INCOME TAX RATES FOR 1973–74 (Hansard, 12 July 1972)

§ Mr. Joseph Hiley (Pudsey)
I beg to move Amendment 141, in page 44, line 9, at end insert: 'except in the case of a man aged 65 years, or a woman aged 60 years, where the investment income to be charged at the additional rate of 15 per cent, shall be so much as exceeds £5,000' The object of this Amendment is to give justice to a body of taxpayers who have been badly neglected and unfairly dealt with for a long time. I seek to treat those with incomes up to £5,000 a year on the same basis as that which the Budget provides for incomes up to an amount of£2,000. Justice demands that this should be done for all bodies of taxpayers who come within this bracket. My Amendment is restricted to the relief being given to those who have attained 65, in the case of men, or 60 in the case of women or, as it is usually put, those who are old pensioners.
We have for a long time accepted that there is a distinction between what is usually known as earned and unearned income. So far as I can trace, dis- 1774 crimination of this kind started in 1806 and lasted until 1816. It was then decided to scrap it. They were apparently so ashamed of it, according to column 1201 of Hansard of 18th April, 1907, that Mr. Brougham moved that all the records of the tax should be burnt or destroyed, in order that posterity should never know that such a tax had existed". Those men were wise in that they realised how iniquitous it was that there should be such discrimination.
The next time the question was considered was in 1907. Mr. Asquith, the then Prime Minister, talking about the general principles and quoting Mr. Gladstone, who was opposed to the idea of unearned income, said this: Take the poor widow with £300 a year derived from investments, and bringing up a family; is she to be placed in a worse position and to be taxed at a higher rate than the small business or professional man making £300 a year from his business? I pose the same question.
A Select Committee was set up in 1906. It bandied about suitable words to describe the distinction between the two types of taxpayer. It had to consider the practicability of differentiating between permanent and precarious incomes. The Select Committee felt it desirable to define clearly the meaning of 'permanent' and 'precarious'. In those days, apparently, precarious earnings were those derived from trade, industry, or the professions, whereas permanent earnings were attached to those who enjoyed the advantage of investment in funds, and so on. How times have changed. Today those descriptions could well be reversed. Particularly in view of the rate of return from the funds, they are now the precarious investments and earnings derived from industry and the professions are much more secure.
The Select Committee's Report says this: Other terms which have been used are 'industrial' 'spontaneous', 'earned' and 'unearned', and incomes resulting from 'investment' and 'personal effort'. It is obvious that there are incomes from investment which are not 'permanent'. There are also incomes which are 'earned' by 'personal effort' and which are less 'precarious' than many which are derived from investment. Probably the words 'earned and unearned' most accurately represent the distinction we have in our minds. I do not agree with that.
1775 It is interesting to note that that Select Committee, in setting a figure at which there should be this discrimination, suggested £3,000, and that was 66 years ago, although ultimately Mr. Asquith plumped for £2,000. In view of the fall in the value of money in the intervening years, the suggestion in the Amendment is a very modest one; for money is now worth probably 10 times less than it was in those days.
I am encouraged in presenting the Amendment by the words the Chief Secretary used on 22nd March: …hon. Members on both sides know from their correspondence how hard it is to explain to people living in retirement on income from savings, or to divorced or separated wives dependent on maintenance payments, why they should be more heavily taxed than people who have the same income in the form of pension or earnings. He continued: …it has always seemed to me absurd to encourage savings and yet penalise the results."—[Official Report, 22nd March, 1972; Vol. 833, c. 1643.] That is precisely what my right hon. Friend the Chancellor of the Exchequer and my hon. Friend the Chief Secretary are doing now. There are many in that group.
1.15 a.m.
In view of the hour and of the mood of the House, I do not want to labour the point, but I believe most passionately and sincerely that a great injustice is being done to these deserving people—none of them scroungers, but people who have worked hard for a very long time; who have not relied on money from someone else—not that there is anything wrong in that—but who, by their own efforts, have earned and saved. It is the responsibility of the Chancellor of the Exchequer to give such people every encouragement to save in the future.

