§ Question proposed, That the Clause stand part of the Bill.—[Mr. Maurice Macmillan,]
§ 8.15 p.m.
§ The Chief Secretary to the Treasury (Mr. Maurice Macmillan)
Partly at least owing to the nature of surtax, this is in some respects a standstill Clause repeating in its provisions the same scale of rates as the previous Administration suggested for the previous year, because it refers to earnings which were taxed at 302 those rates under the provisions of previous Finance Acts for income tax. Surtax is more or less a deferred instalment of income tax, payable in the year following the year of assessment for which it is chargeable. It is an extra instalment of the income tax for that year. The surtax which becomes payable on 1st January, 1972, although the rates are authorised in the Finance Act, 1971—that is, this Bill when enacted—relates to the income tax chargeable in the tax year 1970–71 which is subject to the income tax levels imposed by the Finance Act, 1970.
We shall therefore have to consider the Clause in relation to the then standard rate of tax and to the provisions which were then obtaining rather than to the 1971 rates.
303 The provisions of the Clause cannot in any logical way be related to changes in income tax proposed for 1971–72, although surtax payers will benefit this year to the extent that they share in improvements either in current income relief or in the general benefit from the reduction in the standard rate. The provisions cannot be related to the proposals for 1971–72 and still less are they affected by Chapter III in Part II—Clauses 22 to 29—relating to changes in the method of charging income tax starting in 1973–74.
The Clause simply imposes for 1970–71 the same scale of surtax rates on the same successive slices of surtaxable income above£2,000 as that imposed for 1969–70 by the Finance Act, 1970. In other words, surtaxable incomes not exceeding£2,500 will continue to be exempt, but where the surtaxable income exceeds£2,500 surtax is charged on the excess over£2,000. To avoid anomalies where the surtaxable income is only slightly above£2,500, the Clause provides a "marginal" relief.
Section 11(1) of the Finance Act, 1970 provides as follows:Income tax for the year 1970–71 shall be charged at the standard rate of 41.25 per cent. and, in the case of an individual whose total income exceeds£2,500, at such higher rates in respect of the excess over£2,000 as Parliament may hereafter determine.Parliament is in the process of hereafter determining.
The proposed scale for 1970–71, on top of the standard rate of 41.25 per cent., goes from 10 per cent., making the combined income tax and surtax rate 51.25 per cent., for incomes between£2,000 and£2,500 through 37.5 per cent., making the combined income tax and surtax rate 78.75 per cent., for incomes between£8,000 and£10,000, up to the top level of 50 per cent., making the combined income tax and surtax rate 91.25 per cent., for incomes over£15,000 a year. For the sake of clarity, I should explain that this refers to surtaxable income which is derived from gross income by an abstruse calculation with which no doubt we are all familiar in detail.
The details of the Clause are simple and familiar and there is no difference from last year's provision. I do not think that I need weary the Committee by going over them again. I hope that both sides 304 will find themselves able to support the Clause. No Amendments to it have been put down. Hon. Members on both sides can express a general view on surtax at this or any other rate, and I have no doubt that views will vary from those who think that it is too much of a bad thing to those who think that it is too little of a good thing. I have no doubt that hon. Members opposite will support the Clause because it contains the same rates and scale on the same standard rate of tax as they laid down. I hope that my hon. Friends will equally be able to support the Clause despite its, to them, perhaps slightly dubious origin in detail.
§ Mr. David Marquand (Ashfield)
Perhaps I can at once relieve any anxiety which the hon. Gentleman may feel about whether the Opposition are able to support the Clause by saying that of course he is right. It merely carries on for another year the provisions included in the 1970 Act, and we have no objection to it. But we do think it right that it should be debated on the Floor of the House. As the hon. Gentleman has said, surtax as such is to disappear and we do not mourn its passing. But the very fact that it is to disappear means, we feel, that the principle on which it is based, and which is embodied in this Clause and in equivalent Sections of previous Finance Acts, must be re-emphasised.
A debate on the general principle of surtax gives us such opportunity. We feel it all the more necessary to have the debate because a good deal of the criticism which surtax has attracted, particularly from the Conservative Party, appears to have been directed not just at the nature of the tax but at the principle behind it. Therefore, we cannot help feeling a little worried in case the Government, in abandoning the tax in future years, will also surrender the principle.
The principle embodied in the Clause is basically simple—that those with high incomes should make a larger than average contribution to community services. I do not think that anyone now explicitly challenges that principle, although it would be nice to have from the Minister a rather more firm affirmation that he accepts that principle than any member of the Government has yet 305 given. The real argument between the two parties comes over the question of what level of contribution those with high earnings should make.
We believe that the level of contribution from those with high earnings should not in principle be reduced. This does not mean that the way in which the contribution is raised must necessarily remain inviolate. On the contrary, it is true that many of us on this side, as well as hon. Members opposite, feel that there is a considerable case for changing the way in which the wealthier members of the community make their contribution to community services.
There is a powerful argument for believing that, at the moment, the way in which high incomes are taxed encourages avoidance and is in many cases ineffective. But although we are not saying that the existing method must remain inviolate, we are saying that a change in the method must not be used as a camouflage for lowering the level. In particular, we say that, if the burden of direct taxation on high incomes is to be reduced, that reduction must be compensated for by an increase in the burden of taxation of capital wealth. In our view, the Government have given far too little sign that they recognise this, and it is because of this that we are suspicious, to put it mildly, of their attitude.
I have said that much of the criticism which surtax has attracted from the Conservative Party appears to be directed against the fundamental principle of progressive taxation. This is particularly true of what is sometimes called the "incentive argument" for reducing taxation on high incomes. As deployed by hon. Members opposite, the incentive argument is nothing more than gross hypocrisy. The argument itself can be advanced in three ways. One can listen to what rich people tell one and can take what they say at face value. Arguments of that sort are by far the most common for saying that high rates of taxation have a detrimental effect on incentives. But such arguments are clearly worthless because obviously rich people, like everyone else, would like to pay lower rates of taxation and they are good at finding arguments for proving why they should. Only the exceptionally naïve or credulous will accept at face value what the high 306 income earners themselves say about the disincentive effects of high taxation.
The second way in which the incentive argument is frequently advanced is on the basis of a kind of a priori deductive reasoning from what is alleged to be, I suppose, human nature—that people are bound to suffer a disincentive if they have to pay high rates of taxation because that is what people are like. But if one examines the situation purely on an a priori ground, there is at least as good a case for thinking that high rates of taxation will act as an incentive as for thinking that they will act as a disincentive.
§ Mr. Raymond Gower (Barry)
But does not the hon. Gentleman agree that, in certain circumstances, he has probably found evidence of disincentive not only at surtax level but at factory level? Has he not heard from constituents—I have—who are earning perhaps above average factory wages and complaining bitterly about the disincentive effect of taxation at the level of, say,£40 or£45 a week?
§ Mr. Marquand: Undoubtedly the incentive argument applies lower down the scale and not only to high income earners. But the nature of the argument, which is the point I am on, is as dubious for the£45-a-week man as for the£45,000-a-year man. It is just as unreasonable to believe what a person says, with no other evidence to go on, in the one case as it is in the other, because the person putting the argument has an obvious vested interest.
