case the cost is about £110 million in favour of the better off in our society.

Mr. John Nott (St. Ives)

What the hon. Member means by "loss of revenue" is that the Government are reducing taxes. I suppose that he is against that?

Mr. Davies

No, I mean precisely that the Government are reducing taxes by £110 million in favour of those, basically, who earn £5,000 or more, and who live on capital or on inherited wealth. I do not shrink from that at all. That is what the Government are doing. At the same time they are increasing taxes on the less well-off.

Mr. Nott

The Government have not increased taxes on those less well-off. They have substantially reduced them in the Budget. Because someone has investment income it does not mean that he has inherited wealth. He may have worked hard all his life and saved his money.

Mr. Davies

If the hon. Gentleman were to ask those at the lower end of the scale whether the Government have increased their taxes or not, I have no doubt what their answer would be.

The Clause benefits a number of groups of persons, and we should be told the cost to the Exchequer of that benefit. First of all, there are the individuals who will not be subject to investment surcharge. They will get earned income relief on their investment income, and because there is a reduction of £8 or more for every £100 of gross income the Government should tell us how much the loss of revenue will be.

Next we come to companies. A number of hon. Members opposite were rather perplexed about this in Committee, but the fact is that by reducing the basic withholding tax rate on all dividends and other investment income the Government are giving a reduction, again, of just over £8 for every £100 of investment income which a body corporate receives. Some of the resulting loss of revenue may be recouped if the company passes on the benefit by means of another dividend to shareholders, but no doubt many companies will not do so. Again, therefore, we should be told how much loss of revenue the Government envisage.

We also raised in Committee the subject of payments to overseas residents. A few countries do not have double taxation agreements with us. The result will be that all dividends that leave these shores and go to residents in those countries—companies or trustees—will now have a reduction of tax of £8 out of every £100. The Financial Secretary accepted that fact in Committee and said that there would be some loss of revenue but, again, we have not been told what the extent of the loss of revenue will be. It amazes me that the Government should frame a major Clause which is at the base of reforms and changes and yet have no idea, or will not tell us, what its cost will be.

We also raised in Committee the question of trustees, and the Financial Secretary undertook to look at it, although I detected a certain feeling on his part that this was not a very major problem. But we are not talking about accumulation trusts in the narrow sense. Every trust where there is power to accumulate income—and that power can be extended for 20 years, and in certain circumstances for 80 years—and which does accumulate income will, again, benefit by £8 in every £100 of gross income. In addition, it will not pay any of the excess rates or the investment surcharge, but since we are concerned here with a withholding tax I will not go into that aspect.

The Treasury Ministers should look at this, as it is a major problem. I suggest that at the end of the day they will only have been able to find some settlements and trusts, because in many cases they do not know whether or not they exist, since there is no registration of settlements and trusts.

Mr. Peter Rees (Dover)

The Amendment would benefit such accumulated settlements, as it seeks to reduce the basic rate of investment income, which means that less will be deducted and accumulation settlements will therefore benefit.

Mr. Davies

I was not suggesting that they would not benefit. I am complaining that they will benefit. They will pay less tax, because the income they receive is never distributed, which means that it never goes into the hands of the individual and thereby gets taxed at excess rates and attracts the investment surcharge. It is turned immediately into capital and it will benefit by the reduction.

Mr. Peter Rees

An Amendment in the name of the hon. Member for Ashfield (Mr. Marquand) seeks to reduce the basic rate from 30 per cent. to 20 per cent. That must benefit accumulated settlements, and I am delighted to hear that hon. Members opposite are converted to that thought.

Mr. Barnett

The hon. Member for Dover (Mr. Peter Rees) has obviously not understood the Amendment, since it is also proposed that the basic investment rate should be 38.75 per cent. That would mean that there would not be a reduction.

Mr. Davies

I was concerned, because the legislation proposes one basic rate. We propose two basic rates, one to apply to earned income and one to apply to investment income. We seek to maintain the differential between earned and investment income. If Clause 29 is enacted these accumulation settlements and trusts will benefit to the extent I have described. In addition they will benefit because they will not pay any of the excess rates or the investment surcharge.

