INDEXATION OF CAPITAL GAINS TAX

HC Deb 16 July 1975 vol 895 cc1576-602

'(1) The sums allowable as a deduction from the consideration for the disposal of an asset pursuant to paragraph 4 of Schedule 6 to the Finance Act 1965 shall be altered in accordance with the formula set out below, and any reference in the enactments relating to capital gains tax to any such sums shall be construed as a reference to such sum as altered in accordance with this section— AXB/C=D where "A" is the sum allowable pursuant to the said paragraph 4; B" is the retail price index for the month in which the disposal takes place. C" is the retail price index for the month in which the sum allowable pursuant to the said paragraph 4 was expended. D" is the sum allowable as so adjusted.

(2) This section applies to disposals after 5th April 1975.

(3) In this section "the retail price index" means in relation to periods from 1st January 1962 the general index of retail prices and in relation to earlier periods an index which shall be published by the Board.'.—[Mr. Lawson.]

Brought up, and read the First time.

Mr. Lawson

I beg to move, That the clause be read a Second time.

I apologise for the rather algebraic form in which the new clause is couched. I think, however, that it is fairly straight-forward. That is why I should like it to be added to the Bill.

The purpose of the new clause is self-evident. I think that it is the most precise way of getting at the purpose. That purpose is to ensure that the gain which is liable to capital gains tax is a real gain and not a paper gain, reflecting a fall in the value of money and the rate of inflation. If, for example, over the period concerned the retail price index were to go up by 50 per cent., the amount that would be deducted from the sale price of the assets to compute the taxable gain would be not the original cost price but one and a half times the original cost price. In attempting to index tax, it is interesting to note that it is the general price index—here the retail price index—that has to be taken.

In Committee upstairs we had debates about the mortgage tax relief limit. I am sorry that the right hon. Member for Down, South (Mr. Powell) has left his place, because he was prominent—as was the Financial Secretary—among those who put forward the misguided argument that if there is indexation, for houses one uses the index of house prices and, presumably, for Stock Exchange securities one uses the Stock Exchange index, and so on. A moment's reflection in the context of capital gains tax will show that argument to be nonsense.

The real capital gain if a house or a security goes up in value is not measured against the index of house prices or the index of security prices but is registered against the cost of living generally—the price index generally. That is the only way to compute the true gain.

The argument that is likely to be put up against the clause might be couched in the form of a question: why single out capital gains tax for indexation and not other aspects of the tax system? I am sure that the Minister of State will put forward that argument but, as he well knows, there is one sense in which I am not singling out capital gains tax. I have argued for the indexation of all aspects of the income tax system—tax thresh-holds, tax brackets and so on. We have to deal with one matter at a time, and in this clause we are dealing with the indexation of a capital gains tax.

On the more general question of indexation, it may interest the Financial Secretary and the Minister of State to know that the General Sub-Committee of the Expenditure Committee, of which I have the honour to be a member, had before it as a witness on 20th June Sir Norman Price, Chairman of the Board of Inland Revenue. He gave evidence to the effect that there were no technical problems in the way of indexing the tax system and that it would not make any harder the job of estimating the tax yield or the yield of a particular tax in the year ahead. As some of these objections have been raised by right hon. and hon. Gentlemen when we have raised this matter in the past, I thought it might be useful to have on record the evidence given to the Select Committee by the Chairman of the Board of Inland Revenue.

As I say, why single out capital gains tax? In one sense we have not done so, but in another sense the Chancellor did it for us. I draw the attention of the Minister of State to the Chancellor's Budget Statement. The only reference to indexation in the Budget Statement as far as I can recall was when the Chancellor said: I know that some people take the view that with present rates of inflation the time has come to introduce indexation for capital gains tax. I am not yet persuaded that this would be right. At that time he was not yet persuaded that anything remotely resembling a statutory incomes policy was right. Now that he has been so persuaded, however, perhaps he may by now be persuaded of the rightness of indexing capital gains tax. He went on to say: There is, however, evidence that this tax is bearing unduly heavily on those who hold assets for long periods and is too lenient on those who hold for very short periods, and over the coming year I propose to review the incidence of capital gains tax"—[Official Report, 15th April 1975; Vol. 890, c. 311.] That is all very well, but the only conceivable reason why capital gains tax bears hardly on those who hold assets for long periods is inflation and the absence of an allowance for inflation. If we lived in an era of totally stable prices, people who hold assets for a long period would not be at a disadvantage vis-à-vis capital gains tax. It seems to me that the Chancellor has agreed—to use a phrase of which we shall hear much more in future in a slightly different context—that capital gains tax is a special case.

6.45 p.m.

There is good reason why it is a special case. In the context of the indexation of income tax, the income is there. In real terms it may be slightly less than it appears to be and, therefore, the taxation is a little too high, but the income is there and it is being taxed. With capital gains, however, there are many cases where in real terms there is no capital gain but there is a loss. Something which is totally non-existent in reality is being subjected to a tax which is specifically meant to be confined to capital gains. That shows that the Chancellor was justified in considering capital gains tax to be a special case.