[Miss HARVIE ANDERSON in the Chair]
On the a priori argument for believing that high taxation acts as a disincentive, surely the only common-sense thing to say is that it is highly probable that high taxation will affect different people in different ways? Some people will respond to the income effect and will want to make up their income to what it would have been, in which case high taxation will have an incentive effect. Other people may engage—though it is a little unlikely—in all sorts of complicated economic and mathematical calculations and come to the conclusion that because the marginal rate is high it does not pay them to undertake extra effort. On 307 a priori grounds one cannot believe that the disincentive argument is compelling. The only way to find out is to see what happens and how people's behaviour is changed by differing levels of taxation.
Some studies of this kind have been carried out. The conclusions are, as is so often the case with studies of this sort, extremely confusing and, on the whole, negative. No one has yet been able to demonstrate that high rates of taxation have a significant disincentive effect. The evidence was reviewed very well by Professor Brown in a P.E.P. broadsheet published in 1969. After reviewing all the studies carried out, he asked:
Can the studies reviewed above provide a clear-cut answer to the question, do direct taxes have a disincentive effect? The only intellectually honest answer is No.
That seems to me to be absolutely right.
I now come to the point of the hon. Member for Barry (Mr. Gower) about disincentive effects lower down the scale, though a little further lower down than he was thinking about. If it were true that high levels of taxation, and particularly high marginal rates, had a disincentive effect on those with high incomes, surely it would be equally true that high marginal rates of tax on those with low incomes would have at least as great a disincentive effect? If Conservative hon. Members were honest in saying that they wish to reduce taxation on high incomes because of its effect on incentives, they would be at least as keen to reduce the marginal rates on those with low incomes. But it is now established beyond doubt that effective marginal rate of tax, if we include not only tax but benefit forgone, is often a great deal higher for poor families than for the wealthiest surtax payer in the country.
This week's New Society contains an excellent article by Mr. Tony Lynes summarising the results of a study of low-income families in Birmingham. He shows that if a family with two children on£13-£14 a week increases its income by an extra£1 a week, it loses 72p of that extra£1 in higher insurance contributions and lost benefits—in other words, there is a poverty surtax of 72 per cent. marginal rate. For a two-child family earning£18-£19 a week, the marginal poverty surtax rate was over 100 308 per cent. If such a family increases its income by£1 a week it would be 21p a week worse off as a result of the changes in contribution and benefit.
§ Mr. Nott
If I understand the hon. Gentleman's argument correctly, that would be no disincentive to that family to earn more. Is that what he is saying?
§ Mr. Marquand
What I am saying is that if hon. Members opposite are to convince us that their reason for wishing to reduce the taxation of high income earnings is not to be nice to their friends, but because they are concerned about incentives, the same argument applies equally to those on very low incomes, whose marginal rate of tax and benefit together is a good deal higher in many cases than the highest marginal rate suffered by the wealthiest surtax payer.
The point the hon. Gentleman has not yet taken aboard is that the whole drift of the Government's social policy is to make the whole problem worse than it was before. To drift towards the means-test State is bound to accentuate the marginal rate problem for those with low incomes. The Government's attitude on social policy proves that their professed concern with incentives for the wealthy is humbug. Even if the incentive argument applied to high income earners it could not apply to those who inherit high incomes. That is why we on this side of the House think it is fundamental that if there are to be reductions of taxation on high incomes, they are only justifiable if accompanied by a new and more effective attack on the inequality of capital wealth. The distribution of capital wealth in this country is scandalously unequal at the moment. In 1968, the richest 1 per cent. of the adult population owned 32 per cent. of the personal wealth. The richest 5 per cent. owned 59 per cent. and the richest 10 per cent. owned approximately 75 per cent. This is a far more unequal distribution than is the case with income. It is also clear that the distribution of personal wealth is not sufficiently more egalitarian in this country today than it was 60 years ago.
There is a profound article by Professor Atkinson in the Political Quarterly which goes into the matter in detail. He shows that although the share of the richest 1 per cent. is smaller now than it was in 1911, the share of the next richest 309 9 per cent. has actually gone up. What has taken place is not a redistribution of wealth from the rich to the poor, but a redistribution within wealthy families from father to children and from grandfathers to grandchildren. It is also clearly demonstrated by Professor Atkinson that the rôle of inheritance is as great today as it was in the 1920s, when the whole question was examined by Josiah Wedgwood.
It is also clear that the concentration of personal capital wealth is far more unequal in this country than in the United States and probably it is more unequal than in any other Western country. Whatever may be true about the effect of taxation of incomes on incentives, clearly there can be no incentive argument for maintaining this incredible inegalitarian state of affairs in regard to personal capital wealth. The only possible justification for maintaining this is the argument that property rights are sacred. We on this side of the House reject that argument since we believe, both on grounds of social justice and of economic management, that that view is quite wrong.
There has been a good deal of talk in this debate about the need for an incomes policy. In the face of this distribution of personal capital wealth, how can one possibly go down to a coal miner in my constituency, who is working hard for£25 to£30 a week, risking his life in the process, and ask him to hold back his selfish demands for more? If we are to have an effective, acceptable and workable incomes policy it can only be in the context of a radical assault on this inequality of wealth. It is because the Conservative Party give no sign of recognising the need for this that I believe that, when they talk about incentives, they really mean inequality for its own sake.
§ Mr. A. E. P. Duffy (Sheffield, Attercliffe)
Some of the most common beliefs about British taxation are myths. One is the belief that the United Kingdom is one of the most heavily taxed nations in the world, whereas international comparisons in O.E.C.D. data show that we come about halfway down the list. Another belief is that as individuals we are taxed more greatly than in fact is the case. This is now put down to 310 peculiarities of the standard rate and earned income relief.
A third myth is that the United Kingdom tax tystem is highly progressive. This would be true for incomes above the£4,000 range, but for the bulk of incomes below this range the tax system is proportional rather than progressive. National Insurance contributions, rates and tobacco duties are regressive, that is to say, they take up a larger proportion of small incomes than of high incomes. Purchase tax and drink duty are roughly proportional. Thus, income tax in Britain is not the progressive tax that most people usually think it is. Britain's tax structure was once reasonably progressive, but inflation has now altered its incidence out of all recognition. In trying to ease the position of selected groups I suggest that the Chancellor is merely distorting the situation still further.
The replacement of the archaic income and surtax system with a simple, single, graduated, personal tax has been welcomed on both sides of the House, but the logic of that tax is that it should be progressive throughout the whole of the tax system, and not just at certain levels. It is the opportunity for moving in this direction afforded by the change foreshadowed in Clause 7 which I now wish to explore. For example, a married man with two children will pay no tax at all on roughly his first£950 of income. Between about£1,000 and£4,000 a year, his marginal tax rate is constant. For every extra£ he earns he will pay 30.14 per cent. in tax, but in countries like Sweden and the United States and Germany the marginal tax rate continues to rise between£2,000 and£4,000 a year. This would make for a much more progressive income tax structure as well as for a more equitable distribution of the income tax load, if it were adopted in Britain.