I therefore urge the Chief Secretary and the Government to look at the whole matter, because they may find a considerable loss of revenue resulting from their proposals. But they should not be doing this now: they should have done this before introducing the Clause. They should have worked out their sums before asking us to vote on the Finance Bill.

The cost of the Clause is completely vague—we do not know what it will be—and the Amendment seeks to restore some equity in this respect. The Amendment will no doubt be voted down by hon. Members opposite who, in doing so, will again demonstrate where their sense of priorities lies.

Mr. Loughlin

As I understood him, the hon. Member for St. Ives (Mr. Nott) claimed that the Government have been very generous towards the generality of taxpayers—the earned income tax payers, the lads who work in the factories —and have reduced their tax commitments. Nothing of the sort. I cannot understand how he arrives at that conclusion. What the Government set out to do and have successfully done is to introduce a change in the system of taxation from direct to indirect taxation. If we are considering the benefits to be derived by the generality of taxpayers, we must not only look at the increase in the child allowance or the 6d. reduction in income tax, because that reduction does not affect the vast majority of industrial workers. We must look at the total amount being paid in tax by the average person.

One must bear in mind the various kinds of charges which have been imposed upon every household—for example, the amount allocated in the last agricultural Price Review to increased housewives' costs; the extra amount which housewives are going to have to pay through the ten levy Orders, and other measures. On that basis, one can see the fatuous nature of the hon. Gentleman's claim.

I do not mean this in a nasty sense, but I felt that my hon. Friend the Member for Ashfield (Mr. Marquand) was being a bit naive when he said that the Government were in danger of being driven by their back benchers into eroding the differential between earned and unearned income, so that eventually it will cease to exist. I do not know why he imagines that there is a difference of opinion on this matter between the Government and their supporters. I believe that there is absolute unity among them on that issue, the unity of the Gadarene swine—I do not mean that in a nasty sense either. I believe that this is part and parcel of the Conservative Party's overall taxation strategy.

Whenever there is the slightest criticism of dividends, the Tory Party claims that dividends are the barometer by which we measure people's success. If business is making higher profits, that is success. I do not mind that attitude but the trouble is that when industrial workers want to improve their own incomes and ask for wage increases, we are told that this is highly immoral. Apparently, it is the height of morality for dividends to increase but the height of immorality for earned incomes to increase. That is the Conservative Party's approach.

I am under no illusions about Clause 29. There have been arguments about the non-disclosure of the estimated slice of the cake that will be given in consequence of the Clause. The Chief Secretary got himself entangled because, while he was able to give us a number of estimates, he could not give us the most important one. The Clause is drawn as it is precisely because it will give the Government the opportunity in 1973–74 to decrease the differential between earned and unearned income. That is the intention. They do not seek to deny it. They genuinely believe that unearned income should be given a more favourable status than earned income. I challenge the Financial Secretary to deny it. There is no need for us to be as naïve as my hon. Friend. He is only naïve because he is such a nice fellow. He still thinks that hon. Members opposite have the qualities of the angels they pose as. But I do not criticise him for being naïve.

6.45 p.m.

We have had references to savings. Perhaps the House can help me on this. I am always at a loss to understand what inducement one can make to get people to save. I have always maintained that people only have a given measure of disposable income after they have catered for their known requirements. Most of us live to a given standard. We cater for that standard and beyond it there is a part of our income that we can dispose of in the form of savings, be it 6d. or £6. It seems to me that there is no genuine reason why we should induce people to save. They will save only that which is surplus to their known requirements. There may be a margin in which they can cut down on their requirements in order to increase their savings, but it is a very small margin. I do not see how we can induce people to save more than it is possible for them to save.

The other factor is the reason for which people save. It has been argued that the more we can get people to save, the less taxation we have to impose. One of the criticisms of the last Government was that people were not saving, that they were spending. It is now being recognised by a majority of economists that savings have gone up, particularly in the last six months, because people are beginning to fear the future. They are beginning to fear unemployment. They are beginning to fear runaway inflation. It can be argued that it is better to buy goods than to put money in the bank, but people do not act wholly rationally in circumstances of this kind. The reason why savings are going up is that people are afraid of what will happen on the morrow.