I am well aware that this point is not a new one. As long ago as the debates in Committee on the 1972 Finance Bill, my right hon. Friend the Member for Wan-stead and Woodford (Mr. Jenkin), who was at that time Chief Secretary, said: it would be unjust to tax paper profits—profits that are not genuine because they are due to a rise in monetary not real value."—[Official Report, 10th July 1972; Vol. 840, c. 1354.] It is worth bearing in mind why capital gains tax was introduced in the first instance. I quote from what the then Chancellor of the Exchequer—the present Foreign and Commonwealth Secretary—said in his Budget Statement in 1964: I intend to make a start next spring with two major tax reforms. The first will be a capital gains tax. The dividing line between capital and income has become blurred. The income tax system has been misused by some to avoid paying income tax by entering into arrangements which dress up income, which is taxable, to look like capital, which is mainly untaxed."—[Official Report, 11th November 1964; Vol. 701, c. 1039.] What the then Chancellor of the Exchequer of the then Labour Government was trying to catch was a form of income dressed up as capital. It has turned into a totally different tax—a tax that is not a tax on income, however disguised, but a tax on capital, a form of wealth tax.

Again, I quote what was said by the Financial Secretary's immediate predecessor—now Minister of Transport—in Committee on the 1973 Finance Bill. Referring to one of my hon. Friends, he said: He sees this as a form of wealth tax"— that is, capital gains tax— and I accept that. It is an arbitrary form of wealth tax, however, because it falls on those who have to realise their assets in certain circumstances … the way in which we tax capital gains at the moment is unfair, and I believe that we can remove the element of inequity, which is what the clause is attempting to do. In order to get an overall fairness into our tax system, however, as far as capital is concerned, we ought to have a wealth tax."—[Official Report, Standing Committee H, 23rd May 1973; c. 615.] As right hon. and hon. Members will know, a Select Committee, of which I have the misfortune to be a member, is beavering away at the wealth tax. Indeed, I think that the Committee is sitting at this moment. Capital gains tax has turned into a totally arbitrary kind of wealth tax and it can no longer have any justification in anything like its present unindexed form. That is why last June, during the passage of the Finance Bill, we moved a similar clause to the one now before us. My right hon. Friend the Member for Carshalton (Mr. Carr), who was then Shadow Chancellor, said: We shall not get strength and confidence in investment if at one and the same time we have inflation at this rate and real capital losses and then insist on taxing not capital gains but capital losses."—[Official Report, 13th June 1974; Vol. 874, c. 1974.] On that occasion we divided the Committee, but I am sorry to say that the Government had a majority of 18 votes. It is clear from what I have quoted that it is accepted on both sides of the House that the capital gains tax, which was originally introduced to deal with income dressed up as capital, has now become an arbitrary, unfair and capricious tax on wealth.

Indeed, it is a tax which is imposed at a very high rate. That is not fully realised. During the past year we have had inflation running at a rate of 25 per cent. Let us assume that an asset—it does not matter what it is; it can be any asset liable to capital gains tax which has increased in value but only in line with the rate of inflation, thereby producing no gain in real terms but merely holding its value—is subject to capital gains tax at 30 per cent. on a notional 25 per cent. appreciation. That is equivalent to a 6 per cent. wealth tax—namely, a 6 per cent. tax on the full capital value. I can see that the Financial Secretary is having difficulty so I shall explain the position to him. He will understand that 30 per cent. of 25 per cent. is 7½ per cent., and that 7½ as a percentage of 125 is 6 per cent. That is equivalent to a 6 per cent. wealth tax.

Let us consider the rate at which wealth tax is applied overseas. In Germany, for instance, the top rate is 0.7 per cent. In the country in Europe which has the highest wealth tax rate—namely, Sweden—the top rate is 2½ per cent. Even in the Green Paper issued by the present Government the two top rates chosen for the alternative systems are 2½ per cent. and 5 per cent. Those rates would not be brought into effect except for wealth amounting to £5 million. Here we have a 6 per cent. wealth tax on sums which, far from being in excess of £5 million, are probably so low that they would not be subject to wealth tax as proposed in the Green Paper. This is not only an arbitrary and unfair form of wealth tax but a swingeing wealth tax. It is being imposed at a time when our capital taxation is higher than in any other country in Western Europe as a proportion of GNP and as a proportion of total tax revenue.

It is true that the wealth tax as such has not yet been introduced. Having heard certain evidence, I hope that if it is introduced it will not be anything remotely resembling the form in which it is presented in the Green Paper. Further, if it is introduced I hope that there will be substantial offsets. Of course, since the various debates that I have mentioned we have had a further capital tax imposed—namely, capital transfer tax. The interaction of capital gains tax with capital transfer tax is of the utmost seriousness. The combined effect of those two taxes on transfers could be crippling to small businesses and farms.

We pressed very hard for a reduction in the severity of capital transfer tax, but the Chief Secreary and his colleagues took the view that it was not capital transfer tax we should be going for but capital gains tax. They conceded that the two taxes together were much more severe.

I shall quote what the Chief Secretary said on this matter in Standing Committee. After being tackled on this point—namely, the accumulation of capital gains tax and capital transfer tax—he said: I hasten to add that I accept that in certain instances it can be unfair. Where a man has been running his company from 1965 for 10 years a substantial liability to capital gains tax would accrue. The answer there lies more with a reform of the capital gains tax, whether it be by way of indexation, which the hon. Gentleman"— that is, myself— is so fond of, or another way which others may prefer, a more progressive or different way of dealing with capital gains tax."—[Official Report, Standing Committee A, 11th February 1975; c. 1176.] Perhaps we shall be told the nature of that different or more progressive approach. Thus it was conceded by the Chief Secretary that the accumulation of the two taxes was excessive in its effect and that we should deal with the problem of capital gains tax. That is what we seek to do by means of the clause.