Under the present British system the progressive element in the income and surtax ranges hits hardest not only at the surtax payers as we all know, but as my hon. Friend the Member for Ashfield (Mr. Marquand) has now demonstrated, it also hits at anybody on the threshold of income tax.
A married man with two children will, next year, pay no tax at all on£900 a 311 year. At£1,000 a year his effective or average rate of tax is 1.7 per cent. As his income rises to£1,500 his average rate of tax rises sharply to 11.2 per cent. At£2,000 a year it is up to nearly 16 per cent. I am sorry that the hon. Member for Barry (Mr. Gower) has had to leave the Chamber because he thought that only a worker earning£45 a week had reason to grumble. If he were here he would see that workers well below that level have reason to grumble. It may be that they have much more ample grounds for doing so.
Between£2,000 a year and£4,000 a year the effective tax rate increases from 16 per cent. to 23 per cent. In other words, for the broad band of Britain's middle-class, between£2,000 and£4,000 a year the tax rate is the same, whereas the working man moving into and up through£1,000 a year to£2,000 a year finds his average rate of tax increasing rapidly as he goes. The same is true of the man moving out of the middle and into the upper executive income level. We all know that that is why, in a sense, we are having this discussion. This is what the Clause is about. This is one of the features of the Chancellor's Budget—relief for this type of man.
We hear less about the families of the working man on the threshold of income tax and those who are paying income tax in the£1,000 to£2,000-a-year bracket. That is why in place of the present income tax and surtax I would prefer to see a smoother progression. This would make it easier for people to understand how much tax they pay and would also reduce the disincentive effect present, not merely at the upper end of the existing progression, but also at the lower end. It would undoubtedly allow a change in the maximum cut-off rate, but this is not something I would find very objectionable.
I share the concern of my hon. Friend the Member for Ashfield over the present inequalities. I am especially concerned about those inequalities of wealth rather than of income tax rates. Presumably the higher the cut-off point the greater the store that would be set by inherited capital, tax evasion and tax avoidance. Would it not be better therefore to accept a lower cut-off point, together with the wealth tax as has been suggested?
312 After all, inequality in the ownership of wealth is much more glaring than it is in income. I want to add some further authorities to those cited by my hon. Friend in support of his contention. Michael Lipton in his work "Assessing Economic Performance" shows that the top 1 per cent. of the population owned 42 per cent. of the personal capital in 1960 and collected 60 per cent. of the property income. The very top 10 per cent. owned 83 per cent. and collected 99 per cent. These figures contrast with their mere 8 and 28 per cent. respectively of total post-tax incomes from all sources. The inequality is even greater and, of course, cumulative since the top 1 or 10 per cent. can and do save much larger proportions of their incomes and hence much larger amounts than those with smaller incomes and capital and can thereby add still further to their capital.
Perhaps the most blatant abuses come not from those who own wealth but from those who control it—our top directors, managers and executives. As Eric White shows in "Survey of Executive Salaries and Fringe Benefits in the United Kingdom", there is an almost infinite variety of means of improving the lot of the employee outside the tax system; that is, by increasing real incomes and avoiding tax. The value of fringe benefits has thus assumed major importance.
Fully to appreciate their variety and possibilities one needs to consult Margot Naylor's "How to Reduce Your Tax Bill". One example is that of a company operating a pension scheme for its chosen top executives—92 per cent. of the White companies for all their executives and another 7 per cent. for some—to provide a pension based on one half or more, in 55 per cent. of the cases, of the gross salary. Where the scheme provides a capital sum on retirement, this represents three year's salary or£10,000 tax free. In some cases the sum on retirement goes much higher. The company's contribution, being a legitimate business expense, was tax free.
On retirement the executive could take the capital sum and purchase an annuity. This gives him a larger net income than if he took all his retirement benefit in the form of a pension, because about two-thirds of the annuity is regarded as tax-free capital. Or he could borrow against the capital sum and get tax relief on the 313 interest on the loan set against his remaining tax liability. If the company had some discretion, however nominal, as to the dependant or relative who was to receive the lump-sum payment on the employee's death, there was not even any liability to estate duty. Clearly it is in this direction that the tax gatherers ought to focus their gaze with a view to imposing levies on some of the capital accumulations to which it is giving rise.
§ Mr. Nott
I had not intended to speak in the debate, but as none of my hon. Friends rose a moment ago I thought that I should comment on the opening remarks of the hon. Member for Ashfield (Mr. Marquand). He called in aid more professors than I have yet heard listed in any debate from either Front Bench for some time.
§ Mr. Marquand
§ Mr. Nott
In calling in aid his professors, the hon. Gentleman joined them with a remark, in answer to an intervention by my hon. Friend the Member for Barry (Mr. Gower), which I found rather distressing. The hon. Gentleman was asked whether he had met people in his constituency, chaps earning an ordinary wage in a factory—
§ Mr. Nott
The hon. Gentleman was asked whether he had met people earning a high wage who had said, "My P.A.Y.E. deductions are such that it is not worth working overtime". Surely the hon. Gentleman must have met people in his constituency who complained that it was not worth working overtime because of the P.A.Y.E. deductions which are made.
§ Mr. Marquand
I have met a large number of people who think that the rate of tax which they pay is a good deal higher than it is. One thing which I welcome about the changes is that this misconception will be removed. I am sure that we are all glad about that. What I said was that it does not seem to me that, because a man on£45 a week or any other level says that he will not work any more for fear of paying a high rate of taxation, one should necessarily believe him, unless one can actually find out that he does not work any more. What counts is behaviour, not what people say.
§ Mr. Nott
But who will know best—the man who says that he will not go to work tomorrow because of the large deduction which will be made from his pay packet or the professor who publishes a pamphlet saying that the man is wrong? The argument is carried to extremes by the theorists in the Labour Party. The hon. Member for Ashfield says that the man may say that he is not going to work overtime but he does work overtime. I do not believe that that is always so. Men in my constituency genuinely do not work overtime because they think that their tax deductions are too great.
The hon. Member said that they misunderstand the tax system, that the standard rate on earned income is not 7s. 9d. but 6s., because of earned income relief. But whether the man understands it or not does not destroy the argument that taxation is a disincentive. If a man believes that he is paying surtax at 90 per cent. of his income, it does not matter whether he is right or wrong: if he does not change his job because of it, it is a disincentive. It seems commonsense to me, whatever the professors may say.
The hon. Member for Sheffield, Attercliffe (Mr. Duffy) talked of a pamphlet written by another professor about all the dodges by which people lowered their tax rate, one of which, he said, was borrowing money and offsetting it against taxable income. The pamphlet is out of date. The hon. Gentleman's own party, when in power, cancelled that concession two Budgets ago. He must get the latest edition of the pamphlet published by another professor, because the one which he read was out of date.
The hon. Gentleman then went on to say—I think rightly—that there is no theoretical evidence as to how incentives work either way, and he quoted Professor Brown. But if it is not a different man, Professor Brown was the co-author of a P.E.P. pamphlet on negative income tax. I do not know whether the hon. Member's quotation was from that pamphlet. The whole of the pamphlet set out the arguments, which the hon. Gentleman used about the low income earners, saying that some of the highest marginal rates of tax in the United Kingdom are paid by those on very low incomes.
