§ Before I return to the immediate issues of economic management, it is right that I should make some general observations about our strategy for taxation and tax reform.
§ Since we came to office, we have reduced taxation on a scale unprecedented in our history. Taxation as a proportion of gross domestic product has been cut from 35 per cent. to 30 per cent.
§ In the field of taxation reform it was decided, right at the outset, that it was no longer enough merely to tinker with the system, patching it up here and changing it there. The right course, we decided, was to make a complete and thorough-going review of three main areas—the taxation of income, the taxation of expenditure and the taxation of companies.
241§ On the first, the taxation of income, the old dual system of income tax and surtax is being replaced next month by a new unified tax, simpler, more logical, and easier to understand. That reform is complete.
§ On the second, the taxation of expenditure, the purchase tax and the selective employment tax are being replaced next month by the value added tax, with a single standard rate. That reform is complete.
§ On the third, the old corporation tax is being replaced next month by a new style corporation tax allied to a simpler and more generous system of investment incentives than we have ever had in this country before. That reform is complete.
§ In less than three years, we have tackled not one tax but the whole framework of our tax system. I would like to express my gratitude to those in all parts of the House who have contributed to the detailed legislation but, in particular, to those on this side who, by their support, have made these reforms possible. All these reforms will be in full operation next month. To those who complain of the inevitable problems of transition, my reply is that to avoid those problems is to eschew all fundamental reform. I have no doubt that the changes which come into operation next month, coupled with the unprecedented cuts in taxation, will make a significant contribution to a more dynamic economy. What is now required is to give the new system the opportunity of settling down.
§ It is right, therefore, that I should add—no doubt to the relief of those who bore the brunt of two of the longest Finance Bills in our history—that so far as the traditional system of taxation is concerned, these reforms are for the time being complete.
§ But outside and beyond the traditional framework of our tax system are the proposals for a tax credit system which I announced to the House last year. The case for the tax credit system rests not upon narrow arguments relating to administrative advantage, great though they are, but upon a broad case of philosophical considerations. When we took office we felt that the first task was to reform the present tax structure and to reduce taxation, for only in this way could we lighten the dead hand of exces- 242 sive taxation which had rested too long on our community, stifling incentive, curbing enterprise and penalising thrift.
§ But successive Chancellors—or at any rate those who have reduced income tax, whether by cuts in the rates or by increasing the allowances—have been acutely conscious that cuts in direct taxation cannot help people who do not pay tax; and by definition the people who do not pay direct taxation are the poorer members of the community—the low paid, the pensioners, large families, particularly those with young children, and so on.
§ The tax credit system—which is a logical extension of our existing tax system—is specifically designed to help these people: and in so doing it will buttress the social security system in a way which channels help to people without individual means-testing and without the problem of take-up. It was in this spirit that the new system was proposed. It was in this spirit, I am sure, that it was welcomed on all sides of the House.
§ The scheme is now being examined by a Select Committee of the House. This will be one more case, I believe, where the process of reform will benefit greatly from the more open government which the Green Paper approach facilitates, and from the contribution of a Select Committee.
§ There is, however, one point which I should add. This concerns the payment of child credits. The House should know that the Government will not adopt any arrangement which leaves mothers being paid less than they are at present.