CHARGE OF INCOME TAX FOR 1980–81 AND ABOLITION OF LOWER RATE

HC Deb 02 June 1980 vol 985 cc1147-205

Mr. David Penhaligon (Truro)

I beg to move amendment No. 5, in page 11, line 10, after "; and—", insert— (a) in respect of so much of an individual's total income as does not exceed £750 at the rate of 20 per cent.".

The First Deputy Chairman

It will be convenient to discuss at the same time the following amendments:

No. 6, in page 11, line 10, at end insert— (aa) in respect of so much of an vidual's total income as does not exceed £1,000 at 25 per cent.". No. 11, in page 11, line 24, leave out subsection (2).

No. 12, in page 11, leave out lines 24 and 25.

Mr. Penhaligon

This amendment would reinstate the lower tax band which the Government have abolished, and we have suggested a rate of 20 per cent. on the first £750 instead of the old lower rate of 25 per cent. This is a method of indexation—perhaps an unconventional one. It is a 20 per cent. reduction of that tax burden, which we think is preferable.

The Government have obeyed the strict letter of the famous Rooker-Wise amendment but not its spirit. They have misled people into believing that they have obeyed its spirit. The irony is that the bulk of the hon. Members who voted for the Rooker-Wise amendment on that great night were Conservative Members. It is a little much that the Conservative Party should now take almost the first opportunity to get rid of it.

The Budget has provided for an 18 per cent. indexation of the basic tax band, which is probably a little less than the current level of inflation in any case. The real result of what has happened is slightly complicated but worth examining for all that.

A single person who last year earned £1,915 would have found that he qualified for the full basic tax allowance of £1,165. He would have paid £750 at 25 per cent. The same person this year will find that he will have a tax allowance of £1,375 and on the remaining £540 he will pay at the rate of 30 per cent. By that mechanism his tax bill will have been reduced from £187.50 to £162, a saving of £25.50.

A similar calculation can be made for a married person, though the figures are slightly different in that he will pay £135 and his saving will also be £25 instead of the £52.50 that he might have expected. I say that he might have expected £52.50 because he would not have expected to pay at the rate of 30 per cent. on his first £750. He would have expected to pay at the 25 per cent. rate. Therefore, he has been cheated of half the savings that he could reasonably have expected from a fair and unbiased interpretation of the amendment passed during the last Parliament—that is, £27 as opposed to £25. Such a sum of money is of considerable significance to people at that level of income. In reality we have all been cheated out of £27. When one pays a great deal of tax, £27 is of less significance than it is for a person whose tax bill is £150 or £170 a year. To him, £27 is of great significance.

The Government may argue that the abolition of the lower band is justified because it affects very few people. According to a parliamentary answer, it would affect 10 per cent. of the taxpaying population, that is, 2,500,000 people. The marginal rate of taxation, given that this amendment is passed, would be 20 per cent. Two and a half million people on low incomes are well worth considering.

If the amendment is not accepted today, the Government will have forced on the low-paid people of Britain an effective entry tax rate of nearly 37 per cent. That is a 30 per cent. rate on the lowest band of tax, given the Budget proposals, plus the 6¾ per cent. from the national insurance contribution, a total of 36¾ per cent. tax for a single person on his twenty-eighth pound and for a married person on his forty-second pound. I understand that only Australia can produce tax rates to rival that. It is a quite incredible rate.

For those on family income supplement, the situation is even more incredible. If a person on FIS is unfortunate enough—and I use that phrase with thought—to gain a pound a week rise in his pay he will find the following effects on his take-home pay. His FIS will be immediately reduced by 50p. That is the rule of the game. He will immediately pay 30p of that £1 rise in income tax and he will also have to make a 6¾p national insurance contribution. That is an effective marginal tax rate at entry of 86¾ per cent. for a family man with as many as three children. He begins to pay at that rate on his forty-second pound. That is what Government Members will vote for today if they refuse to accept the amendment that I have offered them the opportunity of passing.

Even if the amendment is passed, the marginal tax rate for the man on family income supplement will be 77 per cent. I hardly consider that satisfactory and that ignores the effect of rent and rate rebates. I suspect that, with FIS, income tax, national insurance contribution and rent and rate rebates, a married man with children earning £50 a week will find himself worse off if he receives a pay rise in the current situation. I cannot imagine a greater nonsense. It is a nonsense which the Conservative Party rightly spent a great deal of time claiming it would rectify if it were given a mandate at the election.

Low-paid people are forced to demand above-average pay increases because of this nonsense. The Government may say that they are low paid because they have no industrial muscle and can do nothing about it. Such a philosophy, which has been normal in the last 12 months, is to be deprecated. The low-paid are in for a shock when they realise what will happen to them as a result of this Bill.

The Minister will probably say that my amendment will cost a great deal of money. I calculate that it will cost about £1.8 billion. Part of that could be recovered by increasing excise duties in line with tax. If petrol had to be involved, which is not exactly favoured in my area, and the money used to help the low-paid that might just be digestible.

The Government could increase the public sector borrowing requirement. It is too low, given the recession. We spend too much time worrying about the fine detail of the PSBR. In the last 12 months, because of the Government's policies which have led to 20 per cent. inflation, the real value of the national debt has been reduced by a full 20 per cent. I do not know whether that was the object of the policies but there is no doubt that it is a consequence. At least part of that peculiar saving could be used to reintroduce a low tax rate for the low paid.

The Liberal Party believes that a taxation entry rate of 30 per cent. is too high. The effective entry rate is 36¾ per cent. and it is scandalous. We offer the amendment as a way out of certain of the Government's proposals which must have escaped their notice because I cannot believe that the Government are in favour of such ludicrously high rates of initial tax. I draw the Minister's attention in particular to the effects on people receiving family income supplement. It is incredible that on the forty-third pound earned by a married man with two or three children we tax him at an effective rate of over 87 per cent., as well as the loss of his rent and rate rebate.

I look forward with optimism to a positive reply from the Government.

Mr. Henderson

My interest is in the fishing industry, and share fishing in particular. Farmers are given relief on fluctuating profits under section 28 of the Finance Act 1978. It is unfortunate that such relief was not given to fishermen, because the same criterion applies to them. Fishermen are primary food producers. They have fluctuating fortunes and are affected by the weather.

An example of the scale of fluctuation is one of my constituents, who in 1978 made a profit of £30,000 but in 1979 made a profit of only £800. If reliefs for fluctuating profits were granted on the basis of an average between years it would affect the tax band under which my constituent could be assessed for income tax. In addition, fishermen have to suffer less stable markets. They must work under strict conservation rules. They cannot improve their incomes by catching more fish. Therefore, in times of difficulties, such as exist at the moment with low prices, they cannot recover the sitution by catching more fish.

9 pm

Partly due to the weather but also for other reasons, such as low prices, reduced opportunities and black imports, the industry is suffering severely. It has done so previously and may do so again. It is to be hoped that the difficulties of the industry will be temporary. If so, the extension of this relief on fluctuating profits to fishermen could help at the present time. Not many people would be affected by this proposal. It would involve low cost to the Exchequer. The criteria seem almost exactly the same as exist for the farmers for whom the relief was originally introduced. It seems simple justice that the relief should be extended to fishermen.

It would give a real boost to the industry's shaken morale. I hope at some stage during the passage of this Bill——

Mr. Dalyell

I have some sympathy with the hon. Gentleman. I know the problems of Crail and Pittenweem, and the other small fishing ports that he represents. When the hon. Gentleman speaks of low cost, he will surely accept that this is a principle that could be extended further than to fishing and farming.

Mr. Henderson

I accept that possibility. It has not, however, been suggested previously that the provisions should be extended beyond the criteria that moved the Treasury in 1978 to provide this relief for farmers. I am arguing that the criteria that produced this original relief would apply equally well to fishermen as to farmers in a way that would not apply to the same extent to any other section of the community. I believe that if the Minister could give some encouragement towards the extension of relief in this way it would help the fishing industry in its present crisis.

Mr. John Horam (Gateshead, West)

I trust that the hon. Member for Fife, East (Mr. Henderson) will forgive me if I do not follow him in his remarks about the share fishing industry in his constituency. Apart from the fact that there are no fishermen in Gateshead, I feel that I should address my remarks to amendment No. 6 proposed by the official Opposition, on which we wish to have a separate vote.

Before discussing the important points related to the reduced rate band, I should put on record two major charges that the Opposition mount against the Government's tax proposals, particularly in the sphere of income tax. In a complete betrayal of all that the Conservative Party said at the general election, the Government, in their first two Budgets, have increased significantly the real burden of taxation. This has been done at a time when the economy is entering a serious recession. The matter was put well by Mr. Walter Eltis, an economist well known to both sides of the Committee—his views have not been uncongenial to the Government in the past and certainly not particularly congenial to the Opposition—in an article entitled " How Much is Going Wrong? ", which he wrote recently for a private company, Rowe and Pitman.

Mr. Eltis said: The sad catalogue of the Government's failures with the real economy are extremely well known and little need be added here. Sir Geoffrey is raising taxes and social security contributions 6½ per cent. in real terms in his first two years as Chancellor—1978–79 to 1980–81. His tight monetary policies together with the world recession are expected to reduce the real National Product something like 2 per cent. in same two-year period. He is therefore raising taxation 8½ per cent. faster than the National Product in just two years. That summarises the real effect—even now it is not fully understood by people at large—of the U-turn that has already been executed in respect of income tax. Given all that the Government said that they were going to do—and, to be fair to them, did on income tax in the first Budget—the net effect at the end of 12 months is an increase of 8½ per cent. in the real burden of taxation which ordinary people have to bear.

As the hon. Member for Truro (Mr. Penhaligon) said in moving his amendment, this must be reflected in the wage claims that come forward in the next round of bargaining. People find themselves under pressure as a result of this increase in taxation. It has happened to all Governments in the past, and this Government do not seem to have learnt that lesson.