I have listened throughout the debate and I am under no illusions. I do not think that the Chief Secretary, even if he seeks leave to reply again, will give us any more information, since the refusal to give information is based clearly on the desire to keep that information to himself, because at this stage he does not want to disclose that the next phase in the redistribution of income will be a further concession to those who live on unearned income.

Mr. Cronin

I would like to preface my remarks, for a change, by saying something complimentary to the Government.

Mr. Barnett

Hear, hear.

Mr. Cronin

I must be fair, but it will be brief.

I think that we all welcome this unified tax system. Certainly, it would work much more satisfactorily if applied by a Government composed of individuals from this side of the House. I do not know that we can trust right hon. and hon. Members opposite to work it.

In principle, the whole idea of a unified tax is a considerable improvement and some of us on this side—and, possibly, some hon. Members opposite also—have pressed for it for many years. Even during the time of the last Conservative Government, we applied pressure for these changes, and I am glad to see that, at last, the party opposite have found a way of doing it.

In dealing with this group of Clauses concerning income tax to be charged for 1973–74, I cannot understand why the Chief Secretary has been so lacking in frankness with us and so unforthcoming as regards proposals for taxing investment income. The Government have been quite straightforward in Clause 36. They have said that The basic rate for the year 1973–74 shall be 30 per cent., unless Parliament otherwise determines. I cannot understand why the Chief Secretary could not today give us an indication of what the surcharge on investment income will be. He said that the investment surcharge would be decided later. At the same time, he said that the basic rate of 30 per cent. was purely notional and that it could easily be changed as the Chancellor of the day thought fit. I cannot understand why there cannot be inserted in the Bill an indication of the Government's ideas about the surcharge on investment income in the proposed unified tax.

Naturally, we on this side must regard this with suspicion. I rather feel that we are being asked as a House of Commons to buy a pig in a poke. We are being asked to approve the scheme of unified taxation without having any idea of the Government's thinking on the important question of taxation of investment income.

Colour must be lent to our suspicions by what the Government are doing in the Bill. We know, for instance, that businesses and corporations are being saved £105 million a year. So we know that big business is being looked after. We know that surtax payers will benefit to the extent of £38 million a year. Capital gains taxpayers will benefit to the extent of £15 million a year. There will be reductions in estate duty to the tune of £20 million a year. These and several other concessions of the same nature total about £200 million a year.

That large sum is being handed back to the wealthier part of the nation, admittedly to the part of the nation which has given backing of a substantial financial nature to the Conservative Party. Presumably, this is the Government's way of showing their gratitude. This is a particularly unfortunate time to show gratitude, however, when it involves handing out about £200 million a year to the wealthiest members of the community and, at the same time, asking the lower-paid members of the community—the trade unionists—to moderate their wage claims. I cannot imagine a more unsuitable time to do this.

The important thing, however, is the Government's extreme generosity to the wealthier sections of the community. It makes us wonder what will happen when, in due course, a Finance Bill is intro- duced to implement the changes envisaged in this group of Clauses for the unified tax of the future. That is what worries us.

The Chief Secretary certainly added fuel to the flames of our suspicion, because he said that he would not regard as sacrosanct the differential treatment between earned income and investment income which has existed since 1907. Thus, we have the Chief Secretary saying, in words almost as plain as any Chief Secretary could say it, that when a Finance Bill is introduced to implement these changes in taxation, there will be preferential treatment for people who receive income from investments.

Mr. Maurice Macmillan

If I recall correctly, I did not say that we regard it as sacrosanct. I said that we did not consider it sacrosanct because it had existed since 1907.

Mr. Nott

I do not know why the hon. Member for Loughborough (Mr. Cronin) is going on about preferential treatment. Up to now, there has been discrimination against savings income. There is a possibility that, belatedly, a Government will remove it. That is what we are talking about. We are not talking about preferential treatment for investment income. We are talking about removing a discrimination which has existed for many years.

Mr. Cronin

I am glad that the hon. Member makes that point, because it brings me to something with which I intended to deal later in my speech.