315 If one takes National Insurance contributions into account and adds them to the tax system, we know that the jump in marginal rates is probably equally as high for a low income earner, a man on£14 to£15 a week, as it is for the man earning£8,000 a year. But Professor Brown advocates a negative income tax to remove this anomaly, so he cannot have it both ways. He cannot say that there is a lack of incentive to the man on a low income to get himself out of the£15 bracket because of the high marginal rates of income tax and National Insurance and also that there is not a lack of incentive for the man on surtax.
The hon. Member said that the level of surtax should not be reduced. It is his view and that of a large proportion of hon. Members who share his political faith, but it is not the view, I understand, of the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) who was the Chancellor in the last Socialist Administration. In his Budget Statement he said quite clearly that he thought that the levels of tax on high income earners were too high. If the right hon. Member for Stechford were still the Chancellor, he might have done something about it because he said that he thought it should be tackled. Nor is it the view which is shared by the right hon. Member for Manchester, Cheetham (Mr. Harold Lever) because when he spoke on this subject from the Opposition Front Bench only a week ago he said that he believed that the levels should be reduced on high income earners.
This brings me to the next argument adduced by the hon. Member for Ash-field, namely, that perhaps, in the last resort, he might accept that the tax levels should be reduced on high incomes, but only if one clobbered the chap with wealth. I have fortuitously obtained from the Library a copy of the official Labour Party document "Into the 'Seventies" which stated, on the subject of a capital tax:and since any new capital taxes such as a wealth tax might be paid out of capital or at the expense of current savings, the extra revenue could clearly not be directly traded off for general cuts in income or purchase tax because of the effects on consumption.316 That statement, from an official Labour Party document, seems to make the case against a wealth tax.
I have no partisan or ideological feelings against a wealth tax. However, the simple fact is that it is not a very good tax. It damages the savings ratio, which in turn damages the economy of the country generally. Why, if the hon. Member for Ashfield thinks that wealth should be dealt with in this way, were his right hon. Friends not prepared to do it in the 25 or however many Budgets it was that we had in five or six years of Socialism? The answer is that they did not do it not for ideological reasons—because their ideology would support a wealth tax—but because it would have been damaging to savings.
It is right to reduce the levels of taxation on high incomes because it so happens that people with very high incomes save a greater proportion of their money than do those with small incomes. This is not surprising. If one reduces taxation or pays extra benefits to a person earning, say,£14 a week, he is, of necessity, likely to spend it all. If, on the other hand, one reduces taxation—and it does not cost much to do this in terms of actual cash—on somebody earning£50,000 a year, a very large proportion, if not the whole, of the reduction goes in increased savings.
One of the values of a distribution of wealth that is not equal—I do not necessarily hold to this, but all the professors the hon. Member for Ashfield cares to consult will assure him that this is the result of the maldistribution of wealth—is that the rich save more than the poor.
I am, of course, talking in macroeconomic as opposed to micro-economic terms. I dealt with the matter in micro-economic terms by saying that I did not know in theory which way incentives really operate—whether they work for the poor in one respect or for the rich in another.
In macro-economic terms, it pays hand over fist to reduce taxes on the man earning£20,000 because he helps to swell the savings ratio, which helps one generate the sort of economic development which enables one eventually to reduce taxes right through the scale.
I conclude by saying that I have heard the argument so many times that what 317 was so disgraceful about 6d. of income tax was that it benefitted the rich more than the poor. Of course it did, because the rich happen to pay more tax. Presumably hon. Gentlemen opposite want to keep a progressive tax system. This was the burden of the speech of the hon. Member for Ashfield. He did not want the progressive taxation system to be tampered with. I appreciate that hon. Gentlement opposite never lower taxes, but the present Government lower taxes; they have knocked off half the tax, in two Budgets, which the Labour Party put on in their 25 Budgets in five years. Under a progressive tax system, if we knock 6d. off tax, the chap who is rich will benefit rather more than the chap who is poor. It is a statement of the obvious.
On this issue, although I have heard the hon. Gentleman's speech many times before, as he has heard mine before, his speech was unsatisfactory, and I hope that he will not call in aid too many professors on the subject of incentives and that he will rather more tend to listen to and believe the man in the street who says, "I shall not work overtime tomorrow; it is not worth it because taxation knocks too much off my pay slip."
§ Mr. John Roper (Farnworth)
I have not heard a speech of the hon. Member for St. Ives (Mr. Nott) before, so the one he has just made came to me as a first hearing. I found it very stimulating and I should like to respond to one or two of the points he made.
The final point that he was discussing was the question of reductions in taxation. On this side of the Committee none of us complains about the fact that taxes have been reduced, but we are concerned about the way they have been reduced and the people who have benefited from that reduction, and, in particular, the way that it has benefited those who pay a good deal of surtax. The hon. Gentleman referred earlier to a possible inconsistency in various of the writings of Professor Brown. I suspect that he was referring to a different Professor Brown in the case of the negative income tax pamphlet from the Professor Brown in the study of incentive effects, referred to by my hon. Friend the Member for Ashfield (Mr. Marquand). Even if it was the same professor—we will not quarrel about that—if Professor Brown is inconsistent and 318 says that incentive effects do not work at high levels but work at low levels, then the Government are inconsistent when they are concerned about incentive effects at high levels, but are not prepared to show the same concern when it comes to incentive effects at the level of the poverty line.
The hon. Gentleman also referred to the question of a wealth tax. He pointed out, as the Labour Party had shown in the document "Into the Seventies", that there are considerable macro-economic problems about substituting a wealth tax for other forms of taxation which have a direct effect upon consumption. That is true. That is one of the macro-effects about such a tax. But the hon. Gentleman referred to the grounds on which one judges whether a tax is good or had. Its macro-economic effect upon the savings ratio is not the only ground on which to judge it. It is one of the grounds on which one would wish to judge a tax, but others are its revenue-raising effect and its equity effect. I very much note what my hon. Friend said about the place of taxation within the context of the introduction of an incomes policy. Here a wealth tax could play a most useful part. It would not only have equity advantages, but would, in the long run, have macroeconomic advantages far greater than anything that has been done in the Budget.
As for the Clause, I know very little at first hand about surtax, and none of my constituents has yet consulted me about whether they should work a little harder to pay more surtax or work a little less hard to pay less surtax. Perhaps the constituents of the hon. Member for St. Ives consult him about it, but my constituents never come to see me about it. They are more likely to want to talk to me about the effects of the poverty surtax, the family income supplement and the other ways in which the Government are affecting those at the bottom of the scale.
Reading the Clause, one gets the impression that there are no changes in surtax this year. It says:…in the case of an individual whose total income exceeded£2,500, at the same higher rates in respect of the excess of that income over£2,000 as were charged for the year 1969–70.319 However, the Budget has had substantial effects in benefiting the surtax payer. Let us take the case referred to earlier of the man with two children who earns£10,000 a year. First, he will get increased child relief, perhaps£80. He will pay a lower rate of income tax. He will get additional earned income relief. Then he will be able to contribute to a personal pension scheme a further£750 a year, raising his total contribution from£750 to£1,500—[Interruption,] If he is not involved in a superannuation scheme, he can contribute up to£1,500 to a personal pension scheme and get tax relief on that, perhaps another£300.