The second charge against the Government's income tax policies and their overall taxation policies is that this large increase in the burden of taxation has been laid mainly on the shoulders of those of modest means and of the poor. The wealthy are the only ones to have gained from the redistribution in the last 12 months. From our point of view that is morally wrong, and it will lead to a growth in poverty on a scale which many of us thought we would never see again. In so far as it does not lead to an increase in poverty, it will certainly lead to hard times for those on modest incomes. It is, of course, with the working poor that we are concerned when we talk about the reduced rate band.

To be fair to the Chancellor, I must say that in introducing his Budget, he explained that he was abolishing the reduced rate band because he needed the money to finance the full indexation of thresholds—he was perfectly frank about that, but he went on to justify its abolition for quite different reasons, and it has become fashionable in some tax circles to argue in that way. Arguments of the sort that (he Chancellor produced then as a justification for this step are somewhat more flimsy than he pretended.

The first is that the abolition of the 25 per cent. tax band will save bureaucracy. Unfortunately, that claim was blown up almost immediately when the Inland Revenue witnesses appeared before the Select Committee. The hon. Member for Enfield, North (Mr. Eggar) is nodding his head, and he will know what happened. The Inland Revenue was compelled to admit that the savings would be mainly on clerical staff. In other words, we are once again talking in terms of the chiefs sacking the indians, rather than of securing major savings of administrators. In addition, the savings are small and it is very difficult for a Government who are at some stage, and before long, planning to introduce taxation of unemployment benefit to argue that they want to go very far down the road of saving staff in the Inland Revenue.

In reading that interesting evidence I noted the passage where the Inland Revenue said that the Treasury was responsible for research into the effects of taxation, whereas the Treasury said that that task was the responsibility of the Inland Revenue. I hope that Treasury Ministers will note this curious disagreement. It is interesting that no one in either of these Departments is responsible directly and solely for this research. This is one area where there could be a small increase in bureaucracy, because this is a vital matter. The Chief Secretary said in relation to one tax increase that it was not important to look at the effect on ordinary people of increases in taxation. That is a deplorable attitude. The ignorance in this area should be rectified by any caring Government.

The second argument that the Government put forward to justify the abolition of the 25 per cent. tax band was that there were not many low-paid workers in that band. The matter was also discussed at length by the Select Committee. That is an important and interesting argument. No one denies that about 3½ million people pay tax in this band. The Institute of Fiscal Studies—I pay tribute to it for its work in this area, and also to the Low Pay Unit, which has done a considerable amount of work—says that the 3½ million figure is misleading, because "of that total only about 300,000 people are married adult men and therefore the main breadwinners of the family. The institute calculates that of those 300,000, only 10,000, and possibly fewer, are in the poverty trap—that is, people who are eligible for the family income supplement. Therefore, in some sort of magical way the 3½ million figure disappears, and only about 10,000 people are really affected by this change in taxation policy. That is not so much a fiscal study as fiscal sorcery. It is reducing the argument to an absurd degree.

I shall put the case the other way. To take out of the argument all the other people is equally misleading. Within that 3½ million figure, more than 1 million are aged over 60. The Institute of Fiscal Studies—and others—has argued that these people do not matter so much because their children have grown up, their costs are lower, and therefore a reduced rate band does not matter so much to them. That is a curious argument. These people are still on very low wages. A couple are having to exist on £40 or £50 a week, and even if their children have grown up and left home it is still an extremely low income in this day and age.

Of the 31½ million total, nearly 1½ million are working wives. They are women who, in the majority of cases, have to work because the main wage of the husband is not sufficient. Therefore, families on very low incomes are suffering, and it is precisely those people that this Government said they wished to help. The previous Labour Government helped. The tax experts are trying to ignore and write off those people. The 300,000 adult males for whom the tax experts have shown some concern are people about whom we should be concerned. They are mainly people in their forties and fifties who are earning only £40 or £50 a week. They are probably people who, for a period during the year, are unemployed and therefore come into tax at a low level even though their earnings when they are employed may be higher than £40 or £50 a week. They are people who are sick for part of a year; people who are on the edge of real poverty. If we look realistically at the figure, we see that a large number of people who are close to the edge of real poverty are involved.

9.15 pm

The poverty trap figure of 10,000 is disputed by the Low Pay Unit. It says that if we take the definition of the poverty trap as being those eligible for family income supplement, the figure is not 10,000, as the Institute of Fiscal Studies calculated, but 37,000. That is a difference of a factor of four. I referred to the absence of any real research into this matter by the Treasury. Here is a point of dispute amongst those who have looked into it. We would be interested to know whether the Treasury has any views on the matter. If not, it ought to begin to do more research in this area.

We are talking about a large group of people on extremely low wages, some of whom are in the poverty trap. We know that the Government have added to the depth of the poverty trap by the increase in charges for means-tested benefits, by their failure to raise the child benefit by as much as they should have done and by other measures. All of these taken together have increased the depth of the poverty trap. That was a matter which, in their manifesto, they said they wished to tackle. " Tackle " is an ambiguous word, but I do not think that anyone who read those sentences thought that they meant that they would worsen the poverty trap.

The final argument by the Government to justify the abolition of this lower tax band is that, in the final analysis, it is worth more to this group of people to increase the thresholds, as the Government have done, even though they are abolishing the reduced rate band. That is likely to be true in any one year. It is important to increase the thresholds as much as possible and to give the most benefit to the poorest paid in our society. I think that both sides of the Committee would accept that. The trouble is that, as the year goes by, more and more of those people are sucked back into the income tax system by inflation. Therefore, at the end of the year, we are left with everyone paying tax and a tax structure that has been made more unfair by the abolition of a reduced rate band.

I think that it is not generally realised in the country at large that 97 per cent. of taxpayers are paying tax at the same marginal rate—the standard rate—as a result of the abolition of the 25 per cent. rate and the increase in the thresholds for the higher rate bands. In other words, the Government have almost succeeded in abolishing the progressive nature of our income tax system. We are back to 97 per cent. of people paying the same marginal rate. As a matter of historical fact, that is comparable with the situation in 1909 when Lloyd George first introduced supertax, as it was then called. As a result of the Government's measures we have not progressed in terms of equity and fairness in our tax system since then.

The argument that the abolition of the reduced rate band will not matter because so few people are involved and because it has so little impact has been overplayed. It is fair to say that we are taking the argument on its strongest ground The reduced rate band, as introduced by my right hon. Friend the Member for Leeds, East (Mr. Healey) when he was Chancellor of the Exchequer, was small in its effect. It was over a range of £750. The Government reduced its effect by the reduction in the standard rate of tax from 33 per cent. to 30 per cent. in their first Budget. The differential was then only 5p in the pound. We are talking about a reduced rate band which was extremely small in extent, but which, even then, was of significant benefit to those who found themselves within it.

The point is that the reduced rate band gave some relief to those on low incomes, and as it stood it could have been extended. It was there, and it could have been increased. That is the burden of our amendment. The amendment proposes the extremely modest step of pushing it up by a further £250 to £1,000. If the Government had wished to follow their policies, they could have done that.

The Government's objective is to reduce the standard rate of tax to 25p in the pound over the lifetime of this Parliament. They could do that in two ways: either by reducing the standard rate penny by penny over the whole range of the standard rate, or, if they so wish, by increasing the 25 per cent. rate band by £250, £500 or £1,000 year by year, thereby benefiting those at the bottom end of the tax scale as the years go by. They would still attain the same objective in the end. That is a path that they have not decided to pursue. Instead, they have abolished that useful addition to the equity of the tax system. In so doing they have kept to the letter of indexation, but broken the spirit. It is a mean decision, which will make life harder for many of the 3½ million who pay tax at the reduced rate. In the long run it will be a step away from the fair and equitable tax structure that I should have thought it was in the interests of all parties to achieve over the lifetime of this Parliament.

Mr. Eggar

I wish to begin my remarks by following some of the comments made by the hon. Member for Gateshead, West (Mr. Horam). I share with him, as do many hon. Members who serve on the Treasury Select Committee, a deep concern about the inadequacy of research into tax matters by the Inland Revenue and the Treasury. I find it an extraordinary omission. I hope that it will be possible to develop a bipartisan approach on that subject. It is alarming how little we know about the way in which the structure of taxation affects individual families and taxpayers.

There I part company with the hon. Gentleman. He talked, quite rightly, about the lower rate tax band, which benefits, he claimed, the lower paid. I wish to put two points to him. First, many of the lower-paid who were paying tax at the reduced rate band will be taken out of the tax bracket altogether. They will not be paying any tax because of the raising of the threshold and the abolition of that band. Secondly, those who are not completely taken out of the lower rate band but find that they are paying tax on a small proportion of their income at 30 per cent., while they may be paying a higher marginal rate of taxation at the top of their income, may be paying a lower average rate of taxation than they were paying at the reduced rate. Therefore, the net effect of their tax payments may be reduced.

The argument about the reduced rate band can be put in terms of a balance. It is the argument between, on the one hand, the disadvantage, which I think the hon. Gentleman recognised, that is associated with the reduced rate band through the increased amount of administration, and the very heavy cost of enforcing and collecting reduced rate band tax. The hon. Gentleman dismissed the savings, but we are informed that when the reduced rate band is abolished it will save 1,300 civil servants, and at least £10 million—probably a great deal more—in administrative costs. That is a significant number. It is almost 2 per cent. of the total manning level of the civil servants that the Inland Revenue estimates are employed to take account of mortgage interest relief. I think, however, that the administrative arguments are well known and need no further rehearsal. That is one side; the disadvantage is the administration side.

What are the advantages of the band? First, as we have heard, it is argued that the marginal starting rates of taxation are too high. The second argument, as we have also heard, is that the reduced rate band is a way of helping the low-paid. I should like first to comment briefly on the marginal rate argument.

There is a danger of confusing marginal rates of taxation and average rates of taxation. Thus the person who is just paying basic rate of tax at 30 per cent. is paying a marginal rate of 30 per cent., but his average rate of taxation could easily be well under 5 per cent. That is one difficulty. The differences are not always recognised. Then there is the so-called disincentive effect of the marginal rate of taxation. All that one can say about that is that there is no evidence whatsoever that the introduction of the reduced rate band by the previous Government in any way increased the willingness of the lower-paid to take jobs or that it gave them a net incentive to increase an already low level of pay.