I would like to refer to what the Chief Secretary said in his intervention. My hon. Friends will agree that he made it clear that he did not regard as sacrosanct the differential between earned income and investment income. When someone of the cagey breed of Chief Secretary makes a statement like that at the Dispatch Box, it implies to anybody who is familiar with the organisation of parliamentary business that there will certainly be preferential treatment for the receivers of investment income in the Finance Bill which eventually implements the unified taxation.

I am not surprised that the Chief Secretary should take that view, because here we have the hon. Member for St. Ives (Mr. Nott) pressing for it. I have no doubt that a large number of hon. Members opposite will also press for it and I am sure that it would receive applause and immense thumping of feet in the 1922 Committee.

Mr. Nott

It would also be applauded by all those retired people who live on savings which they have accumulated during their working lives.

Mr. Cronin

The hon. Member is making some interesting points. The first thing to say in reply is that there is a case for having some band of investment income which pays a reduced rate of surcharge in future. But there is certainly no case for general preferential treatment for all receivers of investment income.

Mr. Nott rose—

Mr. Cronin

I cannot allow the hon. Gentleman to keep interrupting.

Mr. Peter Rees

Perhaps the hon. Gentleman would take us into his confidence and tell us what band of saving income he feels should be taxed at the same rate and receive what he calls preferential treatment.

7.0 p.m.

Mr. Cronin

That is either a rather naive question, or a stupendous tribute to my intellectual powers. These decisions are reached by the Chancellor of the Exchequer only after months of advice from his officials in the Treasury. Why should the hon. and learned Gentleman expect me to give such a figure across the Floor of the House at a moment's notice?

Mr. Peter Rees

It is not a question of what the Chancellor's calculations would be. The hon. Gentleman is giving the House his opinion and I should be grateful if he would take us into his confidence and let us know what he would regard as fair—because he is talking about social considerations—as the band of savings income which should not be discriminated against.

Mr. Cronin

I should say that there is a band of investment income which should reasonably be treated with some benevolence in the surcharge arrangements, but it would be absurd to attempt to say now exactly what that band should be. However, I have in mind that there are people who live on investment income when they retire, who receive investment incomes as modest pensions, and who are entitled to some reasonable treatment. I condemn the Government for their intention to give to all recipients of investment income substantial help in the form of reduced surcharge, reduced in the sense of comparing it with the tax now paid on unearned income. I hope that the Chief Secretary will bear in mind that if he and his right hon. Friend attempt to introduce substantial benefits for recipients of investment income, they will meet strong opposition from this side of the House and from the country as a whole.

The Chief Secretary thought it rather odd that the Opposition had introduced Amendment No. 38 to reduce the basic rate from 30 to 20 per cent. No one would suggest that an Amendment, even from the Opposition Front Bench, must be taken as the tablets of stone coming down from Mount Sinai and therefore committing a future Government. It is generally accepted that the Amendment merely indicates that we feel that something should be done for those who pay income tax in the lower income bands. There is a considerable disincentive to those who start paying income tax at the very lowest level, because they lose social security and other benefits. This is something which the Government should consider, even if they do not accept the Amendment.

The hon. Member for St. Ives (Mr. Nott) is vehement about the importance of reducing taxation on investment income as an inducement to savings. An important feature of encouraging people to save is the rate of interest. Inflation is another. But the most important is probably the real income and the wealth of the prospective saver. There is no doubt that propensity to save increases enormously as the income of the prospective saver rises. Any attempt to link assistance to those on investment income with increasing savings is, therefore, a direct attempt to benefit the higher income groups.

The most important disincentive to savings is the appalling inflation which has rapidly increased since right hon. Gentlemen opposite took charge of the affairs of the country.

Mr. Nott

Savings are going up.

Mr. Cronin

I do not accept that.

Mr. Nott

But they are.

Mr. Cronin

The first thing the Government have to do if they are to increase the incentive to save is to cope with the steady increase of prices and at least to make some sort of attempt to implement their unscrupulous election promises.

Mr. Barnett

We have had a reasonable debate with a brief and totally inadequate reply from the Chief Secretary to some excellent speeches from the Opposition, particularly from my hon. Friend the Member for Ashfield (Mr. Marquand), my hon. Friend the Member for Loughborough (Mr. Cronin), and my hon. Friend the Member for Gloucestershire, West (Mr. Loughlin).