It is sometimes said that the surtax reductions in the Budget are designed to encourage incentive among the employed and that the surtax concessions have been given to the employed. However, that is not the whole story. Again taking our man earning£10,000 a year, if he has a further£5,000 of investment income, he will benefit from the Budget in terms of the tax that he pays on that£5,000 of investment income in addition to the benefits that he obtains on the£10,000 of earned income. The floor at which he will begin to pay surtax on the investment income will have been lowered because of the increased earned income allowance. Therefore, he will not merely benefit on his earned income. He will pay tax at a lower rate on the top slice, and so on his unearned income he will benefit as well. In such a case, there is not only a reduction in the surtax that he pays on the earned income. There is also a considerable reduction in the tax that he pays on the unearned income.
If his wife is also earning, he will get considerable advantages next year. If his wife is earning in the surtax bracket and he has all the investment income attributed to him, which I understand is the practice at present, the benefit will be even more staggering. No doubt that my hon. Friend the Member for Heywood and Royton (Mr. Barnett) will tell me whether I am right about that.
The new tax system will be very favourable to the upper middle classes. We have here a very interesting opportunity in which to carry out the sort of scientific experiment that people have been discussing. Shall we see these people working harder? I have been 320 looking at people whom I see on the Tube as I travel to Westminster. Is the rush hour from the affluent suburbs half an hour earlier? Do people leave work half an hour later in the evenings? Have they a new jauntiness in their step? Are entrepreneurs that much more enterprising in their appearance? I have not noticed it on the trains on which I travel. Perhaps hon. Gentlemen opposite travel on different lines and notice different results—
§ Mr. Kenneth Lewis (Rutland and Stamford)
They do not travel on the Tube. They ride in Rolls-Royces.
§ Mr. Roper
I have not noticed Rolls-Royces passing my front door half an hour earlier in the morning.
We have a very interesting opportunity, effectively, surtax is being reduced. It would be a good idea if the Chief Secretary would tell us that he intends to commission at least half the professors to whom my hon. Friend the Member for Ashfield referred to undertake a study into the incentive effects that this substantial reduction in surtax is having on surtax payers. We should then be able to settle once and for all the argument which has continued for some time between the hon. Member for St. Ives and my hon. Friend the Member for Ashfield. It would be of great interest to the Committee and to the country if the Government would commission a study into the great stimulus to incentive which this reduction in surtax has given. One eminent authority that I have consulted is extremely sceptical about the results. I have noticed no significant results yet.
I wish it were the fact that the economic reality was the same as the words in the Clause and that there were no effective change in surtax rates. The reality is that there will on this occasion be a very substantial reduction in surtax.
§ 9.15 p.m.
§ Mr. Cecil Parkinson (Enfield, West)
Until I heard the speech of the hon. Member for Ashfield (Mr. Marquand) I had not intended to speak, because most of the things that I had wanted to say were said very ably by my hon. Friend the Member for St. Ives (Mr. Nott) in his very interesting speech.
321 The hon. Member for Ashfield said that we must not listen to those who pay tax and we must not discuss with surtax payers and taxpayers the question whether they find high rates of tax an incentive or a disincentive. The hon. Gentleman said that those people would be the last to know; in any case, they are biased; after all, they are the people paying the tax. The argument is that we should talk to people who have talked to those people and on the basis of having talked to such people we should arrive at the conclusion that taxpayers and surtax payers are not put off.
I do not know from where one gets information about incentives or disincentives except from talking to those who are paying the tax. Presumably the professor who came to the conclusion that people were not put off came to that conclusion from talking to them.
I am a practising accountant. I spend many hours of many days talking to surtax payers and discussing their problems with them. I know from personal experience that many people capable of generating a great deal more wealth for the nation and a great deal more income for themselves spend too much time talking to people like me about how to retain what they have been earning, instead of getting on with the job of earning more. Over the years an increasing number of people have come to me and have said, "The tax level is too high. I am no longer interested in building up my business, in working any harder, in earning any more money. All I want to work on is how to pay less tax on what I am getting and how to have a comfortable life, because there is no point in my generating any more income". But I am only a practising accountant and I admit that not many professors come to me with their surtax problems. However, many business people have come to me with their surtax problems over the years.
The hon. Member for Heywood and Royton (Mr. Barnett), when he speaks in his own inimitably honest manner, will be forced to admit that what I am saying accords with his experience over the years as a practising accountant. I found it an extraordinary statement that marginal rates of tax are a big disincentive for the poor but that the rich, about whom hon. Members opposite when it suits them think nothing but the worst, are apparently 322 supposed to rise above themselves on these occasions and not take any notice: they are supposed to find no disincentive in the fact that they will be paying a rate of 87½per cent. whereas the poor man is supposed to be put off by a high marginal rate. We all know that such a rate is a disincentive for the poor—
§ Mr. Joel Barnett (Heywood and Royton)
I am sure that the hon. Member will have had the experience which I have had, of clients saying that the rates of tax are terrible and that they would work much harder if they were lower, but he will know from his own experience that the very people who tell us that literally could not work any harder than they are already working.
§ Mr. Parkinson
I have had that experience, but I have also found that these people are spending an inordinate amount of time with their tax advisers, which is probably why we get to know them so well. They are certainly working very hard, but part of the time they are working, totally unproductively, on how to retain more of what they are earning. Of course, the hon. Gentleman and I are grateful to them for having acquired that interest.
I thought that I had heard the last of it at a candidate's course years ago, but I note that we are still getting that hoary old statistic about 1 per cent. of the population owning 90 per cent. of the wealth, which, we are told, are the same proportions as in 1911. The hon. Gentleman and I know that, although the percentage may have stayed the same, the people within it are a constantly shifting group. I could introduce him to half a dozen people who started life with nothing and are now millionaires. I could introduce him to members of families which were once wealthy and no longer are. The same proportion of wealth might be held by the same proportion of people but the consistent mistake of the Opposition is to assume that, because the proportions do not change, the people within them do not change. It is simply not true.
If anything has been proved by the growth in the number of takeovers and in the number of new millionaires in the City, along with the gradual moving into or taking over of the establishment by new millionaires, it is the fact that 323 entrenched wealth is, in many cases, and certainly to the extent that they think it is, a figment of the imagination of hon. Members opposite. Time and again we have seen companies removed from the control of families which have held it for centuries. Because the new generation has not been capable of coping, along comes a new entrepreneur, picks up the business cheaply and builds it up. If, in turn, his son is not capable of keeping it up, it will become a cheap buy for someone else. Hon. Members opposite should stop assuming that because the percentages of wealth have not changed the people within them have not changed and do not change. No one knows better than the hon. Member for Heywood and Royton and I about the fall of families—the old "clogs to clogs" routine taking place over several generations. I hope that we need hear no more of these phoney statistics about the proportions of wealth in 1911 or 1901 being the same as today and held by the same people. The proportions may be about the same but the people holding the wealth have constantly been changing.