The time has come for the talk to end and for the Government to act. As an Opposition we are in the inevitable difficulty that we can recommend only matters that would cut revenue; we cannot recommend any changes that would increase revenue. I hope the right hon. Gentleman will take it from me that we do not wish to do anything which would lead to an increased public sector borrowing requirement. Of course, we cannot cut Government expenditure as we would wish. We must remember that in the White Paper it is made clear that the Government wish to increase subsidies.

I hope that in this debate we shall be told the total yield of capital gains tax. I understand that in the coming year it is expected to be £325 million. How much of that would be lost by acceptance of the new clause? Perhaps we shall be told what the rate of wealth tax already is in this country—namely, the wealth tax element in capital gains tax. These matters will be of considerable interest to the Select Committee.

Let us have no more prevarication. I hope we shall not hear the argument that this is not the time to act because we do not have a serious rate of inflation. That suggests that inflation is something evanescent and ephemeral in our society. I wish it were so. Given the Chancellor's target of a rate of inflation of 10 per cent. by September 1976, to talk about inflation as something ephemeral is an insult to the House.

Mr. Ridley

We should pay tribute to my hon. Friend the Member for Blaby (Mr. Lawson) for his assiduous pursuit of indexation on all occasions. I have always had some doubts about the argument for indexation of direct taxation. I believe that indexation of direct taxation would have great advantages if we were ever to have a Government who sought to reduce the rate of inflation. It is a necessary concomitant of a return to stable money. Since, instead, we have a Government who have just announced a packet which will put up the rate of inflation, based on seeking to increase the borrowing requirement, I am not so certain that indexation is appropriate in that respect. However, I entirely agree with my hon. Friend the hon. Member for Blaby that indexation of capital gains tax is highly desirable.

7.0 p.m.

If we go back through the history of this tax we can see how Governments change their objectives and how their aims become corruptive. You yourself, Mr. Speaker, in your wisdom and with the purity of your motives, introduced a short-term capital gains tax designed to tax speculators on quick profits. It was the mood of the day to hit those who go into a market and come out again within six months, so that they should pay some part of that profit to the community. I was not particularly enamoured of that proposal. I believe that the speculator plays an important part in society. Anybody who seeks to pursue commodity agreements and to stabilise prices of commodities is seeking to perform the function performed by speculators.

The Labour Party then introduced the long-term capital gains tax, and in due course my right hon. Friends recognised the situation by abolishing the short-term capital gains tax which you had introduced, Mr. Speaker, and they kept the long-term capital gains tax against which they voted when it was introduced. It is strange that that which we voted against we kept, and that that which we introduced we abolished. But that is history.

All those taxes were devised to catch the quick profit. What we now have is a permanent and swingeing levy on capital—and the steeper the rate of inflation the more punishing—and a charge upon the change from one asset to another. This is a capricious and arbitrary form of tax. It is particularly obnoxious because the higher the rate of inflation the more swingeing is the tax. It is a tax on those who have capital assets, and the rates are determined not by any sensible criterion but by the extent of the profligacy of the Government. The more profligate they are the more of the capital stock of individuals they seek to take.

I believe that the Chief Secretary is right to review this tax. I am astonished that he has gone that far. The Chief Secretary is such an attractive and charming man that one is inclined to be beguiled by him. I thought the right hon. Gentleman would have had nothing to do with the tax at all, but that was a wrong assumption. I believe that the right way to review the tax is to abolish it altogether. We have now the capital transfer tax and we are promised a wealth tax. Therefore, there is no need to have a capital gains as well, but if it is to stay, very much the second best course would be to index it.

What worries me is the Chief Secretary's use of the word "progressive" in the passage quoted by my hon. Friend the Member for Blaby. I have a suspicion that in the present context that means "The bigger the capital gain the higher the rate of tax". This means that as the situation becomes more inflationary and people have larger paper gains the greater will be the slice taken by the Government, and that from those who make a small gain a smaller share will be taken by the Government. However, if that is the situation, we shall find it utterly obnoxious. It means that the more the Government hot up the rate of inflation by deliberate actions the more they will take over the assets of people, if those people still have assets left.

The Government do not appreciate the extent to which the economy is not growing but declining. That decline is due to the taxation imposed by the Government. The Government have not come to terms with the fact that people cannot pay the swingeing capital taxation in which the Chancellor so delights, and which the Chief Secretary defends with such cherubic optimism, and at the same time run a capitalist system in which the ownership of assets resides in individuals. Perhaps the Minister of State in reply will say that he does not care, and believes that all capital should be held by the State. If he takes that view, at least we know where we are, but if our economy is to produce successful businesses, and if people are to take risks, and indeed, if we contrive to invite people to produce employment and work to increase our economic growth, such a Government and taxation system becomes incompatible.

It is not difficult to discover people's feelings on these matters. If people are asked why they are leaving the country, or not undertaking certain business, or why their sons are not taking over businesses, those people say "It is not worth it. If I succeed, they take it away from me, and if I fail—I fail anyway. It is better to go to a country where the successful entrepreneur is treated better."

Mr. Nott

Or work for a local authority.

