HC Deb 16 May 1972 vol 837 cc471-88
Mr. Healey

I beg to move Amendment No. 64, in page 44, line 2, after "charged", insert at the rate of 20 per cent. for the first £100 of taxable income and thereafter". Amendment No. 64 is by coincidence an Amendment to Clause 64 which establishes the new unified system of income tax as foreshadowed in last year's White Paper to take effect in April, 1973.

Both in Committee and in the House we have discussed these proposals on several occasions in the last 12 months and we look forward to returning to the discussion on Report stage of this Bill later this summer. I will, therefore, confine myself to general remarks at this late stage in the evening.

In this, as in so many proposals which the Government have put to us in the last few years for reform of the tax system, the Committee must distinguish between the principles of the new system and the rates at which it is applied. Ideally, any tax would combine elegance in administration with equity in effect and the Committee will be well aware that on many occasions elegance and equity are opposed to each other, as is well proved to be the case with VAT.

On this occasion there is no reason why we should not have a unified income tax system brought in which would combine elegance with equity. We could have all the advantages of administrative efficiency which are offered, I readily confess, in this system, together with the social equality of the system it replaces, if the rates and reliefs of the tax were as they should be. As it is, the Government's proposals in this Bill are one more example of the fundamental prejudice which has corrupted all the Government's proposals for tax changes, namely discrimination for the rich against the poor and in favour of those whose live on unearned income, against those who work for their living.

It has been made clear on several occasions, in the Budget debate and on Second Reading, that the £300 million which the Government are giving away to taxpayers in this Clause will go almost wholly to people earning over £5,000 a year or living on investment income. I will confine myself, given the lateness of the hour. to a few examples of what I mean.

Under these proposals, a couple with two children under 11 and earning £1,500 a year—average earnings at this time in history—will get a net cut in tax of only 0.2 per cent. and a net increase of income of only 0.02 per cent. A couple with earnings of £18,000 and unearned income of £2,000 will get an annual tax saving of £702.77, a 6.5 per cent. cut in tax and an increase of 7.6 per cent. in net income. This is offered to a couple in these fortunate circumstances by a Government who are still refusing to allow the Railways Board to pay £20 a week minimum wage to the railway worker.

Taking another example, a taxpayer with an income of £22,100 a year, of which £2,100 is investment income, gets a present of over £2,000 a year from these proposals when they come into effect next year. The Committee must recall that these proposals are only the latest in a series of give aways to the rich for which the Government have been responsible in their two years in office.

My final example of the impact of the Government's tax changes since June, 1970 is that of a married man earning £70,000, with £10,000 unearned income. As a result of these proposals, on top of all the earlier proposals introduced by the Government, he will get an annual tax saving of £11,000 an 87 per cent. gain in his net income.

3.45 a.m.

No one can seriously maintain that changes of this nature are not regressive and profoundly damaging to the idea of one nation which the Prime Minister sporadically presents himself as championing in his weekend speeches.

The main reason for these enormous presents to the wealthier sections of the community is the massive relief given by these proposals on investment incomes. The Chancellor rather disingenuously suggested in his Budget speech that 30 per cent. of the £300 million given away to taxpayers would go to those who had retired. But the Committee will be aware by now that these are not ordinary old-age pensioners; they are wealthy persons living on investment incomes.

I will take another example. Next year a married couple with £15,000 a year in investment income will get a £1,430 present in tax relief, whereas a similar couple who are actually earning £15,000 a year will get only £324 in extra relief as a result of these proposals. There is no technical reason for this. It is a gross injustice which can be attributed only to the fact that the Government have chosen to reverse the social values which had hitherto guided the tax policy of this country.

If the Government had wished to be completely consistent with the simplicity of the new tax system, they could have maintained equity, on the one hand, by imposing a higher rate of deduction on investment income than on earned income and, on the other hand, by lowering the exemption limit for investment income. However, they have chosen not to do so. The Committee must have noticed that even the trendy Bourbons of the Economist were staggered at the Government's effrontery in slapping the British people in the face in this way.

The Chancellor has so far given no reason whatever for these presents to those who need no assistance from the Government. I hope that we shall have some clue to the Government's motives when the Chief Secretary replies to the debate. The hon. Gentleman may argue that giving these presents to people who live on investment income will produce an incentive to work or to invest. However, I put it to him that although we have seen massive increases in investment income over the last two years—and, indeed, massive increases in profits—we have seen only a fall in the propensity of those with money to invest productively for the nation's good.