§ Mr. Emlyn Hooson (Montgomery)
I agree with the hon. Member for Enfield, West (Mr. Parkinson) that far too great a proportion of the ingenuity of this country goes on tax avoidance. Some of the best brains in my profession are employed in advising on taxation matters, and a complicated system of taxation always lends itself to that. Any step proposed in the Clause for simplification of the tax system and the establishment of a single graduated tax in place of our rather antiquated system is to be desired.
Although I sympathise a great deal with the sentiments expressed by the hon. Member for Ashfield (Mr. Marquand), I could not follow his tortuous logic. He was right to attack the Government for their social policy. He pinpointed an area which must cause considerable doubt in the community as a whole.
§ Mr. Maurice Macmillan
I am sure that the hon. and learned Gentleman does not intend to mislead the House, so I should point out to him that the Clause bears no relation to any future arrangement for surtax or income tax or the merging of the two but refers to the imposing of surtax for 1970–71.
§ Mr. Hooson
I understand the point that this is a bridging Clause. It bridges over for the coming year, and I think that it is part of the scheme of rearrangement.
Before the hon. Gentleman interrupted, I was referring to the argument of the hon. Member for Ashfield. He is right to say that there are serious disincentives to the low income earner to improve his lot, and that failure to remove them is a glaring omission from the Government's policy. It was to a certain degree, though not the same degree, a glaring omission from his own Government's policy. The serious disincentive caused by the incidence of national insurance and so on has existed for a considerable time. But I could not follow the hon. Gentleman's leap from that argument to the argument which he seemed to advance that there was no evidence that it was a disincentive for the higher wage and salary earners to be paying taxation at a high rate.
§ Mr. Marquand
What I said was that the arguments about disincentives to high earners were inconclusive, and that there was no solid evidence to show that there were disincentives. I added that if hon. Members opposite were to convince us that their reason for wanting to reduce taxation on high earners was the disincentive effect, then in logic they should also do something about the disincentive effect of the poverty surtax, about which they have done nothing. This suggests that their attitude on disincentives for high earners is hypocritical.
§ Mr. Hooson
I follow the hon. Gentleman's point, but the fact that the Government have failed to take the proper steps to provide incentives for the lower income group is no reason why they should not give proper incentives to the high income group. It would have been preferable if they had done both, but that they have not done the one is not a reason why they should not do the other.
I have no doubt that we shall never find evidence from the academic sphere to prove the incentive or lack of incentive from the incidence of taxation. It is a matter of judgment and common sense. I happened recently in the United States to meet a man who is becoming the European director of an international concern. He was deciding where to live 325 and where his headquarters should be, and he had had the taxation systems and incidence of taxation of each country very carefully investigated. His decision on where to set up his headuarters and live was governed by which country's incidence of taxation was most favourable to to him. I have no doubt from my experience that at a certain level of taxation those who pay taxes at that level find it a serious disincentive, particularly if they have the option of working harder or of free-wheeling. I know from chatting with colleagues in different professions and in business that this occurs.
I have considerable sympathy with the hon. Gentleman's argument that wealth is still very inequitably distributed in this country. This is because the various measures over the years have not been effective. The test of any tax is whether it is to be effective, whether it is to achieve certain economic and social ends, and whether it can be collected to bring in the revenue it is designed to bring in.
Let us take, for example, the death duties which have been the main instrument for trying to achieve a more equitable distribution of wealth. The truth is that people with fairly small estates pay the death duty and those with the large estates generally do not because they have taken proper advice. The£30,000 estate almost always attracts the tax in full, whereas the owner of the£3 million estate has taken advice long before death intervenes. To that extent it is a voluntary tax. It has failed because no steps have been taken in the House to make it effective. All the talk about a wealth tax would have been unnecessary if the Labour Government or any other Government had ensured that the death duty and estate duty were effective taxes.
That is one of the reasons why we have constant complaints. I share the feeling of hon. Members on this side of the matter, but they have always fallen into the trap of being unable to make up their minds whether they want to see capital more equitably distributed or to abolish private capital altogether. The result is that they have never introduced a taxation scheme which enables people to make capital out of income. Very often the 326 person who has not inherited wealth and who relies on his own abilities to earn income is taxed to the hilt and is unable to make capital out of his earnings. If there is anything that gives a man incentive, it is the ability to make capital out of his earnings. I should have thought that the Labour Opposition would be as concerned as the Conservative Government to enable people to make capital out of earnings.
If we made up our minds that we wanted to see a more equitable distribution of capital, our whole taxation system would be re-arranged. The hon. Member for Ashfield must persuade his own party that what is to be aimed at is a taxation system which enables capital to be shared more fairly. He cited the example of the United States, where capital is more equitably distributed than it is here. It may not be equitably distributed, but the proportion is greater than it is here. That is partly because of the tax system there. The young executive in an American firm can be partially paid in shares, and he does not have to pay tax on them until they are realised, generally when he leaves the firm or retires. That is a system which enables people to make capital. There is a continuous turnover in the companies not only of executives but of capital. Capital is distributed much more often than it is in this country, where once capital is in bulk it tends to stay in bulk.
§ Mr. Kenneth Lewis
Having heard the speech of the hon. and learned Member for Montgomery (Mr. Hooson), I feel that, not for the first time, the Liberal Party wishes to have it both ways. In the first part of his speech I thought he was saying that he did not feel there was justification for giving incentive at surtax level because the Government had provided inadequate incentive at the lower level.
§ Mr. Hooson
The hon. Gentleman has misunderstood me. I was criticising the hon. Member for Ashfield (Mr. Marquand) since I said that the fact that the Government had not done enough for people at the lower level was no reason why they should not have done something for people earning at the higher rate.
§ Mr. Lewis
I accept that the hon. and learned Member made that clear at the end of his speech, but I thought that at the beginning he was complaining that 327 the Government had not done that. For many years Governments have been told by Labour Party members, "You cannot give anything to the surtax payer because you have not given anything lower down the scale." This kind of situation under successive Governments led to the situation in which no Government could ever give anything at the top level. We have been in the situation year after year as Finance Bills have come forward that no Government, until the present one, have ever had the courage to give some incentive to those who are earning at the very top.
Some of the very high salaries paid in industry today, which are as much as£50,000,£60,000 or even£70,000 a year, sound very high. If the Daily Mirror prints the news that that is the sort of salary being paid, it is very good propaganda for the left winger who asks, "Why should such-and-such a managing director receive such a large sum of money?" But these salaries have developed through increases over the years because those executives would have been left with only 6d. in the pound. If they had been left with more income at the top end of the scale, those salaries would not have needed to be so high and the criticism would not have arisen.
One managing director once told me that his salary of£70,000 rose completely by accident. He was paid on an incentive basis on a certain proportion of the profits of the business, As the business went up and up in profitability, so his income rose higher and higher. He could not reduce his income because he had to pay surtax on last year's income. To get enough money to pay last year's surtax he had to pay himself about the same sum. He was an individual who had no great capital when he started his business. Obviously he had accumulated some capital through the growth of the company in the shareholdings he had acquired over the years.