Mr. Penhaligon

Will the hon. Gentleman say what evidence there is, after one year, that the enormous tax reductions that were given to the very highly paid have increased their productivity or effort?

Mr. Eggar

With respect, we are talking about the effect at the lower end of the earnings level. The argument across the tax band, and, in particular the higher band, is very different. It is by no means proven. I think that the admirable paper by the Institute of Fiscal Studies effectively debunks the hon. Gentleman's argument that the marginal rates of taxation have in some way acted as a disincentive.

Mr. J. W. Rooker (Birmingham, Perry Barr)

Will the hon. Gentleman give way?

Mr. Eggar

No. I have given way on this point already. I should like to move on; other Members wish to speak.

The second point, which possibly has rather more force, is that the taxation system and the reduced rate band in some way help those on low pay and help to end the poverty trap. As has been stated, John Kay did an analysis of people who had benefited from the reduced rate band. I shall go through the figures again. Some 3½ million taxpayers benefited from the reduced rate band. Of those, half were under 21 or over 60. The chances are, therefore, that they were either at the start of their earnings pattern and building up, or that they were at the end of it and were supplementing a pension, be it a State pension or an occupational pension. Of the remaining 1.8 million, 1.2 million were working wives.

I take the hon. Gentleman's point that it may be that the households concerned depended on the income from the working wife. But even if we accept that, the argument that the hon. Gentleman was advancing was that the reduced rate band was in some way an effective mechanism for ending the poverty trap. I do not think that that is so. The argument about working wives is that we might be marginally increasing the taxation burden on a household which is relatively affluent given a comparison with the level of income we are really talking about tonight.

9.30 pm

Some 160,000 were full-time working wives and 130,000 were single people. I think that it is generally recognised that their outgoings are less significant than those who have families to look after. We are left with 300,000 married men who are said to have benefited from the reduced rate band. There are 10,000, or 37,000, who are recipients of the reduced rate band taxation and in receipt of family income supplement. I am not quite sure which definition the Low Pay Unit employed. The fact remains that we are spending £10 million in administrative costs to help either 10,000 or 37,000 individuals.

Mr. Rooker

Not individuals—families.

Mr. Eggar

We are spending £10,000, if we accept John Kay's definition, in administrative costs to help one family. By any rational analysis, that cannot be the right way to help people in need and people in the poverty trap. I share the concern of Labour Members. We have to erase the ghastly morass at the bottom of the earnings level that deprives people of incentive. However, the reduced rate band is not the way to do it. It is a measure that was forced upon a reluctant Labour Treasury team by the TUC as part of the pay-off for an incomes policy. It was a price that was too high when it was introduced, and it is a price that is too high now.

Mr. K. J. Woolmer (Batley and Morley)

The tax changes that the Government introduced have damaged the majority and have brought benefits to only the very wealthy. When we have finished talking about administrative convenience and percentage changes in taxes, the truth is that in discussing the amendment we are dealing with a tax being paid by the so-called 1 million.

I have been fascinated by the ease with which Conservative Members have managed to play down the effects of an increased margin of tax on those earning £40 to £50 a week when it was so important to introduce large tax cuts for those in receipt of £400 or £500 a week. Tax cuts were to transform the economy. We were told that those on £500 a week needed a tax cut. We are now told that those on £40 or £50 a week can afford to pay a higher marginal rate of tax. It seems that they can afford to pay that higher rate and suffer a loss of benefit that will amount to between 80 per cent. and 90 per cent.

In the end the argument turns on not having to employ 1,200 civil servants. It is an administrative convenience. Any ordinary wage earner would be appalled to hear the arguments of Conservative Members. They would be appalled to hear the way in which young persons earning £30 or £40 a week, or those of 60 or 61 years of age, can be dismissed. Conservative Members seem to be saying " Let us knock 1 million out, because they are 19 or 20 or 60 or 61. Let us dismiss those people." At the same time a handful of taxpayers are to enjoy enormous tax benefits when they are already earning between £15,000 and £20,000 a year. I find that argument bordering almost on the nauseating when I consider the point of view of the majority.

Before the general election we heard a great deal about tax cuts and incentives. The basic rate of income tax was reduced by 3p last year. I remember Conservative Members waving their order papers. They thought that it was a breakthrough. However, the Government are now seeking to put 5p on the rate of income tax for the lowest-paid.

Mr. Eggar

The hon. Gentleman knows that that is rubbish.

Mr. Woolmer

I am always willing to give way to the hon. Member for Enfield, North (Mr. Eggar). Those on £40 or £50 a week will find that 5p is being put on the marginal rate of tax. Last year Conservative Members waved their Order Papers in triumph, because 3p was taken off the tax of those earning £200 or £300 a week.

Mr. Eggar

The hon. Gentleman knows that the threshold is being increased. Perhaps he will comment on the amount by which the average rate of taxation has increased for those earning £40 or £50 a week.

Mr. Woolmer

I shall deal with that point shortly. However, the marginal rate of tax will be increased by 5p in the pound for 2 million people. Before the election we heard that it was important to cut income tax. Is it not farcical that a worker, earning £45 a week, will pay the same rate of tax as a worker earning £250 a week? I am willing to tell the electorate that a worker earning £250 a week does not expect to pay the same marginal rate of tax. We have heard about the administrative problems involved in a fair system of taxation. That almost makes me cry. Of course it will cost money if we are to ensure that a worker earning £300 a week pays a slightly higher rate of tax than a man earning £50 a week. However, that is fairer.

Mr. Rooker

My hon. Friend was not a Member of Parliament before the election, nor was the hon. Member for Enfield, North (Mr. Eggar). They will not know that between 1974 and 1979 the Conservative Opposition did not speak about an average rate of taxation. The argument always centred around the high marginal rates of tax. It is not insignificant that no Tory Member has said that the average rate of tax is important for the working man—whether low-paid or high-paid—and his wage packet. Tory Members have always bellyached that the marginal rate of tax was the one that hit people, and was the one that they understood. My hon. Friend is right to say that that rate has been increased by 5p in the pound and that it will affect over 2 million people.

Mr. Woolmer

I agree with my hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker). Before the election, I went round an engineering works and was told by engineers who had been fed on Conservative propaganda that it was not worth working an extra hour in order to get an extra pound or two in the wage packet, because they would have to pay so much tax. We have heard that it does not matter if a poor person, earning £40 or £50 a week, has to pay a rate of 87 per cent. in the pound. He can go to work for 13p in the pound.

Before the election, engineering workers pointed out that the Conservative Party queried whether it was worth working an extra hour of overtime. They were not being told about an average rate of tax. In my constituency, an increasing number of workers wish that they had a job, let alone overtime.

Mr. Nick Budgen (Wolverhampton, South-West)

Surely the hon. Gentleman will agree that the Tory Party was talking about personal taxation generally and not just about rates of tax on those earning high wages.

Mr. Woolmer

Hon. Members use smooth language when talking about taxation generally. The Budget has increased the marginal rate of tax for the 2 million people who are earning £40 or £50 a week. The Government are reducing the marginal rate of tax for those earning £20,000 a year. If a man earns £20,000 a year, a general reduction in income tax apparently means a £20 reduction in tax. If a man earns £40 a week, he will suffer an increase in taxation. Ultimately, people are interested in how taxation affects them.

Incentives are interesting. Apparently, low-paid workers are not affected by incentives, but high-paid workers are. We see a picture where a person earning £40 or £50 a week is not affected by the incentive to work—until, of course, we begin hearing about the workshy and all the others about whom Conservatives are happy to talk. But apparently someone earning £20,000 a year needs tax cuts to provide him with the incentive to work harder.

It is hypocrisy that workers earning £40 or £50 a week apparently are not affected by the incentive to work, whereas someone earning £20,000 a year is affected by the incentive to work. The miracle is that so many low-paid people are willing to go to work for the pittance that they are paid. Very often they work in non-unionised small firms which Government supporters are always praising. Typical examples of this category of low-paid workers are women who are working to contribute an additional wage to the family budget.

It is appalling to hear Conservative Members dismissing married women who go out to work, as though they can be put to the side of the equation in order to whittle down the figure of 4 million to 10,000. What alchemy is this? By what alchemy can we convert 4 million people affected by the 25p in the pound tax bracket into a problem of a mere 10,000 people? The Conservatives dismiss the married women, the young workers and the elderly workers. However, I see nothing in this Bill which says that anyone who is 60 and earning £20,000 a year will not have his taxes cut. We have heard nothing about the age of people who have high incomes. We have heard nothing about married women with high incomes. However, as soon as we come to people earning only £40 a week, Conservatives say " Dismiss married women, dismiss young people and dismiss old people."

The fact is that 20 per cent. of our work force and 40 per cent. of working women are employed part time. In my constituency—and I am sure that the same is true over most of the country—married women go out to work not for fun but because their earnings make an essential contribution to the family budget. That is most certainly true of the textile towns where the tradition of married women working is very strong and where the average earnings of men are very low. The earnings of married women are a very important part of the family budget.

I look forward to hearing Conservatives say before the next election to young people, married women, elderly workers and near-pensioners whom they wooed before the last election that when it came to dismissing the 25p rate band they cast them aside as people who were not too affected by income tax cuts.

Mr. Eggar

Before the hon. Member works himself up into a lather of indignation, perhaps he will tell the Committee what will be the increase in tax on the people whom he describes so dramatically.

Mr. Woolmer

The effect on every additional £1 earned by a person on £40 or £50 a week is to knock off 5p. That was the kind of figure that Conservatives were saying was the make or break of Britain. That was the great incentive that they intended to offer. It was to reduce——

Mr. Budgen

Will the hon. Gentleman give way?

Mr. Woolmer

No. I must push on.

Mr. Eggar

Answer the question.