At the other end of the scale, in order to accommodate these presents for the wealthy, the Government have imposed an entirely new form of surtax on the poor which is a serious disincentive to earning more money, because the poor family man encounters a 30 per cent. marginal rate of tax the moment he enters the tax system. He jumps from nothing to £30 on his first £100 of taxable income, in many cases when he is earning little over £1,000 in the year. In many cases the extra £2 a week which he earns will be wiped out entirely by the loss of benefits on top of the new tax which he pays.

I regret that parliamentary rules prevent the Opposition proposing Amendments to the Government's proposals which would enable them to increase revenue at any stage. Therefore, it is not possible for us, consistent with the rules of procedure, to reconstruct the Government's proposals along equitable lines.

For this reason we have simply been able to propose that the first £100 of taxable income should be taxed at 20 per cent. instead of 30 per cent. I judge from some figures given in a recent Written Answer that this would cost £350 million in a full year, but this could be met without difficulty at the other end of the scale. Indeed, it could be almost completely made up by denying the reliefs offered in these proposals to those with incomes of over £5,000 a year and those living largely on investment income.

I readily confess that a reduction of tax—from 30 per cent. to 20 per cent.—on the first £100 of taxable income would not be much to offer, but it would at least give the family with three children enough extra money to cover the additional cost of VAT as proposed by the Government on children's clothes and shoes, which we were discussing earlier.

I recognise, as I said, that to make our basic criticism by way of an Amendment which would not involve compensating increases in tax at any point is an imperfect method of proceeding. I recognise, too, that the proposals which we have made mean spreading the relief right up the scale of taxable persons, so that those with higher incomes would gain more than those with lower ones. But we have done it this way to illustrate the fundamental inequity of the rates and reliefs under a unified tax system of which, as a system, we approve in terms of its administrative convenience, and we shall wish later in our proceedings to expand our ideas on this subject in greater detail.

At this late hour I will not add to my remarks, except to assure the Chief Secretary that we do not intend to allow the matter to rest there.

Mr. Michael Meacher (Oldham, West)

Even at this late hour, and for that reason briefly, I feel bound to speak in support of the Amendment because of the need to ease the rate of run in for low-paid workers. This is a modest Amendment, for the reasons adduced by my right hon. Friend the Member for Leeds, East (Mr. Healey) and by no stretch of the imagination can it be called extravagant.

No doubt a bigger impact at less cost could have been secured through some such device as a minimum earned income allowance, and representations to that effect were made to the Chancellor of the Exchequer before the Budget. They were made in particular by the TUC, but the right hon. Gentleman chose to reject them. There are disadvantages with such a proposal, partly because it does not easily fit the new unified rate and partly because of the bigger marginal rate immediately above it.

The Amendment, apart from the general desirability of having a lower tax on the lower paid, has two main arguments in support of it. The first is that it takes one small step towards harmonising our income tax system with that of almost all other industrialised countries, at least in regard to the incidence at the base of the system.

France, Germany, the United States and Australia all have a marginal rate on incomes of £1,000 to £1,500 which is a considerably lower rate than ours. The French income tax system starts at 7 per cent.; the American at 15 per cent.; the German at 19 per cent.; and the Australian system hovers in small steps at about 20 per cent. Therefore, nothing more is being sought by the Amendment than that the lowest British marginal rate shall be low enough to coincide with the maximum adopted by any of our trade competitors. That is a very modest and very reasonable request to make.

The other main argument in favour of the Amendment is that it diminishes, albeit to a small degree, the impact of what has generally become known as the poverty wage trap, arising from the con- junction of income tax and means-tested benefits which eliminate the value of the wage rise. There is a definite span of income where the application of income tax and means-tested benefits eligibility coincides. This happens particularly in families whose income is just over the income tax threshold yet they still remain eligible for benefits such as free school meals and exemption from medical and dental charges. It is becoming increasingly recognised that this coincidence can create a marginal rate of tax ranging between 50 per cent. and 90 per cent., which is in excess of the maximum imposed on the very highest paid executives, and in some cases can rise to over 100 per cent. This is a devastating indictment of the present inequitable system, and any mitigation of it in the general direction of the Amendment must be welcomed.