Mr. Ridley

Or, as my hon. Friend says, work for a local authority, where the security is very much better, because there is no chance of the numbers employed in local authorities doing anything but grow, and nobody is ever made redun- dant. What will happen is that the whole population will work for local authorities and there will be nobody left to pay the rates.

I believe that we should index capital gains tax, but I would prefer to see it abolished. The effect of these taxes on the so-called rich and on our country's economy is cumulatively intolerable. I hope that when my Conservative colleagues return to power they will abolish capital gains tax. It is the most wicked of all the taxes. If there were a choice, I would say that capital transfer tax should stay rather than capital gains tax. Capital gains tax discourages the living and those who seek to make money for themselves and for the country. In many ways the tax is symbolic of the Socialist disease which afflicts the nation —namely, that those who are successful should be penalised by the Government. The Government surely must recognise that with an annual inflation rate of 25 per cent., the incidence of capital gains tax is a windfall which they should not pick up.

The Minister of State, Treasury, should not be content to defend these matters at the Dispatch Box. He should feel some sense of shame. I know that he has been a Treasury Minister for only a short time, and we came to respect and like the hon. Gentleman in Committee, but there comes a time when he should not stand at the Dispatch Box and seek to defend such matters—[interruption.] Does the right hon. Member for Down, South (Mr. Powell) wish to intervene?

Mr. J. Enoch Powell (Down, South)

I wanted to be reminded by the hon. Gentleman when he resigned. Or did he not wait until he was kicked out before he expressed his views on these subjects?

Mr. Ridley

I am glad that the right hon. Member for Down, South has stopped muttering from a sedentary position behind me, because I found it difficult to identify him. Now that he has made his intervention public, I seek to remind him that the rate of inflation was about 5 per cent. in 1972 and, although he knows that on many occasions I have opposed capital gains tax, it is infinitely more pernicious when the rate of inflation reaches 25 per cent.

The right hon. Gentleman has asked me why I did not resign. I remind him that my conscience need suffer for nothing which I defended when in Government. If the right hon. Gentleman can remind me of anything I said when I held office which I would at present regret, I would respect him the more, but as he has not done so I do not know what he is talking about. Therefore I would be grateful if he would keep his own conscience to himself and allow me to be the guardian of mine.

Mr. MacGregor

As my hon. Friend the Member for Blaby (Mr. Lawson) has said, we have had many proposals of this type over the years. Indeed I think it must be the most common amendment proposed on Finance Bills and a regular feature of finance debates. The arguments have been gone over many times, and I thought that my hon. Friend the Member for Blaby developed them with great persuasiveness and skill.

The House is none the worse for hearing these arguments year after year, because, as my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) said, as inflation gathers pace, capital gains tax becomes even more pernicious and it becomes even more right that we should press for an amendment of this sort. When I look at the debate we had on Report last June, I find that the argument was then being pressed that because of the rising rate of inflation an amendment or new clause of this sort was even more imperative. However, now we have reached a year in which we have faced inflation of 25 per cent.—a rate much higher than before—and thus the case for such a change has become more important still.

I have gladly put my name to this clause, although I think that in one sense it is a pity that we talk about this as another indexation-of-capital-gains proposal. I should like to refer to what the then Financial Secretary said in the debate last year. He said: Suffice it to say that I am sure that the hon. Gentleman —he was referring to the proposer of the amendment— recognises that once the principle of indexation is conceded in the tax system it is capable of indefinite expansion. No sooner do we have indexation of capital gains than we have the problem of the indexation of profits and the putting up of a case for the indexation of basic income tax ".—[Official Report, 13th June 1974; Vol. 874 c. 1973.] I happen to support the case for indexation, but here we are talking about a rather different principle. If the Government's argument against the clause is the same as that advanced by the Financial Secretary last year, I should like to briefly develop the point.

In the case of the indexation of tax thresholds, we are trying to ensure that the tax threshold each year is at the same real level as it was in the previous year. We are not talking about the principle of taxing income.

In the case of capital gains tax under the present system we are not taxing capital gains at all. As has been made clear, we are talking about taxing capital. Therefore, I believe that the argument we should be seeking to advance concerning capital gains tax is that the principle is nearer the wealth tax than the indexation argument applying to the rest of the tax system.

Although I have put my name to this clause, on balance I should prefer a different arrangement for the reform of capital gains. I shall go back to what the Financial Secretary said last year, because in the next sentence he said: To say that it would simplify the tax system is nonsense."—[Official Report, 13th June 1974; Vol. 874, c. 1973.] I believe that one of the simpler ways of simplifying capital gains tax, and yet recognising that we are not taxing capital gains, would be to introduce a reform along the lines that for two years it would be taxed at 30 per cent., after four years at 20 per cent., after six years at 10 per cent. and after eight years there would be no tax at all. The actual figures can be argued, but that is one way of doing it. At a time of high inflation that would be a simple way to take account of the point that we are taxing capital and not capital gains.

7.15 p.m.

There are two overwhelming arguments for a new clause along these lines or those I have described. The first is that the present capital gains tax is a fraud. Several examples have been put forward of how over the years people have osten- sibly made capital gains but in fact have not done so. Perhaps I could illustrate the point. It is now necessary, in terms of a so-called capital gain, that that capital gain since 1965 should have much more than doubled to enable the holder of the capital to break even in real terms. Over a 10-year period that shows very clearly the effect of taxation, because one of the important reasons for the need for it to grow at that pace is that the so-called capital gain is taxed at 30 per cent. That shows very clearly, over a 10-year period, the nature of this fraudulent claim that the individual has made a capital gain.