Mr. Woolmer

I have answered it. I shall repeat it for the last time. On a worker earning £40 to £50 a week, the effect is to knock 5p in the the pound off his wage packet. If Conservatives say that 5p does not matter to a worker earning £40, perhaps they will say why it matters so much to a worker earning £20,000 a year. Why did 3p off the standard rate of tax last year cause Conservative Members to wave their Order Papers when it benefited people earning £20,000, whereas 5p in the pound off the tax of the low-paid worker is now to be ignored?

9.45 pm

Over the years the tax system has become more and more unfair to the lower-paid worker. It has also increased demands on the average wage earner. In the mid-1950s the starting rate for income tax was 9p in the pound. It rose steadily until the Labour Government reduced it to 25p in the pound in 1978. It has now risen to 30p in the pound. In the mid-1950s a worker had to earn almost twice average industrial earnings to pay the basic or standard rate. A worker now starts paying the standard rate at 42 per cent. of average earnings. Increasing taxation, particularly on the lower paid, has been a steady trend over a number of years.

The tendency has been to blame inflation and suggest that inflation has pulled people into the tax net. That is only a small part of the reason. Increasing inflation has disguised the increasing unfairness of our method of levying income tax. The real reason, however, why tax has increased for the average and lower wage earner is the increasing amount taken by public expenditure, and over the years we have allowed that increasing share of public expenditure to be financed in a more and more unfair manner. Increased public expenditure has led to a better, fairer and more humane society, which has disguised the increasingly unfair method of levying income tax.

Conservative Members suggest that it is worth doing away with a few civil servants and having a grossly unfair tax system, but that begs the question. I do not believe that the country at large endorses a system whereby 97 per cent. of wage and salary earners pay the same basic rate of income tax, which applies to someone earning £40 a week, and to someone earning £250 or £300 a week. No Government can argue that that is fair. Our tax system has become increasingly unfair.

To reiterate what my hon. Friend the Member for Gateshead, West (Mr. Horam) said, that unfairness is the mark of this Government. At a time of reducing national income and increasing hardship they are willing to introduce a further unfairness. They have decided to increase the marginal rate of tax upon the lowest paid while at the same time giving the biggest tax cuts to the highest paid. That unfairness is losing the Government the hearts and minds of the country. They are taxing unemployment and sickness benefit but are unwilling to tax perks. They are prepared to pay up to £2 million to find the head of one nationalised industry but ignore the problems of those earning £40 a week. They leave excess bank profits untaxed while the average person suffers the consequences of high interest rates. When they need to carry the nation with them they are pushing up the price of gas faster than is necessary, when millions have been persuaded to use gas.

It is the culmination of all this unfairness that is causing people to challenge the Government's policies. The Government tell people that wage moderation is necessary, but they have doubled VAT and are forcing up council house rents and mortgages. This amendment will at least enable the Government to show people that in seeking wage moderation and control of inflation they intend to use the tax system fairly so that those on the lowest income will not be asked to bear the brunt of the tax cuts.

Mr. Dafydd Wigiey (Caernarvon)

We seem to be getting into a tangle, because we are discussing three or four different aspects of the same problem. I regret that, because this is an important matter. I speak as a member of the Standing Committee which dealt with this question at the time of the Rooker-Wise amendment. I regret the fact that the Government should, although sticking to the letter of the law, be doing their damnedest to take away with one hand what they are giving with the other because they are required to do so.

The four aspects of this matter are interwoven. There is the marginal impact of taxation at different levels; there is the question of which people are caught in the tax net and which are taken out of it; there is the question of the right balance in the changes made in the Budget in the tax bands at different levels; and there are the revenue implications, which we cannot escape. If the most worrying aspect is the number of civil servants who have to administer this scheme, the immediate answer seems to be to take as many people out of tax entirely rather than to push them on to a higher rate.

I should like to take up some of the comments made by Conservative Members, sometimes from a sitting position, during the last few speeches from this side of the Committee about the effect of the changes. The indexation of the personal allowances is intended to ensure that they retain their real value. A single person's allowance has been increased by £210 from £1,165 to £1,375—an increase of 18 per cent. The effect of inflation is, regrettably, likely to be slightly higher than that—nearer 20 per cent.—so a single person will hardly retain the value of that allowance. If that is so and a single person will get nothing over the effect of inflation, it is surely wrong to say that that money is available to compensate him for the increase in the lowest level of tax from 25 per cent. to 30 per cent.—yet that, essentially, is what Conservative Members have suggested.

It is essential that as many people as possible are taken out of the tax net, because income tax hits at an unacceptable level. After the war, I believe, income tax was first paid at a level of about 110 per cent. of average male industrial earnings. Those earnings today are about £90 to £100 a week. We would therefore be talking about the income tax beginning at about £5,000 a year. That shows how the position has been eroded over the last two or three decades.

The Rooker-Wise amendment, the indexation of the thresholds, was intended to ensure that at least one of these loopholes was closed—that whereby there was an inevitable erosion year after year, which increasing inflation had achieved since the war. It would be necessary to take specific steps to achieve any additional benefit and regain the lost ground, but at least we would not be allowing this erosion to continue and people would not be brought into the tax net who should never have been there on any acceptable and progressive system.

Regrettably, although the letter of that amendment is being followed, people come on to a rate of 30 per cent. immediately they start paying tax. I should like as many resources as possible applied to taking people out of tax entirely, but that is not being done. The £1.8 billion cost of this change was explained away in a cavalier style. That was unacceptable.

I turn now to the balance—and I should like to take the Chief Secretary with me on this point—between the provisions at different levels of taxation in the package of changes. In the Budget the Chancellor tried to make out that this package was very fair to people on low incomes because of the relatively greater effect of the threshold increase for them than for those on higher incomes.

Let me compare two single people. The first last year earned £1,915; the other earned £25,000. For argument's sake, let us say that the only allowance that they both enjoyed was the personal allowance. Let us assume that both of them have a salary increase of 16.5 per cent. That means that the person on low pay would be earning £2,231—that is the £43 a week referred to by the hon. Member for Truro (Mr. Penhaligon)—and his increase in taxation would rise from £187.5 to £256.8, an increase of 37 per cent. in his tax when the increase in his net take-home pay after tax is 14.3 per cent only.

Compare that with the man earning £25,000 a year. His tax increase is 18.8 per cent. only compared with the 37 per cent. for the man on the low income. The take-home pay of the man who last year earned £25,000 goes up by 15 per cent. compared with the 14.3 per cent. for the man on the lower level of pay. So taking the package as a whole the effect of the increase in the threshold at the lower end, together with the changes in the bands plus the change from a 25 per cent. rate to a 30 per cent. rate of taxation, is that the changes are substantially more beneficial for the man on £25,000 a year than for the man earning £1,915.

Once again, the Government are deliberately helping those on the highest levels of pay and penalising, relatively, those on lower levels of pay. This is a highly regrettable step.

Mr. Henderson

The hon. Gentleman has given us a specific and interesting example. Will he complete his illustration by saying what proportion of the income earned by the two categories of person he cited was left to them after tax?

Mr. Wigley

Of course, the proportion was much larger for the man on the lower income. That is the theory of a progressive income tax system. But the change we have witnessed has eroded that. The changes hit harder the man on the lower income. He is the man who is spending his every penny on the basic necessities of life whereas the man on £25,000 a year has a little bit in hand after providing for the basic necessities to keep him in food, clothing and housing. Surely Conservative Members must accept that.

I should have thought that hon. Members would regret this implication in the Budget. Perhaps the meaning has not yet got entirely home to them. But when this message eventually comes home surely it must be a matter of regret to Conservative Members that a person who now earns £43 a week has had to bear an increase of 37 per cent. in the tax that he pays. That must have a psychological as well as a real effect.

Mr. Douglas Hogg (Grantham)

In order to complete the picture that the hon. Gentleman is painting, will he tell us how many taxpayers, as a proportion of the whole, are in the two levels of income that he has postulated—£25,000 and £1,915 a year?

Mr. Wigley

Of course there are many more people at the lower end of the scale. We all know that. There are 4 million people on a low level of income, and I have no doubt that there are a few hundred thousand at a high level. So what? Is fairness governed by how many people are affected? Is that the principle on which Conservatives base their philosophy?

Mr. Hogg

Yes.

Mr. Wigley

We suspected that, and now we know. I hope that that goes on record and is often quoted.

10 pm

I turn to the revenue implication. I part company with the hon. Member for Truro. He proposes a change of £1.8 billion in Government income. I defend public expenditure because it means schools, houses, roads and homes for the disabled and elderly. Public revenue must be achieved. It is not enough to lump it on to the public spending borrowing requirement. Other tax increases are acceptable in order to compensate for such expenditure. I support higher rates of income tax and higher indirect taxation on spirits and tobacco. I do not think that tax increases on petrol are acceptable because petrol has gone up enough already. I am sorry that the hon. Member for Truro suggested such an increase.

The Government must answer for the way in which they have handled the Rooker-Wise amendment. They have gone along with the letter of it but have done their darnedest to avoid the spirit of it. There is a good case for the Rooker-Wise amendment. It was accepted by Conservatives when they were in opposition. I hope that the Government will keep their eye on the purpose of that amendment. I hope that they will ensure that any relief in direct taxation will be used almost entirely, if possible, to take people out of the income tax net.

Mr. Dalyell

I hope that the Government will not complain too much if we take a little more time, because their Back Benchers have used a good deal of the time. I have two questions to ask arising from a brief that many hon. Members have received from the Low Pay Unit and from constituency experience. Chancellors of the Exchequer have raised the nominal value of personal allowances in almost all Budgets, but their real value has been allowed to fall. The low-paid workers taken out of tax by the increase in allowances in the latest Budget will soon be dragged back into taxation by inflation. We all know what bitterness that involves.

The Chancellor's assertion that the low-paid will be compensated for the loss of the reduced rate band by the increase in allowances is relevant only if the allowances are increased in real terms—that is, by more than enough to compensate for inflation. The Rooker-Wise indexation is not intended to increase the real value of allowances. It aims to make good the loss in value since the previous Budget. Implementation of Rooker-Wise does not reduce the number of taxpayers on overtime. It merely ensures that the numbers subject to tax in 1980–81 are the same as in 1979–80.