No doubt the Minister will say that tax on the lower paid is already being reduced through the raising of the personal reliefs, and we all welcome the fact that the tax threshold for, say, the married man with two children under 11 has been raised by £3.35 a week. But one must add that there is a great deal more to be done, given the unprecedented Budget opportunities of this year, in favour of the lower paid by reducing the tax impost on them.

The tax threshold for this average family is being raised as a proportion of the national average earnings from about 57 per cent. to about 64 per cent., but in order to put this into perspective one has to remember that immediately after the last war the corresponding percentage was slightly over 100 per cent.; in other words, the average man with two children under the age of 11 would not come into the income tax bracket until he earned an average wage which today would amount to about £32 a week. Yet even after these much-vaunted increases in the threshold this man will still he paying tax at the very low wage of £22.50.

This is not exactly the Promised Land because, contrary to all the tenets, help has not been concentrated on those in greatest need. It could have been so concentrated if the personal reliefs had been raised to a very much larger extent—say to £750 for a single person and to £1,000 for a married couple, with a recoupment of the lost revenue very largely by the construction of a more progressive income tax structure with a threshold that would have lifted that average man with two children to £32. That would have restored the immediate postwar position.

Nor would the scheme have been particularly costly. The Inland Revenue was generous enough to cost it. That exercise showed about £1,400 million in lost revenue, while what the Chancellor of the Exchequer chose to do cost slightly over £1,200 million. For these reasons the Government's efforts on behalf of the lower paid are seen in perspective to be distinctly modest. I urge the Chief Secretary to accept the Amendment, because he needs to show earnest of his intention to go a great deal further on behalf of the lower paid if he is to come anywhere near matching the very much bigger figure which my right hon. Friend has proposed.

4.0 a.m.

Mr. Patrick Jenkin

The right hon. Member for Leeds, East (Mr. Healey) and the hon. Member for Oldham, West (Mr. Meacher) have recognised that at this hour it is appropriate that we should be brief. As the right hon. Gentleman opened the discussion of the Amendment very widely—I make no criticism of that—perhaps I may be permitted a few remarks in reply, although it may be more appropriate if we return to this matter elsewhere if the occasion offers.

The burden of the right hon. Gentleman's case was that the benefit of the unification, the £300 million cut, goes substantially to the better off, especially to those with investment incomes. On any change from an outdated system with a thoroughly irregular pattern of rates and reliefs—and I do not know whether the right hon. Gentleman has ever attempted to study the lines on the graph of the effective and marginal surtax rates at different levels——

Mr. Healey

The hon. Gentleman will readily admit that I made the point that, as a system, the unified tax system is superior to that which it replaces but that its social impact is far inferior. There is no good reason for that. We have not so far had one from the Government.

Mr. Jenkin

If the right hon. Gentleman will let me make my speech, I shall come to the central point.

Quite apart from the structure of the system, the effect of the rates that it produced, on both investment and earned incomes, particularly at the levels where surtax operated, was and is—because we still have it—highly irregular. One could describe it as a higgledy-piggledy system, with very little apparent rhyme or reason, simply because of the structure of the tax. The short answer to the right hon. Gentleman's point about the benefit of the transfer to this simple and regular graduation is that to the extent that benefits accrue differentially to different income levels and to different mixes of investment and earned income, that is far more a measure of the unfairness and distortion of the old system than of any deliberate attempt to better the position of those with incomes which benefit from this change. The existing system is so irregular and, indeed, unfair that any change from it is bound to give substantial benefits to those who are being disproportionately disadvantaged by the present system. That is the essence of the case.

If one moves to a regular graduation, this is inherently likely to be a fairer and smoother scale, rising—as I am sure my hon. Friend the Member for Surrey, East (Mr. William Clark) will remind us on the next Amendment—to a higher marginal rate at the top for investment incomes than we have at present. It is inherently likely to be fairer if it is regular than if it is as irregular and irrational as the present system.