§ Mr. Patrick Jenkin
My hon. Friend the Member for Pudsey (Mr. Hiley) will perhaps forgive me if I do not follow him in his references to Asquith and the events of 50 or 60 years ago, though I listened with fascination to the product of his researches.
Instead, I shall confine myself to dealing with the substance of the Amendment and the case which he has put before the House. It is a case which I under- 1776 stand, and with which, I know, many of my hon. Friends will have sympathy; namely, that despite the great changes which will take place in our personal tax structure on 5th April next year we are still retaining, it is argued, too substantial a discrimination against investment income; and that the figure we have put into the Bill for the starting point of the investment income surcharge of £2,000 should be higher.
Perhaps I may remind my hon. Friend of what exactly has been done, or will be done—and I entirely take the point that it has not yet happened—in the course of this reform of our personal tax system; a reform for which we legislated last year, and of which the Bill contains, as it were, the signposts, and fixes the limits and rates of tax and the rate of investment income surcharge, all to come into effect at the beginning of the next financial year.
The key point in what we are doing, and it is one to which I was referring in the passage which my hon. Friend read from my speech in the Budget debate, is that the first £2,000 of investment income will be treated with limited exceptions to which I shall come in a moment, in exactly the same way as if it were earned. Under the present system, a person, however small his personal income may be, does not, if it is investment income, enjoy the benefit of the earned income relief, and is therefore taxed at a much higher effective rate.
What we are doing for the first time is to say that the first £2,000 of this investment income will be taxed at the same rate as if it were earned income. The only exceptions under the present rules are those for very small incomes and for elderly, retired people over 65, again at the lower levels; the so-called small income relief and the age relief. In these circumstances, incomes though they may be investment incomes, are treated as though earned; but above those limits, which are quite low, income does not qualify for earned income relief.
The effect of what we are doing can be seen, and I invite my hon. Friend to look at Table 18, in the red book, the Financial Statement and Budget Report for 1972–73, where we have set out the amount of tax paid by a married couple whose income all comes from investments, in the three years, 1971–72; 1777 1972–73, and what it will provisionally be under the figures we have included in the present Bill for 1973–74.
Perhaps I may take two figures as an example. For a married couple whose investment income is £2,000 a year, the amount of tax last year was £594.81; this year it is £542.50, and by next year when the first £2,000 of investment income can be treated as earned and taxed at a basic 30 per cent. rate, the tax will fall to £367.50–27.1 per cent. this year to 18.4 per cent., which is by any standards, a substantial reduction in taxation. This is, as I said in an earlier speech, a belated act of justice in removing unfair discrimination which has affected people whose incomes cannot, by any use of language, be described as substantial.
May I take the level which my hon. Friend used as an example, someone who has sold a business, has retired, and is enjoying the investment of the proceeds—a married couple with an income of £5.000 a year. They paid £2,238 in 1971–72; they will pay £2,186 this year, but next year they will pay £1,717, again a substantial reduction from an effective rate of 44.8 per cent. last year to 34.4 next year.
I have had substantial correspondence with my hon. Friend, and the main point is that because it is taking two years from the Budget last year to 5th April next year to implement the massive reform which this unified personal tax system represents, the benefit for these people has not yet accrued. I can understand the impatience which many people feel. Many of them are getting on in years and are not sure how much longer they have to live. They are suffering a sense of injustice in that a substantially higher rate of tax continues to be charged.
Next year, the relief we intend in our unified system will take place and they will enjoy the benefit and will feel subject to a much fairer system of taxation that for many a long year past.
I believe that although hon. Members opposite have quarrelled with the starting point and the rate of surcharge, they have all acknowledged that my right hon. Friend's reform in this unified tax system is not only long overdue, but will be a greatly improved and a much fairer system for the general body of taxpayers.
1778 While I can understand my hon. Friend's concern on behalf of this his constituents, obviously as he described them a wholly admirable and worthy people, I ask him to pass on to them a message of hope, and a request to hold out a little longer, a message that next year the relief they seek will be given. We could not go beyond £2,000 this year. I think the £2,000 my hon. Friend mentioned from 67 years ago was directed to a different point, not to earned income and investment income. We could not go beyond that because it would seem that beyond that the benefits in terms of tax reductions to the people with more than the smallest investment incomes would be such that it would be difficult to justify. I believe that we have hit the right level. I do not say that it will stay there for all time. Obviously it will not. But the general pattern of the tax we have introduced is one which has commended itself to a very substantial majority in the House. I hope that my hon. Friend will feel that we have proceeded in the right direction and that he need not press his Amendment tonight.

§ Mr. Hiley
I am most disappointed by that reply. What the Chief Secretary has said has merely convinced me more and more how right I was to move the Amendment.

§ Mr. Dalyell
Have a vote.

§ Mr. Hiley
However, I am happy that my hon. Friend said that he did not want to deal with the references to 67 years ago. I hope that between now and next year he will take the opportunity of reading them. He will then find that what I said was correct, and probably that will influence him to be a little more generous when the time comes again.
I beg to ask leave to withdraw the Amendment.