The Low Pay Unit says that it is misleading to imply that the low-paid are being compensated by the implementation of Rooker-Wise. By the time of the next Budget there will be more, not fewer, low-paid workers paying tax. They will all be paying at a rate of 30p in the pound if clause 17 is accepted. Does the Treasury accept that statement from the Low Pay Unit? If it does, it has consequences for all our constituents.

My second question is of a different nature. With my hon. Friends the Members for Glasgow, Shettleston (Mr. Marshall), Glasgow, Kelvingrove (Mr. Carmichael) and Motherwell and Winshaw (Dr. Bray), on Thursday I visited the tax centre at East Kilbride. Once again we were extremely impresed by the efficiency with which the centre is run. It was, as the Minister knows, to have been the pioneer of 10. As he knows equally well, the development at Bootle did not go ahead as many people wished at the time. The system was changed. The East Kilbride centre is, therefore, still unique in Britain. It is a tax centre, employing 2,000 people, with the most modern computer facilities. Anyone who sees operators examining tax returns on screens and the facility that enables telephone calls to be made to complainants within minutes must be impressed. I should like to say, on behalf of my colleagues, that we were extremely impressed by the efficiency and courtesy of the staff. I do not say that none of the complaints that were rife five or 10 years ago about Centre One still exists, but there are certainly far fewer.

I accept that the Revenue has to take its share of personnel cuts. What is the effect of raising the threshold either in the Centre One context or in the context of the new computer lines that the Revenue is trying to introduce in most areas? This is, in a sense, a mundane, logistical question. The answer, however, would indicate the extent to which we should support the raising of the threshold simply on the grounds of saving Inland Revenue time, which will be difficult enough when the Revenue cuts take place if there are not to be concurrent cuts in the functions of the Revenue. I hope that the Minister has grasped the point of the question.

The Minister of State, Treasury (Mr. Peter Rees)

We have had an interesting debate, which carries echoes of what occurred in the last two years of the Labour Administration. I am tempted to say that the debate may have marked, if not the efflorescence, at least the re-florescence of the Lib-Lab pact. It may turn out to be of short duration and to be fragile. All things are perhaps possible in the aftermath of Wembley. To hear Opposition Members arguing so eloquently and persuasively for the restoration of the lower rate band takes me back, as I am sure it did hon. Members on both sides who had the privilege of serving in Standing Committee upstairs, to debates that took place not only on the indexation of thresholds but on the question of the reintroduction of the lower rate band.

Mr. Dalyell

We had an interesting day at Wembley.

Mr. Rees

I wish that I had been there. I do not think that I would have qualified for admission to that great hall. I shall be studying carefully the policy document that emanates from the hon. Gentleman's great party as a consequence of those debates.

The Liberal Party, represented by the hon. Member for Truro (Mr. Penhaligon), has evidently shied away from amendment No. 4, designed to reduce the basic rate from 30 per cent. to 28 per cent. I suspect that it acted with a certain wisdom. On a rough, crude view, the amendment would have cost about £3 billion. What is £3 billion between friends?

The hon. Member for Truro will know that it is the stated objective of this Government, as my right hon. and learned Friend the Chancellor of the Exchequer has said on more than one occasion, to bring down the basic rate to 25 per cent. That will not completely eliminate, but it will do something to ameliorate, the problem of the marginal rate for those who pay tax. This is a real problem, which the Government recognise. We recognise it in Opposition and we recognise it in Government. We would not shy away from the problem.

The hon. Member for Truro, representing the Liberal Party with such elegance, has chosen to concentrate his fire on the lower rate band. The hon. Gentleman presses the Government to reintroduce the lower rate band of 20 per cent. as opposed to 25 per cent., as it was last year and in previous years, on the first £750 of taxable income. The cost would be £1.8 billion, and since the hon. Member was prepared to toss £3 billion across the Floor of the Committee with such ease he is perhaps unimpressed by the cost. However, these are factors that any Administration must take into account.

On the other hand, the Labour Party, represented by the hon. Member for Gateshead, West (Mr. Horam), with his customary persuasiveness, pressed only for a lower rate band of £1,000 at 25 per cent. The cost would be somewhat more modest, at £1.175 billion. Again, there is an administrative cost, and I can assure the Opposition, especially the hon. Member for Batley and Morley (Mr. Woolmer), that although this may not be the determining factor in our minds it is a factor nevertheless. I have heard rather more thoughtful speeches from the hon. Gentleman in the Standing Committee than the speech that he made this evening. Again, Wembley had obviously gone a little to his head.

Mr. Bob Cryer (Keighley)

It was a good speech.

Mr. Rees

Certainly the hon. Gentleman carried his hon. Friends with him. If he had not carried his hon. Friends, he would have carried nobody. He certainly evoked no favourable response from the Conservative Benches. I am delighted that he should have received a warm commendation from his hon. Friends below the Gangway, but it is the duty of the Committee to analyse the problem a little less emotively and more carefully than the hon. Gentleman was disposed to do on this occasion.

I should like to set the debate in its context—which the hon. Members for Truro and Gateshead, West did not do—by reminding hon. Members how and when the lower rate band was first abolished. In 1969 there were two lower rate bands—at 4s. and 6s. in the pound. On that occasion Mr. Roy Jenkins replaced them with one rate band. He took a further step in 1970 and eliminated that.

Without being arrogant, we can say that we are following in the steps of Mr. Roy Jenkins. I cannot see that on that occasion—neither I nor the hon. Member for Gateshead, West was in the House then, but I have studied the reports of the debates—any Labour right hon. or hon. Members saw these as steps away from a fair and equitable tax system.

Mr. Penhaligon

Will the Minister confirm that at that time the basic threshold of tax as a percentage of average earnings was 57 per cent., whereas now, under the Government's proposal, it is 42 per cent? Does that not make a substantial difference to the argument?

Mr. Rees

Those percentages must be set against the background of the earned income relief then provided.

This is not the first time that hon. Members have had to debate this issue, and, as sometimes happens, there has been a remarkable turn-around in the positions adopted by Members on both sides.

Perhaps I may remind the House of what the right hon. Member for Llanelli (Mr. Davies) said on this question, because he put his finger on the dilemma that often faces Governments. That dilemma, which has faced consecutive Administration, which, to put it at its mildest, have been a little short of cash, has been to decide whether to devote the money available to raising thresholds or to do something about intermediate lower rate bands. The right hon. Member for Llanelli said in 1977: If the cost of the reduced rate band had to be met by keeping the tax threshold lower than it would otherwise be, it would widen the poverty trap by enlarging the overlap between tax liability and entitlement to means-tested benefit. On that day words of wisdom fell with great profusion from the right hon. Gentleman. He also said: A reduced rate band as distinct from an increase in the tax threshold would not give most help to those on the smallest incomes For the man on the tax threshold complete exemption for a few pounds is worth more than a lower rate of tax on a larger band of income which he has not got."—[Official Report. 3 March 1977; Vol. 927, col. 747–8.] Those are wise words, and the sentiments behind them have informed our thinking. My hon. Friend the Member for Enfield, North (Mr. Eggar) queried the quality of advice that Treasury Ministers received. Perhaps he will recognise that there is some consistency in the advice given to Ministers on this subject.

10.15 pm

Up to 1977 the Labour Administration were consistent in their approach. They followed the view of Mr. Roy Jenkins, and we would not dissent too strongly from their conclusions. We believe now, as they believed then——

Mr. Rooker

Will the Minister refresh my memory? From what he said, it would appear that in 1978, when the lower rate band was introduced, the Tories voted against it. I may be wrong, but I do not remember the then Oppositioin voting against the introduction of the lower rate band.

Mr. Rees

The hon. Gentleman has taken part in many Standing Committees on Finance Bills, and he must know that we have consistently opposed the reintroduction of the lower rate band because we felt it was a misapplication of fiscal resources. The overall thrust of our criticisms was that the money would have been much better devoted to raising the threshold or reducing the basic rate.

I should like to remind the hon. Gentleman and the Committee that the then Chief Secretary, the right hon. Member for Heywood and Royton (Mr. Barnett), said in 1978, when the then Government changed their position, that there was a delicate choice between raising the thresholds and reintroducing a lower rate band. For reasons that we can all now recall, the Government were under pressure from their friends on the Liberal Benches and from the trade union movement, and they decided that perhaps the latter course was a proper use of fiscal resources.

We have formed a different view. Our view is consistent with the view that the Labour Party held until 1978. We believe that it is better and fairer to devote resources to keeping the 1,300,000 taxpayers out of tax. It is not true, as the hon. Members for Batley and Morley and for Gateshead, West whom I did not follow clearly on that point, said, that it widens the poverty trap. It is true—and I concede this at once—that for a narrow range of taxpayers it may deepen it.

But politics—and it does not need the percepliveness of Aneurin Bevan to say it—is about choice. If resources are limited, one has to decide whether it is better to keep 1,300,000 people out of tax—I hope I shall carry the hon. Member for Birmingham, Perry Barr (Mr. Rooker) with me on that—than to fritter away these resources—I pick my word carefully—by reintroducing or maintaining the lower rate band. Compelling evidence on that—I dare say Labour Members would not take my uncorroborated testimony—was given to the Taxation Sub-Committee of the Treasury and Civil Service Select Committee by Mr. John Kay, who said: We have found little substance in any of the arguments in favour of the reduced rate band. It does not help the low paid. It does not significantly increase incentives either for those in work or as between those in work and those out of work. Few of those who were in the reduced rate band were in the poverty trap, and few of those who were in the poverty trap were in the reduced rate band. There, succinctly and concisely and, I like to think, relatively impartially, Mr. John Kay demolishes the case for the reduced rate band. Nothing that has been deployed today has persuaded me that his evidence on that point was wrong.

The hon. Member for Truro said that the cost of maintaining the lower rate band and, presumably, putting up the threshold could be covered by excise duties. That is a possible option. However, I think that he dismisses too cavalierly the possible impact on the retail price index. We have heard a certain amount from the Liberal Party and from Labour Members about the impact of that. Alternatively, the hon. Gentleman said that we could perhaps have a larger public sector borrowing requirement, but he did not take the Committee into his confidence about what that would do for interest rates. I do not think that he had addressed his mind too closely to some of the practical problems of maintaining the lower rate band and at the same time increasing the tax threshold.