There is a clear difference of philosophy between us. But, in addition, we believe that under the existing system, apart from the irregularities, unfairnesses and distortions inherent in it, the discrimination against investment income was altogether disproportionate. It is right that those with the larger investment incomes should pay tax at a higher rate than they would if the incomes were earned. This is reflected in the investment income surcharge at what I think most people recognise is a higher rate than they expected—15 per cent. But we felt that the small investment incomes, the first slice, were being quite disproportionately disadvantaged by the existing system and the existing level of discrimination. A single man whose only income is investment income of £4,000 has a marginal rate of 61.25 per cent. Yet if he had an earned income of £4,000, which is now not an excessive salary for middle management, he would have a marginal rate of 30.14 per cent. At that relatively modest level of executive income the marginal rate is twice as high if it is investment income. [HON. MEMBERS: "Hear, hear."] This is the difference between us. Hon. Members opposite would seek to justify a differentiation as broad as that. I find it astonishing that any reasonable man who acknowledges that we are living still in a free society, where the market operates substantially in the private sector, would believe that by penalising investment income even at that modest level to that extent—[An HON. MEMBER: "What about if it is inherited?"] If it were only inherited it would be a different matter. There is substantial additional taxation on inherited wealth. What I am saying would apply to the man who has succeeded in accumulating capital during his lifetime. [An HON. MEMBER: "Out of what?"] The hon. Gentleman gives himself away, because the tax rates are so high that it is extremely difficult to accumulate. One of the objects of the reforms of which this forms part is that people should be enabled and encouraged to accumulate something during their lives, because we believe that that makes for a freer society, where people have more independence and self-reliance, and that it is therefore altogether a healthier social state.

Mr. Alan Green (Preston, South)

It is the difference between the pursuit of equality and the pursuit of equity.

Mr. Jenkin

My hon. Friend is a former Treasury Minister.

We believe that the balance had shifted too far the other way. What is represented by the Opposition as massive new benefits to the better-off is merely going some way to redress a distortion which was too far in the other direction. At the top levels the benefits of the new system are very small. On a large earned income of £100,000 the effective rate of tax as a result of unification falls by only 0£8 per cent. It is unrealistic to argue that the benefits accrue at so high a level to the very rich. Looking at the breakdown of the cost of the £300 million, we find that only 10 per cent. of the cost £35 million, accrues to those with incomes of £10,000 or over. Therefore, I believe we have struck a fair balance. We are urged by some people to do away with any differentiation between investment and earned income. That would be going too far, conferring disproportionate benefits.

Mr. Dalyell

Who are these "some people"?

Mr. Jenkin

There have been a number who feel this.

Only two countries in the world seek to differentiate to any substantial extent between investment and earned income—this country and France. The hon. Member for Oldham, West said that we should try to bring our tax system into harmony with those of our competitors. I had some sympathy with what he said, but there is no shadow of doubt that our marginal rates of tax at the top. particularly on investment income, are as high as or higher than those of every other developed country. That is why I argue that we have struck a fair balance and that what we have succeeded in doing with the unification is to achieve a regular gradation and sensible and fair method of differentiating the higher investment incomes.

Most reasonable people would believe that to be fair, and would believe that to the extent that benefits are conferred on certain slices of incomes it is far more a measure of the existing distortions, anomalies and unfairnesses than of any distortion built into the new system.

The Amendment would establish a reduced rate band of £100 to be taxed at 20 per cent. The cost of so doing—this is a measure of the extent of it—would be £215 million if it were taken out of the basic band of £5,000, or a little more than that if it were additional to the band of £5,000 taxed at the basic rate. I see the attractions of a reduced rate. The hon. Member for Oldham, West mentioned some of them. There would be a lower marginal rate for the lower incomes, and a smoother run-in, as he put it; it would give a smoother gradation.

But the cost would be high. It is right to remind the Committee that it was not this Government who eliminated the reduced rates. Two successive Budgets of the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) eliminated first one and then the other reduced rate. We inherited a situation in which the marginal rate of tax on the threshold of earned income was over 32 per cent. We have reduced that to almost 30 per cent., and it will be 30 per cent. on the basic rate.

A band of £100, which would represent a tax reduction for the great majority of taxpayers of about £10, is hardly a sufficiently reduced rate band to be worth the substantial administrative burden. I ask the Committee to accept that. It would require the recoding of about 5 million PAYE taxpayers. Even in an ordinary year, that would be a major job for the Inland Revenue to undertake.