Let us take the last year alone. It is now necessary, for example, on capital of £1,000, to have had an ostensible gain of £350 in order to break even in real terms. I grant that £250 of that is for inflation. However, there is an extra element of £100 which has to be achieved in order to pay the tax and then to get back to the same situation in real terms. Therefore, the first strong argument is that this is now a totally fraudulent tax which is not a tax on capital gains at all.

The second argument is that it is yet another disincentive to saving. There are many things wrong with the present tax system, such as the combination of keeping the thresholds where they are and increasing the rate at a time of inflation. The present system has many disadvantages. I am convinced that we are beginning an era in which we shall see more and more evasion of tax by people who in the past would never have dreamt of doing so. They will now do so because they think that the tax is totally unfair. They look at the capital gains tax and see that they are in fact being taxed on something which is not a capital gain. That leads them even further to believe that the tax system is unfair.

I do not want to go into all the arguments about the disadvantages of our tax system. However, a further difficulty of capital gains tax is that it is encouraging people not to save in any area where they think they may have a possible capital gain. We know of many examples where people are taking the rational decision in an era of high inflation, with tax at this level, of simply spending all they have. That cannot be in the national interest.

I believe that a proposal of this sort would go some way to deal with that matter. I well recall the debate on capital transfer tax earlier this year when the present Minister of State—given that we have to have Labour Ministers, I certainly welcome him and I am glad to see him on the Front Bench—made a speech from the back benches on capital transfer tax and capital gains tax. He very powerfully advanced the argument to his own Front Bench—and by implication he had in mind the point we are making now—that capital gains tax is not a proper capital gains tax but a combination of the two and that that was the danger about what the then Government were doing. He asked that Labour Ministers should look at the matter again. I believe that he brings a fresh mind to the matter and for that reason I welcome him to the Front Bench. I hope that, within the Government and within the Treasury, he will show his willing-ness to question capital gains tax and the combination of capital gains tax and capital transfer tax and that he will expedite the day when we see some reform proposed from his own Front Bench. It is too long to wait for another year before he is able to produce his own amendments.

I hope that we do not hear the argument that because a wealth tax is being examined by a Select Committee and because the capital gains tax has some analogies with wealth tax, we should wait until a total review has taken place. In that situation, as my hon. Friend the Member for Blaby has said, we shall almost certainly have to wait for a year when inflation will probably still be at the rate of 25 per cent. We are piling on each year the nonsense that capital gains are being taxed when in fact they are not capital gains. It is for the Government to try to deal with the situation now.

Mr. Hordern

I should like to put one further point to the Minister of State. There have been many debates over the years on the indexing of capital gains. There have also been debates about other forms of taxation, notably taxes on companies, and suggestions that they should also be indexed in part. That principle appears to have been accepted in the stock appreciation provisions in the Bill. It is difficult to imagine what the Sandi-lands Committee has been considering if it was not the principle of allowing indexation for stock appreciation.

The Government have allowed the stock appreciation principle to be applied not only to companies but to partnerships and individuals. There is a provision in the Financial Statement this year where for individuals and partnerships £70 million is applied to relieve stock appreciation.

What is the difference between allowing stock appreciation relief for an individual or a partner in a partnership and allowing a form of indexation, which the new clause proposes, on the increase in capital brought about by inflation? The stock held by a partnership is in every way within the ownership of the individual partners. The stock of that partnership is allowed for tax purposes to be deducted from the earnings of the partnership for the purpose of stock appreciation. I do not see the real distinction once it has been accepted that there is to be stock appreciation for companies, individuals and partners. I hope that the Minister will pay attention to that point.

As my hon. Friend the Member for Blaby (Mr. Lawson) said, the Government's proposal amounts to a tax on wealth. There is no longer any question of a tax on real capital gains. It would not be difficult to sort out what the real capital gain was. But in all these areas—this was the reason for the appointment of the Sandilands Committee and for the stock appreciation provisions—with inflation running at 25 per cent., it must mean that there is a tax on resources, not on capital appreciation.

I shall not trouble the House further. I should like the Minister of State to tell us what distinction he is able to draw and to define between the appreciation in stock held by an individual and in the capital which that individual may hold.

Mr. Denzil Davies

We have had an interesting debate, although it has not really centred specifically on the new clause proposed by the hon. Member for Blaby (Mr. Lawson).

Mr. Lawson

The Minister means that it has not centred on his brief.

Mr. Davies

I have written my own brief.

The new clause specifically deals with the indexation of capital gains. However, I thought that I detected less enthusiasm in the hon. Gentleman's speech than in previous speeches that he has made on the subject of indexation. I may be wrong, but I thought I detected a lack of enthusiasm.

In other speeches, while points have been made about the problems created by inflation and capital gains tax—I shall come back to those matters later—again I detected perhaps a little less enthusiasm for solving those problems by means of indexation. I think that is a fair analysis of the way that the debate has gone.

Mr. MacGregor

Does the Minister accept that, if that is his impression, it is our fault? I was endeavouring to point out that there was a separate argument on capital gains. However, it did not mean that I had removed my feelings about indexation elsewhere.