Mr. Penhaligon

I think that in reality the Government have honoured the Rooker-Wise amendment. The real question must be: what will they do next year; what will they succeed in abolishing next year to raise the £1,000 million that I still contend they have fiddled from the low-paid? They have paid for the Rooker-Wise amendment by abolishing the lower rate band. What will they do next year?

Mr. Rees

The hon. Gentleman is a little ambitious and is widening the debate. Let us debate next year's Budget when it comes. The abolition of the lower rate band will find only £748 million, while the cost of increasing the threshold is over £1,700 million. The hon. Gentleman is right to a degree. It would not have been possible fully to index the personal allowances without this step unless we were to have recourse to the kind of measures that he canvassed but was not prepared to argue to a conclusion. This is the stark choice before the Committee. Those who are disposed to vote for the preservation of the lower rate band are morally obliged to ask themselves how they would find the extra £1 billion.

I could hardly flaw the analysis put forward by the hon. Member for Caernarvon (Mr. Wigley), but his conclusion did not seem to flow from his analysis. The hon. Gentleman, who is a trained accountant, made a notable contribution, but he got off course when he came to his conclusion. We all know why.

Mr. Wigley

Does the hon. and learned Gentleman accept the comparison that I made that, in the circumstances that I quoted, a man on a low income will be paying 37 per cent. more taxation this year, whereas a man on a high income will be paying only 18 per cent. more taxation?

Mr. Rees

A feature of any progressive tax system—this point was made by various hon. Gentleman—is that, unless we tailor our reliefs in a curious way—the previous Labour Government managed it from time to time—if we give an across-the-board cut, if we raise the thresholds, those who pay tax at the highest marginal rate will derive the greatest benefit.

The hon. Gentleman may say that we should not have a progressive tax system. I recall that a previous Liberal spokesman, Mr. Gladstone, argued strenuously against a progressive tax system, but the Government changed their tune when the then Chancellor of the Exchequer, who represented Caernarvon, introduced his Budget in 1909 or 1910. There is a respectable intellectual case for not having a progressive income tax system, but we need not debate it on this occasion. I should be delighted to do so, but that would detain the Committee too long.

My hon. Friend the Member for Fife, East (Mr. Henderson) raised some interesting points about averaging. I hope that he will not think me discourteous if I say that they do not, strictly speaking, arise on this clause. He gave an example of a constituent earning £30,000 in one year and £800 in the next year. At least he would have benefited at some point from the cuts in the higher rates that my right hon. and learned Friend introduced last year. It would not all have been pure pain for him. My hon. Friend is right to say that in principle there are others, apart from farmers, who exhibit some of the same characteristics and who are dependent on seasonal fluctuations, such as hoteliers and boarding house keepers. I note my hon. Friend's remarks. Perhaps we shall be able to debate the matter in greater detail on some other occasion.

The hon. Member for West Lothian (Mr. Dalyell) always produces at least two penetrating questions—although whether they are entirely relevant to the subject of the debate is a matter for the Chair. I shall attempt to respond to his questions. He raised certain points that he culled, I assume, from a variety of papers circulated by the Low Pay Unit. I have read at least one paper in depth. Its conclusions depend on certain assumptions about the increases in earnings. Again, it would be wrong for me to anticipate my right hon. and learned Friend's next Budget. Much will depend on the extent to which we are able to devote resources to indexing, or, more than indexing, personal allowances. We have chosen this year to concentrate rather limited resources on keeping 1,300,000 people out of tax.

I emphasise that there has not been full indexation for the higher rates. If facile points are to be made about a bonanza for the rich—I seem to recall that the Low Pay Unit said something on those lines—it is only fair to draw attention to the fact that the higher rate bands have been indexed to the tune of 11 per cent. So much for that slightly partisan comment by the Low Pay Unit about rich pickings. We could all make that sort of comment, but it does not stand up to close analysis.

The other point raised by the hon. Gentleman related to administrative savings if the thresholds were raised, as we proposed. I cannot estimate exactly the number of man-years that will be saved by keeping 1,300,000 people out of tax, but there will be a saving. If the hon. Gentleman wishes me to give him a specific answer I shall have an estimate prepared and will write to him. It must be self-evident that if the number of people are kept out of tax the administrative costs of running the system will be that much less.

Mr. Hooley

The Minister keeps saying that 1,300,000 people will be kept out of tax. That depends entirely on the appalling drift of inflation and the drift of incomes.

Mr. Rees

The hon Gentleman is not listening closely to my remarks. I am talking about this year. The Low Pay Unit's proposition depends on assumptions made about increases in wages. That is naturally one of the factors that we shall wish to consider when deciding by how much we can increase the thresholds next year.

Mr. Woolmer

Will the Minister tell the Committee by how much the low-paid wage earner's earnings will have to rise to bring him back into tax?

Mr. Rees

I am rather bad at mental arithmetic, but I estimate the figure to be about 18 per cent. Let us wait and see. It will be a factor that will weigh strongly with this Administration. I do not know whether it weighed strongly with the Labour Administration. I do not think it did, because they were faced with this choice and chose to reintroduce a lower rate band. I have given the evidence of Mr. Kay in case my evidence was not entirely acceptable to the Committee, and to demonstrate that it was largesse directed at the wrong target. It was fiscally misdirected, and it was administratively wasteful.

10.30 pm

In a year when there are constraints on what the Government can do, I believe that we are directing the cuts to exactly where they should be directed—to raising the threshold. We believe that that will do far more for the lower-paid, for whom Opposition Members affect, no doubt genuinely, so much concern. But the concern is not confined to the Opposition Benches. It is felt equally acutely on the Government side of the Committee. We believe that we are doing a greater service to the lower-paid than we could do by reintroducing the lower rate band.

I hope that Opposition Members will, on reflection, see the force of what I am saying. I hope that they will not feel obliged to press these amendments to a Division, because by so doing they will have demonstrated either that they have not analysed the problem or that they are not concerned—

Mr. Dalyell rose——

Mr. Rees

No, I shall not give way. I am coming to a conclusion.

By so doing, Opposition Members will demonstrate that they are not really concerned with keeping out of tax the lower-paid and that they are not really concerned with directing fiscal benefits where they should be directed in a difficult period.

On that basis, I hope very much that neither the hon. Member for Truro nor the hon. Member for Gateshead, West will feel obliged to press their amendments to a Division.

Mr. Dalyell

Before the Minister sits down—normally I would not bother him with such a point—perhaps I may remind him that he made an offer of an assessment, in the form of a letter, of precisely what the staff consequences would be. If it were unnecessary work I would not, as he knows from proceedings on previous Finance Bills, ask him to do it. But certainly, in the light of the vist of some of my colleagues and myself to Centre One, it seems to me highly relevant that Treasury Ministers should have before them precisely this information. Therefore, I should like to accept the Minister's offer to make such an assessment and, at his convenience, to write to me.

Mr. Rooker

I shall not detain hon. Members for long. However, we are in Committee and, therefore, it is easier in some ways for Ministers on the Floor of the Chamber to get away without the normal cut and thrust that takes place in Committee Rooms upstairs, where they have to rise again and answer questions. Ministers have been noticeably lacking in doing that today.

We have had many bogus arguments from the Minister of State. He has not answered a single point put by my hon. Friend the Member for Batley and Morley (Mr. Woolmer) about the 5p in the pound increase on the extra £1 of earnings that the low-paid will have to pay in this tax year.

I want to make only two points. First, I do not accept for a moment that it was necessary to abolish the lower rate band in order to pay for the amendments that Audrey Wise and I successfully moved to the Finance Bill 1977. I resent this abolition, which involves a wholly bogus argument. I can find 10 places from which the money can be obtained in tax concessions that the Government have given away in this Budget, not to the low-paid but to the better-off.

As is well known by hon. Members, but not known outside Parliament, we cannot table amendments to the Finance Bill in order to make clear where we would obtain the money. We are prevented by the rules of the House of Commons from doing that. It gives Ministers an argument and an excuse to say " Where would you get the money from? You have tabled no amendments to say where." Of course we cannot put such amendments on the Amendment Paper, but that does not mean that our arguments do not have validity.

The Minister kept referring to the numbers of people being taken out of tax. But they will be taken out for a few transient months. They will be back in again. The figure this year will be 11 per cent., not 18 per cent. The figures are there. There are more people paying tax this year than there were last year and the year before. The number of taxpayers is increasing, even though the effect of the indexation provision has existed for the last couple of years. The Minister cannot say " We have taken 1.3 million out of tax ", as the Conservatives argued on the 1979 Budget. It is a bogus argument, and the low-paid know that.

I shall reserve other remarks on that line for tomorrow, or when we reach clause 23, because of what the Government are contemplating there. Again they will use as an excuse the so-called Rooker-Wise amendment to benefit the higher rate taxpayers, who already get a benefit from the indexation of the thresholds over and above, in cash terms, what the average taxpayer gets. Tomorrow or the day after the Government will seek to move an amendment which, if implemented, will benefit the well-off to a greater extent than I would have thought even they would have contemplated.

The Minister has said that politics are priorities. He means that the Government have decided to screw the 10,000 or 40,000 families—he does not seem to care which it is—that we are discussing. At the end of 1979 there were 80,000 families in receipt of family income supplement. There were 63,000 paying income tax. Of the 63,000 about 49,000 were paying tax at 25p in the pound. The Low Pay Unit has estimated that 12,000 of the 49,000 will be removed from tax by raising the threshold. That leaves 37,000 families in a poverty trap that will be deeper. As the Minister said, it will be deeper and not wider.