This year, we have a massive recoding to be done, with 3 million hours of overtime to contemplate. I ask the Committee to accept that it would be wholly impossible this year to add the 1½ million hours of overtime which would be necessary to recode to give effect to a reduced rate band of the sort which the right hon. Gentleman has proposed.

I take this opportunity to pay a warm tribute to the Chief Inspector's Branch of the Inland Revenue, which has managed to clear the decks in a quite remarkable way for the great recoding operation necessary to get unification oil to a good start next year. It is desperately important, and I very much welcome what the right hon. Gentleman said about the structure of the new tax. It has been widely welcomed. We should do nothing which would jeopardise its smooth and effective introduction, and I congratulate the Inland Revenue on the steps which it has taken to make it possible to get this unification of coding off the ground as efficiently and swiftly as I am sure it will.

I recognise the attractions of the Amendment, but I cannot advise the Committee to accept it. It is not possible administratively. A band of no more than £100, even though it would cost £215 million, would hardly represent a sufficiently wide band to make the graduation worth while. I suggest that, if we were to give this relief, it would be better given, perhaps, by a further increase in the personal allowances. However, my right hon. Friend's Budget proposals in this regard, giving a much bigger increase in personal allowances than we have had at any other time, represent a major step in the direction of relieving tax on the lower paid. That is where we should stand. I hope, therefore, that the right hon. Gentleman will feel able to withdraw his Amendment.

Amendment negatived.

4.15 a.m.

Mr. William Clark (Surrey, East)

I beg to move Amendment No. 121, in page 44, line 9, leave out 15 per cent.' and insert 5 per cent.'.

The First Deputy Chairman

I think it will be convenient to take at the same time Amendment No. 122, in page 44, leave out lines 10 to 19 and insert:

Table Higher rate
Part of excess over £5,000
The first £3,000 … … 35 per cent.
The next £3,000 … … 40 per cent.
The next £3,000 … … 45 per cent.
The next £2,000 … … 50 per cent.
The next £1,000 … … 55 per cent.
The next £1,000 … … 60 per cent.
The next £1,000 … … 65 per cent.
The next £1,000 … … 70 per cent.
The remainder … … 75 per cent.

Mr. Clark

Perhaps I might spend a few moments on Amendment No. 122 first. I apologise for raising the matter at this hour—it certainly is not my favourite hour for moving Amendments—but I am fortified in the knowledge that it does not seem that this will be a long debate.

My hon. Friend the Chief Secretary has just said that the idea of the new unified tax is to have easier graduation, but I notice that in the table in the Clause the first jump over £5,000 income is by 10 per cent. My table in Amendment No. 122 suggests 5 per cent. If it were carried right through between £5,000 and £20,000. it would mean a difference in tax paid of about £2,000.

One of the things I cannot understand about the table in the Bill is that the first three increases are in tranches of £1,000 each. There are then two at £2,000, one at £3,000 and one at £5,000. It would have been much better to have wider brackets at the beginning, because I am sure my hon. Friend the Chief Secretary will accept that it is at, say, the £5,000£6,000 point of income that the income is most sensitive. It would be much better to have a gradual increase to stop the frustration at the sensitive point. because an extra £1 at the lower end of the scale would, I am sure, be much more valuable than an extra fl at the higher end. Here the Treasury has got its priorities mixed up.

Amendment No. 121 deals with the top or marginal rate of tax. I accept that it is a narrow point but it is an extremely important one relating to the marginal rate. Irrespective of one's income, whether it is £10,000, £100,000, £200,000 or any other figure, the top rate of tax paid is 38¾ per cent. standard rate plus 50 per cent. surtax. The total rate at present paid is 88.75 per cent. Under the proposal in the Bill my right hon. Friend the Chancellor of the Exchequer suggests 75 per cent. with a special surcharge of 15 per cent., making a total rate of 90 per cent.

I fully appreciate—and even right hon. and hon. Members on the Opposition Front Bench will agree—that in this and previous Budgets there have been many welcome reductions in taxation. I should not like my hon. Friend the Chief Secretary to think that I am moving the Amendment in any carping or mean sense or that I am criticising the Treasury unnecessarily. The Clause seems to me extraordinary, however, when we on this side have always said, including when we were in opposition, that the marginal rate of 88¾ per cent. was far too high. I shall not bore the Committee by quoting what was said in the past by my right hon. Friend the Chancellor as well as by my right hon. Friend who is now Home Secretary about the disincentive of having a marginal rate as high as 88¾ per cent.