Mr. Davies

I accept that there are separate arguments and problems. I am surprised that the Opposition Front Bench did not put down a new clause which did not go as far as indexation, but might have been said to try to deal with those problems. We have not had that kind of new clause. We have a new clause—

Mr. Lawson

It is a very good one.

Mr. Davies

It is an excellent, well-drafted new clause. It sets out clearly the principle of indexation for the purposes of capital gains tax. That is the new clause to which we must speak.

I confess that I am sceptical about the virtues of indexation in general. Indexation, if it ever came about, would merely in the end be a cosmetic exercise which would possibly appear to alleviate the symptoms of inflation without doing anything to attack the causes. It would be guileless if it ever came about—I do not think that it ever will in this country—to believe that we had done something to solve the problems of inflation. I recognise that there are different views in all parties. However, I do not see how indexation of taxation in general, or in other areas which would have to follow, would solve the present problem of inflation. It does not get to the cause of the problem.

Mr. Lawson

For the sake of clarity and for the record, may I say that neither I nor my hon. Friends have at any time suggested that indexation in general or in particular would solve the overriding problem of inflation?

Mr. Davies

I did not say that it had been suggested. The hon. Gentleman in a previous debate admitted that indexation was becoming fashionable and that for that reason even he had doubts about it. The danger is that if we go along this way, we may be sidetracked into believing that in some way or other we are solving problems of inflation when we are not.

Mr. Lawson

indicated dissent.

Mr. Davies

The hon. Gentleman shakes his head, but I think that is the danger.

The hon. Member for Cirencester and Tewkesbury (Mr. Ridley) made an extraordinary speech. First he said that he was not in favour of indexation. Indeed I should expect that from him, knowing his views generally on financial matters. I was then surprised to hear him say that he favoured the indexation of capital gains tax, but he wanted to abolish it. The hon. Gentleman is a member of a party which was in Government for four years. That Government did not abolish capital gains tax. They did not introduce different forms of capital gains tax to alleviate the problem of inflation. We had inflation in those four years, although I agree that towards the end of that period inflation was increasing. Therefore, I could not really understand the logic of the hon. Gentleman's speech.

I accept that stock appreciation is a mild form of indexation. It was introduced not as a temporary measure but as a stop-gap measure until the Sandi-lands Committee could look at the matter and report on it in detail. We do not know what that Committee will say. However, I accept that in stock appreciation and other areas we have to some extent accepted something which looks like indexation.

The new clause goes much further, because it asks us to index a major capital tax. The first weakness of the new clause is that it singles out one major capital tax for indexation.

Mr. Lawson

So did the Chancellor.

Mr. Davies

The Chancellor was responding to a suggestion that had been made to him. He did not say that he favoured indexation. The hon. Gentleman favours indexation of capital gains tax. However, I do not believe that he can stop there. Once we accept indexation of capital gains tax, I do not see how, in fairness or in justice, we can deny indexation of income tax which is paid by the majority of people in this country. If the owners of wealth and capital are to get the benefit of indexation—if there is a benefit—we cannot deny the same benefit to the majority of people who pay the bulk of the income tax.

The hon. Member for Norfolk, South (Mr. MacGregor) tried to draw a distinction between indexation of allowances and of capital gains. I could not follow him. I did not understand the distinction that he drew. There is no distinction in principle between the two.

My first reason for rejecting the new clause is that we cannot stop at the point which is proposed. We have to go on to other areas of direct taxation and income tax. The hon. Member for Blaby has argued in the past for general indexation. I accept that there may be a case for that proposition, although I disagree with it. If we have general indexation, however, we must accept that at a time of high inflation the immediate consequence would be a reduction in the Government's revenue. If we had general indexation of capital and income tax, the revenue would fall.

The hon. Gentleman asked me by what figure the revenue would fall if we accept the new clause. I cannot give the answer to that because we do not know it. It depends on many factors—the length of time the assets are held, the rate of inflation and so on. I am not putting the hon. Gentleman off. It is not possible to work out, as far as capital gains tax is concerned, what is the loss to the revenue or the shortfall.

7.30 p.m.

Mr. Lawson

This is most extraordinary. In that case how does the Minister of State say that the figure for the yield of capital gains tax in its present form of £325 million in the coming year is estimated? That, too, depends on how long securities are held, the rate of inflation, when they are disposed of and so on.

Mr. Davies

I have given the hon. Gentleman the answer and I cannot honestly stand at this Dispatch Box and give him a precise figure. It would be meaningless to try to do so. I would expect the shortfall to be fairly substantial, but I cannot say any more than that because I cannot give a figure.

Hon. Gentlemen have argued in the past that in some way or other, if we had indexation of capital gains tax—on my argument it follows that if we did we should have to have it on income tax—this would be some kind of discipline on the Government, and that Governments would have to come to this House and increase the rates of taxation or do certain other things. I do not believe that this is a realistic argument. At the end of the day, whether we have indexation or not, Governments will still have to decide, and the House will still have to decide between the conflicting claims of raising revenue for taxation, borrowing, reducing public expenditure and increasing public expenditure. This is no way of dealing with those hard, difficult decisions which still, in the end, will have to be made in this House and according to the political priorities of the majority of the House. Therefore, the first reason is that we could not stop at indexing capital taxes. We should then, in logic and fairness, have to extend it to indexing income tax, and then we should get into further problems.

Mr. Ridley

On that point, the Government in nearly every year have greatly relaxed the incidence of income tax, to reflect the change in the value of money, by altering the personal allowances. Since they have in that way de facto indexed income tax to some extent, when will they de facto index capital gains tax?