What are we saying to those families? The brief of the Low Pay Unit states: What does this mean for those in the ' poverty trap '? Previously there were about 50,000 families "— I was talking of 49,000— who would stand to lose 25p in tax out of each additional pound earned. That extra pound would have meant an extra 6½p in national insurance contributions together with a reduced eligibility to FIS of 50p. From an extra pound earned, the family could expect to be only 18½p better off, even if we ignore the potential loss of housing rebates and other benefits. The result of the abolition of the reduced rate band of tax will mean that for an estimated 37,000 families, an extra pound earned could mean only 13p more to spend. There will be only 13p more to spend, not 18½ p. These families will be paying an extra 5p in the pound income tax on every extra pound that they earn by way of overtime, extra jobs or bonuses. That fact cannot be denied. These are the people who are at the sharp end of the Government's policy. Nearly 40,000 families will have their income tax rate increased by 5p in the pound. That was not in the Tory Party manifesto. That was not in any of the speeches made by that heartless woman who is now the Prime Minister prior to the general election last year.

We are talking of 37,000 or 38,000 families. There are 400 to 500 of these families in every constituency represented by Conservative Members as well as in the constituencies represented by my hon. Friends. They will have to argue the Government's case before their constituents. My hon. Friends and I will be able to argue the case because we shall oppose the Government's policy. It will be interesting to hear how Tory Members argue it in the years to come, or when the families concerned realise what has happened. What will be their response when the media report that income tax has been increased for thousands of such families whereas it has been decreased at the margin, and decreased substantially, for those on higher earnings?

The Low Pay Unit states: The abolition of the RRB "— that is, the reduced rate band— will therefore intensify the effects of the poverty trap for an estimated 37,000 families. These estimates "— this is the issue that the Government have to answer— differ significantly from other independent estimates published before the Budget, and were based on Family Expenditure Survey (FES) data. Part of the reason, we suspect,

is that the FES is a small sample representing one in 2,000 or 0.03 per cent. of all households) which can provide misleading results. Our own estimates are based on a 10 per cent. sample of FIS recipients carried out by the DHSS.

The estimates of the Low Pay Unit are based on a sample survey of 10 per cent. of those on family income supplement. It was carried out not by National Opinion Polls Ltd. or by the Tory Central Office, but by the Department of Health and Social Security. Those results are based on a much larger sample and must give a more reliable estimate of the number of families affected at the sharp end.

Many Conservative Members have dismissed the 3 million people who will suffer an increase in tax of 5p in the pound because the figure includes women who work part time and youngsters of 18 and 19 years. However, many of those youngsters may be married. They may be trying to put together a home. The figure includes people aged over 60. The Tories have dismissed such people. Let us debate those who are left, the 40,000 families at the sharp end. Is that figure correct? The Low Pay Unit has used the Government's figures. It has not used the figures of some razzmatazz outside body.

My hon. Friend the Member for Gateshead, West (Mr. Horam) made it clear that no research has been done on the effects of taxation. The Treasury says that the Inland Revenue is responsible, and the Inland Revenue says that the Treasury is responsible. Perhaps the Government have subcontracted the work to one of the fringe banks, with which some members of the Government are associated. The figures were based on Government information. The Minister should explain either today or tomorrow, why the Low Pay Unit is wrong. That is his only case. If he can prove that it is wrong, some of his words may make some sense. He will have to prove that it is wrong before Opposition Members accept the Government's arguments.

Question put, That the amendment be made:—

The Committee divided: Ayes 116, Noes 154.

Division No. 329]	AYES	[10.42 pm
Allaun, Frank	Archer, Rt Hon Peter	Bennett, Andrew (Stockport N)
Alton, David	Barnett, Guy (Greenwich)	Booth, Rt Hon Albert
Anderson, Donald	Bern, Rt Hon Anthony Wedgwood	Boothroyd, Miss Betty
Bray, Dr Jeremy	Graham, Ted	Park, George
Callaghan, Jim (Middleton & P)	Grant, George (Morpeth)	Parry, Robert
Campbell-Savours, Dale	Grimond, Rt Hon J.	Penhaligon, David
Carter-Jones, Lewis	Hamilton, James (Bothwell)	Prescott, John
Clark, Dr David (South Shields)	Hamilton, W. W. (Central Fife)	Rees, Rt Hon Merlyn (Leeds South)
Cocks, Rt Hon Michael (Bristol S)	Haynes, Frank	Richardson, Jo
Cowans, Harry	Heffer, Eric S.	Roberts, Ernest (Hackney North)
Crowther, J. S.	Hogg, Norman (E Dunbartonshire)	Roberts, Gwilym (Cannock)
Cryer, Bob	Homewood, William	Rodgers, Rt Hon William
Cunliffe, Lawrence	Hooley, Frank	Rooker, J. W.
Cunningham, George (Islington S)	Horam, John	Rowlands, Ted
Cunningham, Dr John (Whitehaven)	Howelis, Geraint	Sever, John
Dalyell, Tam	Hughes, Robert (Aberdeen North)	Silverman, Julius
Davies, Rt Hon Denzil (Llanelli)	Hughes, Roy (Newport)	Skinner, Dennis
Davis, Terry (B'rm'ham, Stechford)	John, Brynmor	Snape, Peter
Deakins, Eric	Johnston, Russell (Inverness)	Soley, Clive
Dean, Joseph (Leeds West)	Jones, Rt Hon Alec (Rhondda)	Spearing, Nigel
Dewar, Donald	Kilroy-Silk, Robert	Spriggs, Leslie
Dixon, Donald	Lamborn, Harry	Steel, Rt Hon David
Dormand, Jack	Leadbitter, Ted	Thomas, Dafydd (Merioneth)
Douglas, Dick	Leighton, Ronald	Tilley, John
Dubs, Alfred	Lewis, Ron (Carlisle)	Tinn, James
Duffy, A. E. P.	Litherland, Robert	Torney, Tom
Dunwoody, Mrs Gwyneth	Lyons, Edward (Bradford West)	Wainwright, Edwin (Dearne Valley)
Eadie, Alex	McCartney, Hugh	Wellbeloved, James
Eastham, Ken	McKay, Allen (Penistone)	Welsh, Michael
Ellis, Raymond (NE Derbyshire)	MacKenzie, Rt Hon Gregor	White, Frank R. (Bury & Radcliffe)
Evans, loan (Aberdare)	McNamara, Kevin	White, James (Glasgow, Pollok)
Evans, John (Newton)	Magee, Bryan	Wigley, Dafydd
Ewing, Harry	Marshall, Dr Edmund (Goole)	Wilson, Gordon (Dundee East)
Field, Frank	Marshall, Jim (Leicester South)	Wilson, William (Coventry SE)
Flannery, Martin	Mikardo, Ian	Winnick, David
Fletcher, Ted (Darlington)	Millan, Rt Hon Bruce	Woolmer, Kenneth
Foot, Rt Hon Michael	Morris, Rt Hon Alfred (Wythenshawe)
Foster, Derek	Morris, Rt Hon Charles (Openshaw)	TELLERS FOR THE AYES:
Garrett, John (Norwich S)	Morton, George	Mr. A. J. Beith and
Gourlay, Harry	O'Neill, Martin	Mr. Clement Freud.
NOES
Alexander, Richard	Fraser, Peter (South Angus)	Miller, Hal (Bromsgrove & Redditch)
Ancram, Michael	Gardiner, George (Reigate)	Miscampbell, Norman
Aspinwall, Jack	Garel-Jones, Tristan	Morgan, Geraint
Beaumont-Dark, Anthony	Glyn, Dr Alan	Morris, Michael (Northampton, Sth)
Bendall, Vivian	Goodlad, Alastair	Morrison, Hon Peter (City of Chester)
Benyon, Thomas (Abingdon)	Gorst, John	Murphy, Christopher
Benyon, W. (Buckingham)	Gow, Ian	Myles, David
Berry, Hon Anthony	Griffiths, Peter (Portsmouth N)	Needham, Richard
Best, Keith	Grist, lan	Nelson, Anthony
Bevan, David Gilroy	Gummer, John Selwyn	Newton, Tony
Biffen, Rt Hon John	Hamilton, Michael (Salisbury)	Oppenheim, Rt Hon Mrs Sally
Blackburn, John	Haselhurst, Alan	Page, Rt Hon Sir R. Graham
Boscawen, Hon Robert	Havers, Rt Hon Sir Michael	Page, Richard (SW Hertfordshire)
Brotherton, Michael	Hawksley, Warren	Parris, Matthew
Browne, John (Winchester)	Heddle, John	Patten, Christopher (Bath)
Bruce-Gardyne, John	Henderson, Barry	Patten, John (Oxford)
Buchanan-Smith, Hon Alick	Hicks, Robert	Pattie, Geoffrey
Budgen, Nick	Hogg, Hon Douglas (Grantham)	Pollock, Alexander
Bulmer, Esmond	Holland, Philip (Carlton)	Price, David (Eastleigh)
Cadbury, Jocelyn	Hunt, John (Ravensbourne)	Proctor, K. Harvey
Carlisle, John (Luton West)	Hurd, Hon Douglas	Rathbone, Tim
Carlisle, Kenneth (Lincoln)	Jopling, Rt Hon Michael	Rees, Peter (Dover and Deal)
Carlisle, Rt Hon Mark (Runcorn)	Kellett-Bowman, Mrs Elaine	Renton, Tim
Chapman, Sydney	King, Rt Hon Tom	Rhodes James, Robert
Clark, Hon Alan (Plymouth, Sutton)	Lawson, Nigel	Rhys Williams, Sir Brandon
Clarke, Kenneth (Rushcliffe)	Le Marchant, Spencer	Roberts, Michael (Cardiff NW)
Cockeram, Eric	Lennox-Boyd, Hon Mark	Sainsbury, Hon Timoihy
Costain, A. P.	Lester, Jim (Beeston)	St. John-Stevas, Rt Hon Norman
Cranborne, Viscount	Lloyd, Peter (Fareham)	Shaw, Michael (Scarborough)
Critchley, Julian	Loveridge, John	Shepherd, Colin (Hereford)
Dorrell, Stephen	Lyell, Nicholas	Silvester, Fred
Douglas-Hamilton, Lord James	Macfarlane, Neil	Sims, Roger
Dover, Denshore	MacGregor, John	Skeet, T. H. H.
Dunn, Robert (Dartford)	Macmillan, Rt Hon M. (Farnham)	Speller, Tony
Edwards, Rt Hon N. (Pembroke)	McNair-Wilson, Michael (Newbury)	Sproat, lain
Eggar, Timothy	Major, John	Stanbrook, Ivor
Eyre, Reginald	Marlow, Tony	Steen, Anthony
Fairbairn, Nicholas	Marten, Neil (Banbury)	Stevens, Martin
Fairgrieve, Russell	Mates, Michael	Stewart, Ian (Hitchin)
Faith, Mrs Sheila	Mather, Carol	Stewart, John (East Renfrewshire)
Fenner, Mrs Peggy	Maude, Rt Hon Angus	Stradling Thomas, J.
Finsberg, Geoffrey	Maxwell-Hyslop, Robin	Thomas, Rt Hon Peter (Hendon S)
Fisher, Sir Nigel	Mayhew, Patrick	Thompson, Donald
Fletcher-Cooke, Charles	Mellor, David	Thorne, Neil (llford South)
Fowler, Rt Hon Norman	Meyer, Sir Anthony	Thornton, Malcolm