An interesting point emerged from the Chief Secretary's reply. It appeared that he was able to cost our Amendment, although his own scheme, which, we have been told, was prepared with such loving care and work for six years, has not been given any kind of figure. Although the Amendment was selected only yesterday, the Government have been able to say that it would cost £1,800 million to reduce the 30 per cent. rate to 20 per cent.—on the assumption that we were proposing that everyone now taxed at the standard rate should be taxed at 20 per cent., an absurd idea in any case.

The Chief Secretary criticised us for going back to a reduced rate band, but the Chancellor himself intends to have bands ranging, presumably, from 30 per cent. upwards, or at least so we understand to be the intention. It is difficult to understand why the Chief Secretary should have thought it strange that we should propose a rate band reduced from 30 per cent. to 20 per cent.

We seek clearly to differentiate between investment income and earned income. The Government scheme introduced by the Bill would be more complex than our suggestion if they felt that a small exemption, a modest slice, to use the Chancellor's words, of investment income should be exempted. If they kept it low, the scheme would be more difficult and more administratively complex. The greater the exemption from the investment surcharge, the simpler it would be.

Our scheme would get away from that dilemma because we would have two rates, one for earned income one for investment income. The Government are not prepared to accept this and the major reason came out clearly in the debate. It is that they wish to remove as far as possible the distinction between earned and investment income. This is really what it is all about. It is no use the hon. Member for St. Ives (Mr. Nott) talking about savings income. What we are talking about in terms of real relief if we remove this distinction are people with very substantial amounts of capital which certainly cannot be saved by an average working man. The average working man can save very little after he has paid his tax. We are talking about relief on a substantial scale.

As my hon. Friend the Member for Llanelly (Mr. Denzil Davies) said this is a matter of priority. Even if there was some case, and I do not accept that there is, for encouraging savings on a blanket scale—this certainly was not accepted by the Royal Commission—the question of priorities as between earned and investment income remains.

What has emerged today is how far we have got from the days when the Government used to speak about having more open government. Those days have gone because it is clear that if they had wanted to tell us what sort of differential they had in mind it was open for them to do so. The excuse given by the Chief Secretary was a little odd, to say the least. He says that it cannot be done because it cannot be related to anything. Why not? We have a basic rate of 30 per cent. Why cannot it be related to that? That 30 per cent. rate is not a hard and fast rate for 1973–74. If he had wanted to tell us it was open to him to do so.

The hon. Gentleman used the argument about the need for more flexibility and demand management. It is interesting that the Chancellor needs more flexibility and room for demand management. With his present management of the economy he certainly needs some flexibility and he certainly needs to do something about demand management. When his judgment is proved wrong by everyone in the country he is still not prepared to be flexible and to reflate the economy in such a way as to remove the present absurdly high level of unemployment. Now we are told this by the Chief Secretary—the Chancellor was not here and maybe he will have a word with his hon. Friend later. The hon. Gentleman says that he must refrain from telling us what the differential is likely to be, what the slice of investment income to be exempt will be, because the Chancellor needs the flexibility in a few years' time. The right hon. Gentleman is not using the flexibility which he has now. This is doing away with the whole concept of open government to give the Chancellor flexibility in managing the economy.

It is more than just flexibility that he needs, the Chancellor must recognise what is going wrong under the present management

of demand. We on this side condemn the Government for using this scheme in this way. We condemn the secrecy, when everything that has been said means that they really know what their intentions are about the differentiation between earned and investment income. We can only assume that they are not telling us because it involves a massive increase in the redistributive effect of taxation and it would therefore make them even more unpopular when the country begins to realise just what they are doing under the cloak of reform. It is for these reasons that I advise my hon. and right hon. Friends to support the Amendment.

Question put. That the Amendment be made:—

The House divided: Ayes 181, Noes 197.