Mr. Davies

Perhaps I can come back to the point concerning capital gains tax a little later because, as the hon. Gentleman knows, we are having a review of capital gains tax, and I could not say anything specific in relation to that review. But we are looking at it, as the Chancellor of the Exchequer has said.

Once we move into a general indexation of direct taxes, I do not believe that we can stop there either. I do not believe that we can stop at the relationship between the taxpayer and the Govern- ment, which is an important relationship. But there are other relationships, and then we are driven logically and in equity to move into other relationships and areas and to apply indexation there.

The hon. Member for St. Ives (Mr. Nott) has stated this on a number of occasions, and I think we should be driven towards general indexation. If we argue it from the point of view of fairness and equity, why not index the interest paid to a building society? The present situation may be unfair in regard to the relationship between building society and mortgagor. Why not look at the position of the pension fund that happens to be a landlord and holds a lease with a seven or 14-year review clause? Why should we not then index the rent payable under that particular lease because we are depriving the pensioners of receipts as a result of the effect of inflation on the value of the rent?

The argument can be taken further and applied to a developing country with one or two commodities to sell on the world market. Why not move into that area?

These are the problems that we face, and I do not think we can accept an amendment relating to the indexation of capital taxes without considering all these other problems—the whole field of taxation, the whole economic field, and the repercussions that there would be.

Having said that, I accept—perhaps a different clause should have been put down—that there are problems in relation to capital gains tax and inflation. My right hon. Friend the Chancellor of the Exchequer, the Chief Secretary to the Treasury and Treasury Ministers have accepted this. The hon. Member for Norfolk, South quoted a speech that I had made in Committee. We have accepted that there is a problem. What we do not accept is that this problem can be solved by introducing this rather fashionable and beguiling concept of indexation, for the reasons I have given. We are now looking at capital gains tax, and the review will obviously take into account everything said in this debate and in previous debates on this subject.

Mr. Lawson

Will the Minister say what the problem is in his opinion?

Mr. Davies

The problem, quite clearly is inflation. I have not tried to conceal it. The reason for this clause having been put down is presumably inflation. My point is that in the way it is drawn, relying upon indexation, it will not solve the root cause of the problem, which is inflation. That is why the Government have introduced measures to bring down the rate of inflation. That is the problem at the root of the clause. The hon. Gentleman may laugh, but the clause will do nothing to solve the problem of inflation.

We accept that there are problems in relation to capital gains tax, certainly in the case of people who have held assets for a long period of time. Their position is aggravated by inflation. We are reviewing capital gains tax, as I have said already, and will take into account everything said here.

The official Opposition recognises the problem and castigate the Government for inflation. Therefore, I am surprised that the Opposition did not see fit to put down a new clause—less expansive, perhaps, in its scope than the indexation clause—to try to deal with this problem.

There are many precedents, the United States Government have tried to deal with the problem by having different rates of capital gains tax in relation to the length of time for which an asset is held. That might be a way of dealing with it. I do not know. It creates anomalies and I am not putting it forward as a suggestion. I should have thought that an Opposition who were very worried about this matter would be more concerned to put down that kind of clause than a general new clause which merely tries to import the concept of indexation.

At the end of the day the problem is inflation, and it can be dealt with only by reducing the rate of inflation. Indexation is a false solution. It will not solve the problem. But bearing in mind that we are having a review, and that we accept what has been said, I hope that Conservative Members will at least accept that we are in earnest, and that this clause will be withdrawn and not pressed to a Division.

Mr. David Howell

I am glad that the Minister of State, towards the end of his speech—which he told us he had put together himself—recognised that there is a problem. The earlier part of his remarks was so very discouraging and damning as to the difficulties that have arisen in this area that I began to think he would not be in agreement even with the undertaking made by the Chancellor of the Exchequer in the Budget speech and his assertion that, in the light of evidence that the tax is bearing unduly heavily on people holding assets for long periods, and is too lenient on those holding assets for short periods, he proposed over the coming year to review the incidence of tax. Towards the end of his speech, however, the Minister came round to that part of the official line, and that is something to be thankful for.

I think that my hon. Friend the Member for Blaby (Mr. Lawson) did a great service to the House by taking us back, as did my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley), into the history of this tax. It is in the history and the attitudes taken up that we find the springs of our present discontents. We have to understand what was originally intended in order to understand how hopelessly inadequate are the present arrangements to meet even what was originally intended, whether one agreed with that or not.

I think it was my hon. Friend the Member for Blaby who quoted the words of the then Chancellor of the Exchequer on 11th November 1964, when the new Labour Government had just taken office. The then Chancellor of the Exchequer said: The Income Tax system has been misused by some to avoid paying Income Tax by entering into arrangements which dress up income, which is taxable, to look like capital, which is mainly untaxed."—[Official Report, 11th November, 1964; Vol. 701, c. 1039.] That was the spirit of the time.

But it went even further. The argument was put forward in 1955 to the Royal Commission on Taxation by Mr. Kaldor, as he then was, that, in the light of what seemed then to be the certain and continual annual growth in equities which was being underwritten by the growth policies of the Government, there would be an automatic increase in the equity value of shares held. This generated an incomes stream which was not being taxed, and this was entirely wrong. Therefore it was right that taxation should be adjusted by the introduction of a capital gains tax to tax this continuing, rising stream of income which would flow from those fortunate to hold equities.