My hon. Friend the Chief Secretary has said in the past that that was far too high, and that is splendid, but we are now increasing it to 90 per cent. There is an anomaly here in view of what my hon. Friend said in answer to the previous debate when the right hon. Member for Leeds, East (Mr. Healey) got on to the Labour Party philosophy about investment income. I do not consider it unearned income or that it should be most heavily taxed.

Although taxation is high and has been high, we have to remember that in this respect there are two types of people: the superannuated who do not have to save to provide a pension, and the non- superannuated who have to save to create a pension for themselves. It is nonsense for the right hon. Member for Leeds, East, to suggest that all investments are somehow to be avoided and to be penalised out of existence. I remind him that in spite of the reductions in the Budget, a man earning £15,000 a year will still pay £6,596 in tax, and that is not a small figure.

The marginal rate is too high. The Amendments suggest that the investment slice should be taxed at 5 per cent. rather than 15 per cent. I accept that that would be expensive for the Revenue and would cost between £70 million and £80 million a year. But if the marginal rate is too high at 881 per cent., it is nonsense to make the rate 90 per cent. If it is too expensive to adopt the Amendments, surely my hon. Friends at the Treasury could work out a scheme to maintain the 15 per cent. investment surcharge while having a graduated scaling up from 30 per cent. to 40 per cent. to 50 per cent. and so on up to 85 per cent. with a cut off thereafter.

That would be in line with our policy and with our previous thinking. My hon. Friend and the Chancellor used to think, as I still do, that a high marginal rate of taxation was a disincentive and, as my hon. Friend said a few moments ago, we have one of the highest marginal rates in the world even now. It was one of the highest before the Budget and to raise it to 90 per cent. will make it even worse.

If my hon. Friend cannot go the whole way with me and make the reduction from 15 per cent. to 5 per cent. for the investment slice, I hope that between now and Report he will consider having a cut off at 85 per cent., or at least 87¾ per cent. That I estimate would cost the Revenue only £3 million but it would be worth while, and I hope that my hon. Friend will give that suggestion sympathetic consideration.

[Mr. RICHARD CRAWSHAW in the Chair]

Mr. Patrick Jenkin

I should like to thank my hon. Friend the Member for Surrey, East (Mr. William Clark) for the moderate way in which he has put forward these Amendments and for his forbearance from reminding the Committee of some of the things that have been said by myself and my colleagues about the undesirability of high marginal rates of taxation. I do not withdraw anything said by my right hon. Friend the Chancellor of the Exchequer or myself on that subject. We still have a top marginal rate of tax which is uniquely high by international standards, and when my right hon. Friend said in his Budget statement of last year that a 90 per cent. rate served no useful fiscal, social, or economic purpose, he was right. The question is how far and how fast one may move to a more acceptable situation.

My hon. Friend has discussed two Amendments, and I will take them in the order in which he mentioned them. His main case on Amendment No. 122 was that he thought that we had got the differential in the graduation the wrong way round. Whereas in the scale in the Bill the steps are narrower at the lower level and broaden out as they reach the high level, the steps in my hon. Friend's Amendments are much wider at the low level and narrow at the higher level. This is very much a matter of a judgment of the cost. I cannot wholly exclude from consideration the fact that the difference between my right hon. Friend's scale and that of my hon. Friend in Amendment No. 122 is a further £110 million to he added to the £300 million cost of unification.

I would question the logic behind my hon. Friend's proposal. What we want to aim at is a smooth and steady graduation. If such a scale were to be put on log graph paper one would want it to start more or less as a straight line. That would necessarily predicate that the steps at the higher end of the income should be wider than the steps at the lower end—that is, the steps should be broadly proportional to the amount of the incomes at different levels.

Mr. Clark indicated dissent.