Division No. 413]	AYES	[7.15 p.m.
Abse, Leo	Ford, Ben	Lyons, Edward (Bradford, E.)
Albu, Austen	Forrester, John	Mabon, Dr. J. Dickson
Allaun, Frank (Salford, E.)	Fraser, John (Norwood)	McBride, Neil
Allen, Scholefleld	Freeson, Reginald	McCann, John
Ashton, Joe	Galpern, Sir Myer	McCartney, Hugh
Atkinson, Norman	Gilbert, Dr. John	McGuire, Michael
Bagier, Gordon A. T.	Ginsburg, David	Mackenzie, Gregor
Barnett, Joel	Gordon Walker, Rt. Hn. P. C.	Mackie, John
Beaney, Alan	Gourlay, Harry	Maclennan, Robert
Bennett, James (Glasgow, Bridgeton)	Grant, George (Morpeth)	McMillan, Tom (Glasgow, C.)
Bidwell, Sydney	Griffiths, Eddie (Brightside)	McNamara, J. Kevin
Blenkinsop, Arthur	Hamilton, James (Bothwell)	Mahon, Simon (Bootle)
Boardman, H. (Leigh)	Hamilton, William (Fife, W.)	Mallalieu, J. P. W. (Huddersfield, E.)
Booth, Albert	Hamling, William	Marks, Kenneth
Buchan, Norman	Hannan, William (G'gow, Maryhill)	Marquand, David
Buchanan, Richard (G'gow, Sp'burn)	Hardy, Peter	Marsden, F.
Callaghan, Rt. Hn. James	Harrison, Walter (Wakefield)	Marshall, Dr. Edmund
Campbell, I. (Dunbartonshire, W.)	Heffer, Eric S.	Meacher, Michael
Cant, R. B.	Hooson, Emlyn	Mellish, Rt. Hn. Robert
Carmichael, Neil	Horam, John	Mendelson, John
Carter-Jones, Lewis (Eccles)	Huckfield, Leslie	Millan, Bruce
Castle, Rt. Hn. Barbara	Hughes, Rt. Hn. Cledwyn (Anglesey)	Milne, Edward (Blyth)
Clark, David (Colne Valley)	Hughes, Robert (Aberdeen, N.)	Mitchell, R. C. (S'hampton, Itchen)
Cocks, Michael (Bristol, S.)	Hughes, Roy (Newport)	Morris, Alfred (Wytnenshawe)
Cohen, Stanley	Hunter, Adam	Morris, Charles R. (Openshaw)
Concannon, J. D.	Irvine, Rt. Hn. Sir Arthur (Edge Hill)	Morris, Rt. Hn. John (Aberavon)
Corbet, Mrs. Freda	Jay, Rt. Hn. Douglas	Moyle, Roland
Cox, Thomas (Wandsworth, C.)	Jeger, Mrs. Lena (H'b'n amp; St. P'cras, S.)	Murray, Ronald King
Crawshaw, Richard	Jenkins, Rt. Hn. Roy (Stechford)	O'Halloran, Michael
Cronin, John	John, Brynmor	O'Malley, Brian
Crosland, Rt. Hn. Anthony	Johnson, Carol (Lewisham, S.)	Oram, Bert
Dalyell, Tam	Johnson, James (K'ston-on-Hull, W.)	Orme, Stanley
Davidson, Arthur	Johnson, Walter (Derby, S.)	Oswald, Thomas
Davies, Denzil (Llanelly)	Johnston, Russell (Inverness)	Owen, Dr. David (Plymouth, Sutton)
Davies, S. O. (Merthyr Tydvil)	Jones, Barry (Flint, E.)	Pardoe, John
Davis, Clinton (Hackney, C.)	Jones, Dan (Burnley)	Parker, John (Dagenham)
Davis, Terry (Bromsgrove)	Jones, Rt. Hn. Sir Elwyrv (W. Ham, S.)	Parry, Robert (Liverpool, Exchange)
Dempsey, James	Jones, Gwynoro (Carmarthen)	Pavitt, Laurie
Doig, Peter	Jones, T. Alec (Rhondda, W.)	Pendry, Tom
Douglas-Mann, Bruce	Kaufman, Gerald	Pentland, Norman
Driberg, Tom	Kinnock, Neil	Perry, Ernest G.