We have heard speeches by hon. Members opposite on the lines that we cannot give incentives by simply reducing surtax among people who already have got too much, and it has been asked how those people can be made to work harder. One of my hon. Friends said that they could not work harder because they work very hard already, but the fact is that 328 they take greater risks because they feel that it is worth while. It is the risk-taker who provides the development of industry which provides the jobs and gets the exports for the country and provides us with our prosperity.
I am sure that if young people can look ahead and see that if they become high earners they will be able to keep more of their money, they will have the incentive to take the risks which are in their own interest as well as in the interests of the nation. I do not see how hon. Members opposite can argue against this being an advantage to industry since we have not tried it over the last 10 years. This is the first time that there has been a cut to enable those high flyers to earn more. Perhaps we ought to try it and see what happens. I estimate that in two or three years time we shall be in a better position to tell whether this policy has worked.
Hon. Members opposite seem to be giving a considerable amount of notice in advance that, if there is another Labour Government, there will be a wealth tax. I suppose they feel that this will win them a lot of votes. There is, however, a danger that much of the wealth they will seek to secure through this tax will fly out of the country. Surely it is apparent that the country needs investment. Most of the savings come from people who are high earners. If we need such investment, whatever Government are in power, it can come only from people who are given encouragement. There is no encouragement given, and no investment to be gained, by imposing a wealth tax. What the Labour Party should be considering is some form of incentive tax. If they can improve on our incentive tax then good luck to them, but they have not shown any intention in doing this up to now.
§ Mr. Dalyell
If I attempted to follow the remarks of the hon. Member for Rutland and Stamford (Mr. Kenneth Lewis), on what he said about risk, I should be out of order. I should like to address myself for a moment to the Minister of State who in an earlier debate taunted us on this side of the Committee and said it was a pity that we did not go out and try to do something to persuade those who support us to restrain their wage demands. He implied that we either did not have the courage, the will or the 329 patriotism to do it. I played some part, I do not claim an overwhelming part, in what I think is recognised as being almost a model agreement in the most difficult of all industries, the motor industry. There was an agreement at Bath-gate, together with an agreement at Cowley along rather different lines, which was regarded as being almost a model of restraint.
To get such a longish-term agreement and persuade shop stewards to go along with it, it is necessary to be able to say that the Government are pursuing a fair economic policy in the crudest terms. My hon. Friend the Member for Ashfield (Mr. Marquand) talked about facing miners earning£30 a week and persuading them to restrain their claims. In the motor industry this problem is acute. When we discuss this kind of claim it must be against the background of the general economic situation. If it is desired that there should be wage restraint then we cannot do the kind of things, arising out of the Clause. The offhand dismissal of a tax on wealth is very unwise, whatever form the tax takes.
In all of these discussions we have to come down to the realities of the situation and to recognise that part of what the hon. and learned Member for Montgomery (Mr. Hooson) said was only too true. Estate duty and other forms of taxation are often uncollected and the haggling goes on for a long time. This brings us to the basic issue and that is the state of the Inland Revenue. We can go on and on discussing pure economic arguments and desirable forms of taxation, but we have to face the fact that the Revenue at this level is in a creaky condition.
It is hardly surprising, because being an income tax adviser to wealthy people is a far more lucrative job than being Her Majesty's Inspector of Taxes. Time and again I have given the figures for the Scottish Estates Duty Office. Over a ten-year period 32 graduates were trained, 13 of whom went off to private insurance and law firms, seven to banking, four were considered unsuitable for one reason or another, four went to get married and four remained. The problems of the Scottish Estates Duty Office are perhaps especially difficult, for reasons known to the Treasury.
330 Similarly, on several occasions I have raised this subject and been told "We are looking into the problem; we will come up with some kind of answer." This has not been done and as far as I know there is still no clear view about what should be done to deal with the shortage of key members of the Inland Revenue. Without them, without proper pay, any kind of meaningful operation of the taxes listed by the hon. and learned Member for Montgomery is impossible. The Minister of State is chatting away quite amiably. Perhaps he would like to interrupt me and tell we what he plans to do about this.
§ Mr. Higgins
I hesitate to do that. Actually I was contemplating that perhaps the reason for the shortage is that the hon. Gentleman, myself and the hon. Member for St. Ives (Mr. Nott) were all at Cambridge together and all ended up here.
§ Mr. Dalyell
Whatever kind of group we may or may not have been in, or whatever our merits or demerits, that is not a complete answer to the problem. The Minister's charm is all very fine, but it will not do, because the problem still exists.
The Treasury says, "We shall do something about it. We shall publish the result of this, that, or the other study." It has not done so yet. Until these loopholes are properly tackled and until there is a feeling that the wealthy are paying what they ought to pay even under the present system, it will be very difficult to get the restraint for which the Minister was asking today.
§ [Sir ROBERT GRANT-FERRIS in the Chair]
§ 9.45 p.m.
§ Mr. Maurice Macmillan
The debate has shown one or two misconceptions about the nature of the Clause and the provisions in the Bill regarding surtax payers. I should make it clear at the outset that there are no new benefits for surtax payers other than those contained in the provisions about earned income. There a re no extra provisions for surtax payers concerning unearned income either for the year to which the Clause relates, 1970–71, or for this tax year 1971–72. This shows how right hon. Members on both sides 331 were to welcome the new methods, which have nothing to do with the Clause, for making a more comprehensible and sensible arrangement for collecting what would in the past have been surtax.
One point which has been made in this connection is that our tax structure, income and surtax combined, is no longer progressive. This does not stand up to examination. It is still a very steep tax which the Clause puts into force for 1970–71 and, indeed, for future taxation as reflected by other provisions in the Bill.
It is reasonable, although I should be out of order in expanding the argument too far, in examining the part of the Bill dealing with the future, to say that the provisions for the changes to operate after 1973 do not show any signs of not being a method of taxing earned and unearned income, but meet the point raised by the hon. Member for Ashfield (Mr. Marquand), with which many on both sides would agree, that on the whole those who have the largest income should pay higher rates of tax and contributions towards communal expenditure. That proposition in general terms has not been dissented from—not even by the more extreme laissez faire wing of the Liberal Party in the past. That is a very fair point which we can make. Apart from the misconception of what the Clause was doing, there has been a slight misconception of some of the motives which underlay our arguments.
This debate ranged rather wide, from the nature of direct allowances through the possibilities of wealth and questions of capital and income accumulation, down to incentives. For a relatively limited Clause, it was a fairly wide-ranging debate.
The hon. and learned Member for Montgomery (Mr. Hooson) wished to see more provision to enable people, including high earners, to create capital out of their income for savings and investment encouragement. I hope to be able to discuss these matters at a later stage; I have devoted some thought and argument to these matters myself in the past. But in this, he appeared to disagree almost completely with the hon. Member for Sheffield, Attercliffe (Mr. Duffy), who, in referring to the blatant abuses which managers and directors get up to, rather 332 than earners, referred to their capacity to accumulate capital. I understood the hon. and learned Member to wish managers and directors, rather than earners, to be able to do this, so there was a slight discrepancy there.