Mr. Jenkin

My hon. Friend shakes his head but it seems that this would be the logical progression. I admit that the Bill does not produce an absolutely smooth progression. The first step is from 30 per cent. to 40 per cent. whereas over the rest of the range it proceeds in 5 per cent. steps. We found that this was necessary to keep the cost within bounds because a 5 per cent. differential at that level costs a great deal more than it does higher up as there are many more people in that income band. It enabled us thereafter to get a smooth progression of 5 per cent. steps up to the top rate of 75 per cent. on earned income, reaching 90 per cent. on investment income. As compared with my right hon. Friend's proposal, the scale proposed in the Amendment is less progressive at points immediately above the higher rate starting point but is more sharply progressive for those at the top of the income range. This is a matter of judgment. We considered a number of scales before deciding on this scale in the Bill, which I believe on the whole is right.

Turning to Amendment No. 121 I should say that the cost of this is £83 million which compares with the yields of the investment income surcharge as it stands in the Bill of £125 million. Obviously this knocks away more than half the yield of the investment income surcharge. I recognise the strength of the case made by my hon. Friend about the effect of the 15 per cent. surcharge in addition to the higher rates and the basic rate in the Bill.

Clearly this is a disadvantage of this pattern as we have introduced it. The marginal rate—I hope that hon. and right hon. Gentlemen are taking note of this—is higher than it is in the current year. This must be recognised as unsatisfactory. At the same time it is right to look at the effective rate as it applies to taxpayers at different incomes. The truth is that because we are taxing the first £2,000 of investment income at the same rate as earned income—and that applies to all those with investment incomes of £2,000 or above—the effective rate of tax does not exceed the effective rate at present until very high incomes are reached. For a single man without any earned income it is about £150,000.

4.30 a.m.

But the essential point is that the £2,000 investment income taxed at the basic rate represents, as we intended, a substantial improvement in the incentives for saving and in the relief of taxation for those with investment incomes because we believe that the existing discrimination is unrealistic and unfair.

Dr. Gilbert

As the hon. Gentleman has indicated that this state of affairs is unsatisfactory and he intends to remedy it in the near future, are we to understand that in the next Budget we shall have tax concessions for bachelors earning £150,000?

Mr. Jenkin

The hon. Gentleman must wait and see what is in the next Budget. Very few hon. Members will defend as a long-term permanent state of our tax system a top rate of 90 per cent.

My hon. Friend the Member for Surrey, East indicated an alternative suggestion at which we should look—that there should be a cut-off rate which might be 85 per cent., still very high by international standards. I cannot undertake to consider that between now and Report. We have made quite substantial changes in the taxation system. Whether my right hon. Friend the Chancellor would feel able to move in this direction next year obviously must be left to then. This would be a budgetary matter next year.

I accept my hon. Friend's criticisms about this very high top rate, not least because it is higher than the existing rate, but perhaps he will acknowledge that we have done a good deal in this year's Budget. We have reduced the effective rate on the taxpayer about whom he was talking, and considering that we have been in office for less than two years perhaps he will agree that the total reductions of tax are a thoroughly worthy fulfilment of our pledges in our election manifesto. Unification represents a great simplification and great improvement of the structure. It cannot be done in such a way as to preserve existing relationships, and we do not want to do that. We want an even graduation, and we have it. We wanted the easing of discrimination between earned and investment income, and we have that, too. We wanted specially to help smaller investment income, and that we have done.

My right hon. Friend's reform in this direction has earned the praise and admiration of the overwhelming majority of people who have studied these matters. We have achieved a reform which will come into effect next year and which will be of very great value and benefit to the whole country and economy. In these circumstances, I hope that my hon. Friend will feel it right not to press his Amendment.

Mr. William Clark

I understand from my hon. Friend the Chief Secretary that, although he will not do anything between now and Report, he will bear in mind, and that he sees, the force of the argument that at some time we must reduce the marginal rate of tax from 90 per cent. In those circumstances, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Question proposed, That the Clause stand part of the Bill.

Mr. Joel Barnett

We on this side of the Committee would, if it were not for the hour of the morning, wish to speak at length in attacking what has been said by the Chief Secretary and to divide on this Clause. But we hope to return to this matter on another occasion. Unlike the Chief Secretary, we would be prepared to defend the top rate of 90 per cent. on a single man with investment income of £150,000 a year.

Question put and agreed to.

Clause 64 ordered to stand part of the Bill.

Clause 110 ordered to stand part of the Bill.

To report Progress and ask leave to sit again.—[Mr. Barber.]

Committee report Progress; to sit again this day.

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