Duffy, A. E. P.	Latham, Arthur	Price, J T. (Westhoughton)
Dunn, James A.	Lawson, George	Price, William (Rugby)
Dunnett, Jack	Leadbitter, Ted	Probert, Arthur
Eadie, Alex	Lee, Rt. Hn. Frederick	Rees, Merlyn (Leeds, S.)
Edwards, Robert (Bilston)	Leonard, Dick	Richard, Ivor
Evans, Fred	Lestor, Miss Joan	Roberts, Rt. Hn. Goronwy (Caernarvon)
Fernyhough, Rt. Hn. E.	Lever, Rt. Hn. Harold	Rodgers, William (Stockton-on-Tees)
Fisher, Mrs. Doris (B'ham, Ladywood)	Lomas, Kenneth	Roper, John
Fietcher, Ted (Darlington)	Loughlin, Charles	Rose, Paul B.
Ross, Rt. Hn. William (Kilmarnock)	Stewart, Rt. Hn. Michael (Fulham)	Weitzman, David
Sandelson, Neville	Stoddart, David (Swindon)	White, James (Glasgow, Pollok)
Sheldon, Robert (Ashton-untler-Lyne)	Strang, Gavin	Whitehead, Phillip
Shore, Rt. Hn. Peter (Stepney)	Summerskill, Hn. Dr. Shirley	Willey, Rt. Hn. Frederick
Silkin, Rt. Hn. John (Deptford)	Taverne, Dick	Williams, W. T. (Warrington)
Silkin, Hn. S. C. (Dulwich)	Thomas, Rt. Hn. George (Cardiff, W.)	Wilson, Rt. Hn. Harold (Huyton)
Skinner, Dennis	Tinn, James	Woof, Robert
Small, William	Tomney, Frank
Smith, John (Lanarkshire, N.)	Urwin, T. W.	TELLERS FOR THE AYES:
Stallard, A. W.	Varley, Eric G.
Steel, David	Walker, Harold (Doncaster)	Mr. Donald Coleman and
Stewart, Donald (Western Isles)	Watkins, David	Mr. John Golding.
NOES
Adley, Robert	Gower, Raymond	Parkinson, Cecil (Enfield, W.)
Allason, James (Hemel Hempstead)	Grant, Anthony (Harrow, C.)	Percival, lan
Archer, Jeffrey (Louth)	Gray, Hamish	Pike, Miss Mervyn
Astor, John	Green, Alan	Pounder, Rafton
Atkins, Humphrey	Grieve, Percy	Powell, Rt. Hn. J. Enoch
Awdry, Daniel	Gummer, Selwyn	Price, David (Eastleigh)
Baker, Kenneth (St. Marylebone)	Hall, Miss Joan (Keighley)	Pym, Rt. Hn. Francis
Balniel, Lord	Hall, John (Wycombe)	Quennell, Miss J. M.
Barber, Rt. Hn. Anthony	Hamilton, Michael (Salisbury)	Raison, Timothy
Batsford, Brian	Hannam, John (Exeter)	Rawlinson, Rt. Hn. Sir Peter
Berry, Hn. Anthony	Harrison, Col. Sir Harwood (Eye)	Redmond, Robert
	Haselhurst, Alan
Biffen, John	Hawkins, Paul	Reed, Laurance (Bolton, E.)
Biggs-Davison, John	Hayhoe, Barney	Rees, Peter (Dover)
Blaker, Peter	Higgins, Terence L.	Rees-Davies, W. R.
Boardman, Tom (Leicester, S. W.)	Holt, Miss Mary	Ridley, Hn. Nicholas
Body, Richard	Hicks, Robert	Ridsdale, Julian
Boscawen, Robert	Hordern, Peter	Rossi, Hugh (Hornsey)
Bossom, Sir Clive	Hornsby-Smith, Rt. Hn. Dame Patricia	Russell, Sir Ronald
Bowden, Andrew	Howe, Hn. Sir Geoffrey (Reigate)	Sandys, Rt. Hn. D.
Brinton, Sir Tatton	Howell, Ralph (Norfolk, N.)	Scott-Hopkins, James
Brocklebank-Fowler, Christopher	Hunt, John	Sharples, Richard
Brown, Sir Edward (Bath)	Hutchison, Michael Clark	Shaw, Michael (Sc'b'gh amp; Whitby)