The hon. Member for Sheffield, Attercliffe put a slightly different emphasis to that of his hon. Friend the Member for Ashfield on the whole question of the distribution of personal capital wealth. The hon. Member for Attercliffe appeared to mind about new people acquiring wealth more than about anything else, while the hon. Member for Ashfield clearly minded more about old people hanging on to wealth than new people acquiring. The dichotomy was exposed by my hon. Friend the Member for Enfield, West (Mr. Parkinson), in his admirable contribution on what he called entrenched wealth, pointing out that the percentage of the owners of capital who may hold the larger amounts does not necessarily imply that the people making up that percentage have stayed the same over the years.
The hon. Members for Farnworth (Mr. Roper) and West Lothian (Mr. Dalyell) regarded the taxation of wealth more directly than through income tax and surtax as politically desirable rather than economically effective. My hon. Friend the Member for St. Ives (Mr. Nott) made it clear that, even from the most doctrinaire point of view, one would be misleading the Committee and the country if one were to suggest that even the most radical change in the taxation of wealth is likely to produce large sums in proportion to the total tax yield and that, therefore, the main arguments in its favour are those of social justice and political reason.
One has to take considerable pains in what is after all, even in the minds of the Labour Party, still to be a mixed economy, with a large proportion of the national effort in the private sector, to avoid killing the goose which lays the golden eggs.
§ Mr. Barnett
Would the hon. Gentleman develop the argument as to how he would achieve the target of social justice on his concept of a tax policy, bearing in mind that he has already accepted that a prices and incomes policy cannot achieve social justice either?
§ Mr. Macmillan
Not on this Clause. The debate has already ranged rather wide.
I hope that the hon. Member for West Lothian will forgive me if I do not even attempt to reply to his answer to my hon. Friend's contribution to another debate earlier today which I did not hear. His account of the difficulties of the Scottish Estate Duty Office was enough to wring the heart of any Treasury Minister.
It will be appreciated that the difficulties of the Inland Revenue, which are considerable, have been sufficiently great in the past that taxation has been collected through other means. The Department has acted with great fortitude, courage and considerable effort and I am conscious that the changes proposed in the Budget will not exactly decrease its burden of work. However, we hope that the simplification and clarification of the tax structure will ultimately do so.
Another large part of the argument turned on the question of incentives, and here, for once, I had to agree with the hon. and learned Member for Montgomery when he said that it was extremely doubtful whether one could have any degree of certainty about anything in this sphere, including taxation, in considering what was or was not an incentive.
I agree that it is difficult to make any sort of assessment of motivation in the sphere of human endeavour. It is difficult for professors, tax consultants and anybody by observation, common sense or anything else to assess what makes human beings do various things. This is made even more complicated by the capacity for self-deception and what one might call the post hoc propter hoc syndrome which tends to arise on these occasions.
The idea that high taxation, and particularly high marginal taxation, is a disincentive seems to have been a delusion from which Chancellors of both major political parties have suffered, though frequently they have taken a different view once in opposition.
It has been pointed out that the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) made it perfectly clear, both in 1968 and 1969—I will not go into this in detail; his words are in HANSARD for all to read—that he re- 334 garded high marginal rates of taxation as a disincentive.
He also made it plain that, in his view, some of our more successful competitors abroad were holding their positions because, at least in part, compared with them our rates of direct taxation on earned income were comparatively high. The right hon. Gentleman also made it clear that he would have liked to have done more to lower the rates of taxation on high earned incomes, and he went as far in 1969 as to say that he regarded an increase in one of the earned income allowances as a high priority for a later Budget.
Some of the contributions to what one might call the incentive argument failed to appreciate that whether or not, at a given moment, people will work more or less hard if their marginal rates of taxation are reduced is only part of the question. The important part is the general climate of opinion that is created by different rates of marginal taxation, both for those who are paying them and for those who hope one day to pay them because, by so doing, their incomes will be increased.
When one considers both the rates of taxation on earned income and the natural desire, which the hon. and learned Member for Montgomery mentioned, of high earners to create their income through savings and investment in the country, one must realise that it is the general incentive to success that is part of the capacity of any economy to keep going in difficult circumstances. Some of the speeches from hon. Gentlemen opposite, but not all, seemed to disparage the effort, and, by disparaging, the reward that that effort may regard itself as having earned. Perhaps that was particularly true where there was a lack of recognition that in many cases such abuses by high earners as may be detected are due to the fact that their marginal rate of taxation is, in their eyes, too high. The same applies whether the extra effort is being made inside or outside the surtax bracket.
§ 10.0 p.m.
Mr. J. T. Price
Perhaps the right hon. Gentleman would round off his argument more convincingly if he referred to the fact that some of the higher incomes to 335 which my hon. Friends were referring were not earned incomes but unearned incomes. How does the question of incentive apply to those people in the very high income brackets, who are merely dealing with inherited property and what flows from it in the way of very high incomes? Surely this is germane to the argument.
§ Mr. Macmillan
I am afraid that the hon. Gentleman must have misheard me when I was pointing out that this particular Clause and this Finance Bill do not contain any relief for unearned incomes, other than that which would naturally be enjoyed by the relief in the standard rate of taxation.
§ Mr. Macmillan
The hon. Gentleman may not accept it, but it is true. First, we are talking about a Clause which applies to 1970–71. Second, we are talking about the surtax which will be paid in 1972, due on 1st January. Therefore, the taxation of unearned and earned income in the year 1971–72 may be held to be relevant. Other than the natural consequence of lowering the standard rate of tax, there is no particular relief for unearned income. Indeed, some of my hon. and right hon. Friends on this side of the Committee have been rather critical of my right hon. Friend the Chancellor for this omission. This must be taken into account. Therefore, this is not a suitable time for me to develop the arguments suggested.
Both sides of the Committee have made the point about the disincentive effect at the low level of the very low threshold of income tax. This is one of the consequences. It is a difficulty which we all have to face. It grew primarily during the years of Labour Government, due partly to inflation, partly to the extent to which the right hon. Member for Stechford lowered the tax threshold, and partly to the fact that income tax under the arrangements made by the right hon. Gentleman starts being paid at the standard rate at so low a level. This is a function, to some extent, of the selective nature of social security benefits, in that the more one tries to help those whose need is the greatest, the more one produces, as does a system of negative income tax to some extent, the 336 disincentive problem of the margin. It is a problem of which we are very conscious.
We have ranged wide in a general debate on the taxation of high earners and, to some extent, earners. I think that the Committee will agree that it has been a slightly disorganised debate, no doubt due to the fact that the Clause which we are discussing relates so narrowly to one aspect of the problem and deals only with the tax to be charged as surtax at the rate decided by the Labour Party for 1970–71, and is the surtax due on 1st January, 1972, calculated on the earnings in that year and set in the Finance Bill of this year.
§ Question put and agreed to,
§ Clause 7 ordered to stand part of the Bill,
§ To report Progress and ask leave to sit again.—[Mr. Maurice Macmillan,]
§ Committee report Progress; to sit again Tomorrow,
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