Too many people were redefining their income as capital or gaining income from the growth of equities and calling it capital rather than income and thereby avoiding taxation. That was the spirit in which the movement for the long-term capital gains tax grew and those were the arguments on which the introduction of the long-term tax was based.

Today, things are totally different. First we have the appalling inflation rate. Secondly—let us hope that it is only a passing circumstance, although it seems to be passing very slowly—we have long since said goodbye to the idea of the annual growth in the value of equities right across the board as a result of the steady and persistent achievements of successive Governments in our economic growth. That has not come out as planned at all.

Instead, we have had for a time a lurch to a dead stop in economic growth. We have had a lurch into rates of inflation which we would not have believed possible 10 years ago. They have produced these remarkable figures, of which the simplest and most obvious came from my hon. Friend the Member for Norfolk, South (Mr. MacGregor) that £1,000 invested in 1965 is £2,250 in 1975 with a purchasing power which is exactly the same and which is exactly the same amount in real terms while the figures are well over double.

Against that background, we require the Government to address their mind seriously and urgently to the problems involved.

The Minister of State spent a considerable amount of time pouring cold water on the idea of indexing and the principle of monetary correction. He said that this was no way to solve our difficulties. My hon. Friend the Member for Blaby was right to intervene to say that no one who had been into the matter seriously had ever suggested that monetary correction was a solution to the inflation problem. It would be absurd to suggest that this of itself was a solution to the problem.

The Minister of State went on to say that this was all cosmetics. However, cosmetics are not always bad. Some people would say that at times they can render a great improvement to certain features. I do not think we should be quite so ready to use the word "cosmetics" so dismissively, always implying that any attempt to improve appearances is bad and is to be frowned upon.

Over the whole question of monetary correction there is a great deal of humbug. I suspect that it is part of our national character to say that indexation is immoral and that monetary correction is undesirable, and for Ministers to say how impossible it is to index capital when all the time we are indexing and moving from one tax to another.

7.45 p.m.

We are moving into indexed bonds and stock appreciation. The Minister of State said that stock appreciation was temporary. When we debate the next new clause, we shall want to go into that statement more carefully. Our understanding and the understanding given by the Chief Secretary was that it was anything but temporary. Until we get that cleared up, we shall press the Government very hard. Our understanding is that stock appreciation provisions are here to stay. That is part of our affairs is indexed.

Pensions are indexed. Civil Service pensions are effectively indexed. The Government have now put one toe in the water over the indexing of bonds and others forms of lending money to the public purse. All this is going on. No doubt while it is going on we shall hear lectures about how impossible it is for indexing to be introduced. All the time indexing is creeping in.

We have to be a little more flexible than the Minister was in his dismissal of indexing. Although it trips easily off the tongue to say that we cannot index anything without indexing everything, the fact is that many things have been indexed already and quite a lot of people, organisations and forms of financial transaction are already piling on to the index escalator.

Mr. Denzil Davies

Do the Opposition support the clause and the principle of indexing capital gains?

Mr. Howell

I shall explain clearly where the Opposition stand. The main thing to establish is where the Government and the Chancellor of the Exchequer stand having given indications that the problem would be solved. Shall we have to wait another year with 20 per cent. to 25 per cent. inflation while capital gains tax is levied once again on nonexistent increases in real capital? Shall we have another year of a selective tax on wealth? Is that the way the Government intend to proceed?

The Minister of State asked me where the Opposition stood. We think that the capital taxation which has been brought in, the evaporation of the orginal purpose of the capital gains tax, the introduction and the interaction of the capital transfer tax with the capital gains tax, and the threats and veiled intentions which are being unfolded vis-à-vis the wealth tax have all combined to make capital taxation a complete shambles. The urgent need is for the Government who have made this mess to begin to put together some orderly form of capital taxation. It is Treasury Ministers who are the chief architects of the shambles which has emerged in capital taxation. They should be putting it right. I can understand the Chancellor of the Exchequer telling them to get a move on and do it and not leave us in this chaotic situation.

I was interested in the inability of the Minister of State to give us any estimate of the revenue. We have been conscious of the need to prevent further moves by the Government to increase the enormous public sector borrowing requirement. Even so, they continue to make some moves. We shall not add to them. Therefore, although we cannot be told the revenue implications, I shall not advise my right hon. and hon. Friends to press the new clause.

The Opposition take these matters seriously. We do not believe in shovelling out White Papers which increase the public sector borrowing requirement and food and council house subsidies. We believe that the capital taxation issue is one of the most important today. It is having a very serious effect on investment and on what remains of any incentive to invest in new equipment and to build up successful enterprises. The sooner the Minister of State and his voluble friends beside him stop their giggling and get on with the job of reorganising capital taxation, the better it will be for investment, for jobs, and for the workpeople.

Mr. Lawson

I am very glad that my hon. Friend speaking for the Opposition Front Bench has shown a considerably warmer and more welcoming attitude to this new clause than the Government. When I heard the Minister of State say that the problem was inflation—as if we needed to be told that—and that the problem of capital gains tax could not be solved until the problem of inflation had been solved, I thought that we would never solve the problem of capital gains tax. Then the Minister told us that there would be a special review of the particular problems of capital gains tax this year and that he would not wait until we had solved the problem of inflation. On that understanding, I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.