Buchanan-Smith, Alick (Angus, N amp; M)	Irvine, Bryant Godman (Rye)	Shelton, William (Clapham)
Buck, Antony	Jenkin, Patrick (Woodford)	Sinclair, Sir George
Bullus, Sir Eric	Jessel, Toby	Skeet, T. H. H.
Burden, F. A.	Kellett-Bowman, Mrs. Elaine	Smith, Dudley (W'wick amp; L'mington)
Butler, Adam (Bosworth)	Kilfedder, James	Soref, Harold
Cary, Sir Robert	Kimball, Marcus	Speed, Keith
Channon, Paul	King, Evelyn (Dorset, S.)	Spence, John
Chapman, Sydney	Kinsey, J. R.	Sproat, lain
Chichester-Clark, R.	Knight, Mrs. Jill	Stainton, Keith
Clarke, Kenneth (Rushcliffe)	Knox, David	Stanbrook, Ivor
Clegg, Walter	Legge-Bourke, Sir Harry	Stewart-Smith, D. G. (Belper)
Cockeram, Eric	Lloyd, Ian (P'tsm'th, Langstone)	Stokes, John
Cooke, Robert	Longden, Gilbert	Stuttaford, Dr. Tom
Coombs, Derek	Loveridge, John	Sutcliffe, John
Cooper, A. E.	Luce, R. N.	Tapsell, Peter
Cordle, John	MacArthur, Ian	Taylor, Edward M. (G'gow, Cathcart)
Corfield, Rt. Hn. Frederick	Maclean, Sir Fitzroy	Taylor, Robert (Croydon, N. W.)
Cormack, Patrick	McMaster, Stanley	Tebbit, Norman
Costain, A. P.	Macmillan, Maurice (Farnham)	Temple, John M.
Critchley, Julian	McNair-Wilson, Patrick (New Forest)	Thompson, Sir Richard (Croydon, S.)
Crouch, David	Maddan, Martin	Trafford, Dr. Anthony
Curran, Charles	Madel, David	Turton, Rt. Hn. Sir Robin
Davies, Rt. Hn. John (Knutsford)	Maginnis, John E.	van Straubenzee, W. R.
d'Avigdor-Goldsmid, Sir Henry	Marten, Neil	Vaughan, Dr. Gerard
d'Avigdor-Goldsmid, Maj.-Gen. Jack	Mather, Carol	Vickers, Dame Joan
Dixon, Piers	Maude, Angus	Waddington, David
Dodds-Parker, Douglas	Meyer, Sir Anthony	Walder, David (Clitheroe)
Douglas-Home, Rt. Hn. Sir Alec	Mills, Stratton (Belfast, N.)	Walker, Rt. Hn. Peter (Worcester)
du Cann, Rt. Hn. Edward	Mitchell, Lt.-Cot. C. (Aberdeenshire, W	Walters, Dennis
Eden, Sir John	Mitchell, David (Basingstoke)	Ward, Dame Irene
Edwards, Nicholas (Pembroke)	Moate, Roger	Warren, Kenneth
Elliot, Capt. Walter (Carshalton)	Molyneaux, James	Weatherill, Bernard
Eyre, Reginald	Monks, Mrs. Connie	Wells, John (Maidstone)
Farr, John	Monro, Hector	Whitelaw, Rt. Hn. William
Fell, Anthony	Montgomery, Fergus	Wiggin, Jerry
Fenner, Mrs. Peggy	Morrison, Charles (Devizes)	Wilkinson, John
Finsberg, Geoffrey (Hampstead)	Mudd, David	Wolrige-Gordon, Patrick
Fisher, Nigel (Surbiton)	Murton, Oscar	Wood, Rt. Hn, Richard
Fookes, Miss Janet	Nabarro, Sir Gerald	Woodhouse, Hn. Christopher
Gilmour, Ian (Norfolk, C.)	Normanton, Tom	Wylie, Rt. Hn. N. R.
Gilmour, Sir John (Fife, E.)	Nott, John
Glyn, Dr. Alan	Oppenheim, Mrs. Sally	TELLERS FOR THE NOES:
Goodhart, Philip	Owen, Idris (Stockport, N.)
Goodhew, Victor	Page, Graham (Crosby)	Mr. Tim Fortescue and
Gorst, John	Page, John (Harrow, W.)	Mr. Jasper More.