Townend, John (Bridlington)	Ward, John	Winterton, Nicholas
van Straubenzee, W. R.	Warren, Kenneth	Wolfson, Mark
Viggers, Peter	Watson, John
Waddington, David	Wells, Bowen (Hert'rd & Stev'nage)	TELLERS FOR THE NOES:
Wakeham, John	Wheeler, John	Mr. John Cope and
Walker, Bill (Perth & E Perthshire)	Wickenden, Keith	Mr. Peter Brooke.
Waller, Gary

Question accordingly negatived.

Amendment proposed: No. 6, in page 11, line 10, at end insert— (aa) in respect of so much of an individual's total income as does not exceed £1,000 at 25 per cent.'.—[Mr. Denzil Davies.]

Question put, That the amendment be made:—

The Committee divided: Ayes 115, Noes 152.

Division No. 330]	AYES	[10.54 p.m.
Allaun, Frank	Flannery, Martin	O'Neill, Martin
Alton, David	Fletcher, Ted (Darlington)	Park, George
Anderson, Donald	Foster, Derek	Parry, Robert
Archer, Rt Hon Peter	Freud, Clement	Penhaligon, David
Barnett, Guy (Greenwich)	Garrett, John (Norwich S)	Prescott, John
Belih, A. J.	Grant, George (Morpeth)	Rees, Rt Hon Merlyn (Leeds South)
Benn. Rt Hon Anthony Wedgwood	Grimond, Rt Hon J.	Richardson, Jo
Bennett Andrew (Stockport N)	Hamilton, James (Bothwell)	Roberts, Ernest (Hackney North)
Booth Rt Hon Albert	Hamilton, W. W. (Central Fife)	Roberts, Gwilym (Cannock)
Boothroyd, Miss Betty	Haynes, Frank	Rodgers, Rt Hon William
Bray, Dr Jeremy	Heffer, Eric S.	Rooker, J. W.
Callaghan, Jim (Middleton & P)	Hogg, Norman (E Dunbartonshire)	Rowlands, Ted
Campbell-Savours, Dale	Homewood, William	Sever, John
Carter-Jones, Lewis	Hooley, Frank	Silverman, Julius
Clark, Dr David (South Shields)	Horam, John	Skinner, Dennis
Cocks, Rt Hon Michael (Bristol S)	Howells, Geraint	Snape, Peter
Cowans, Harry	Hughes, Robert (Aberdeen North)	Soley, Clive
Crowther, J. S.	Hughes, Roy (Newport)	Spearing, Nigel
Cryer, Bob	John, Brynmor	Spriggs, Leslie
Cunliffe, Lawrence	Johnston, Russell (Inverness)	Steel, Rt Hon David
Cunningham, George (Islington S)	Jones, Rt Hon Alec (Rhondda)	Thomas, Dafydd (Merioneth)
Cunningham Dr John (Whitehaven)	Kilroy-Silk, Robert	Tilley, John
Davis, Terry (B'rm'ham, Stechford)	Lamborn, Harry	Tinn, James
Deakins, Eric	Leadbitter, Ted	Torney, Tom
Dean, Joseph (Leeds West)	Leighton, Ronald	Wainwright, Edwin (Dearne Valley)
Dewar, Donald	Lewis, Ron (Carlisle)	Wellbeloved, James
Dixon, Donald	Lltherlnnd, Robert	Welsh, Michael
Dormand, Jack	Lyons, Edward (Bradford West)	White, Frank R. (Bury & Radclilfe)
Douglas, Dick	McCartney, Hugh	White, James (Glasgow, Pollok)
Dubs, Alfred	McKay. Allen (Penistone)	Wigley, Dafydd
Duffy, A. E. P.	Mackenzie, Rt Hon Gregor	Wilson, Gordon (Dundee East)
Dunwoody, Mrs Gwyneth	McNamara, Kevin	Wilson, William (Coventry SE)
Eadie, Alex	Magee, Bryan	Winnick, David
Eastham, Ken	Marshall, Dr Edmund (Goole)	Woolmer, Kenneth
Ellis, Raymond (NE Derbyshire)	Marshall, Jim (Leicester South)
Evans, loan (Aberdare)	Mikardo, Ian	TELLERS FOR THE AYES:
Evans, John (Newton)	Millan, Rt Hon Bruce	Mr. George Morton and
Ewing, Harry	Morris, Rt Hon Alfred (Wythenshawe)	Mr. Ted Graham
Field, Frank	Morris, Rt Hon Charles (Openshaw)
NOES
Alexander, Richard	Carlisle, John (Luton West)	Fisher, Sir Nigel
Ancram, Michael	Carlisle, Kenneth (Lincoln)	Fletcher-Cooke, Charles
Aspinwall, Jack	Carlisle, Rt Hon Mark (Runcorn)	Fowler, Rt Hon Norman
Beaumont-Dark, Anthony	Chapman, Sydney	Fraser, Peter (South Angus)
Bendall, Vivian	Clark, Hon Alan (Plymouth, Sutton)	Gardiner, George (Reigate)
Benyon, Thomas (Abingdon)	Clarke, Kenneth (Rushcliffe)	Garel-Jones, Tristan
Berry, Hon Anthony	Cockeram, Eric	Glyn, Dr Alan
Best, Keith	Cope, John	Goodlad, Alastair
Bevan, David Gilroy	Costain, A. P.	Gorst, John
Biffan, Rt Hon John	Cranborne, Viscount	Gow, Ian
Blackburn, John	Critchley, Julian	Griffiths, Peter (Portsmouth N)
Brinton, Tim	Dorrell, Stephen	Grist, Ian
Brittan, Leon	Dover, Denshora	Gummer, John Selwyn
Brooke, Hon Peter	Dunn, Robert (Dartford)	Hamilton, Michael (Salisbury)
Brotherton, Michael	Edwards, Rt Hon N. (Pembroke)	Haselhurst, Alan
Brown, Michael (Brigg & Sc'thorpe)	Eggar, Timothy	Havers, Rt Hon Sir Michael
Browne, John (Winchester)	Eyre, Reginald	Hawksley, Warren
Bruce-Gardyne, John	Fairbairn, Nicholas	Heddle, John
Budgen, Nick	Faith, Mrs Sheila	Henderson, Barry
Bulmer, Esmond	Fenner, Mrs Peggy	Hicks, Robert
Cadbury, Jocelyn	Finsberg, Geoffrey	Hogg, Hon Douglas (Grantham)
Holland, Philip (Carlton)	Morris, Michael (Northampton, Sth)	Sproat, lain
Howell, Ralph (North Norfolk)	Morrison, Hon Peter (City of Chester)	Stanbrook, Ivor
Hunt, John (Ravensbourne)	Murphy, Christopher	Steen, Anthony
Hurd, Hon Douglas	Myles, David	Stevens, Martin
Jopling, Rt Hon Michael	Needham, Richard	Stewart, Ian (Hitchin)
Kellett-Bowman, Mrs Elaine	Nelson, Anthony	Stewart, John (East Renfrewshire)
King, Rt Hon Tom	Newton, Tony	Stradling Thomas, J.
Lawson, Nigel	Oppenheim, Rt Hon Mrs Sally	Thomas, Rt Hon Peter (Hendon S)
Le Marchant, Spencer	Page, Rt Hon Sir R. Graham	Thompson, Donald
Lennox-Boyd, Hon Mark	Page, Richard (SW Hertfordshire)	Thorne, Neil (llford South)
Lester, Jim (Beeston)	Parris, Matthew	Thornton, Malcolm
Lloyd, Peter (Fareham)	Patten, Christopher (Bath)	Townend, John (Bridlington)
Loveridge, John	Patten, John (Oxford)	van Straubenzee, W. R.
Lyell, Nicholas	Pattie, Geoffrey	Viggers, Peter
Macfarlane, Nell	Pollock, Alexander	Waddington, David
MacGregor John	Price, David (Eastleigh)	Wakeham, John
Macmillan, Rt Hon M. (Farnham)	Proctor, K. Harvey	Walker, Bill (Perth & E Perthshire)
McNair-Wilson, Michael (Newbury)	Rathbone, Tim	Waller, Gary
Major, John	Rees, Peter (Dover and Deal)	Ward, John
Marlow, Tony	Renton, Tim	Warren, Kenneth
Marten, Neil (Banbury)	Rhodes James, Robert	Watson, John
Mates, Michael	Rhys Williams, Sir Brandon	Wells, Bowen (Hert'rd & Stev'nage)
Mather, Carol	Roberts, Michael (Cardiff NW)	Wheeler, John
Maude, Rt Hon Angus	Sainsbury, Hon Timoihy	Wickenden, Keith
Miscampbell, Norman	St. John-Stevas, Rt Hon Norman	Winterton, Nicholas
Maxwell-Hyslop, Robin	Shaw, Michael (Scarborough)	Wolfson, Mark
Mayhew, Patrick	Shepherd, Colin (Hereford)
Mellor, David	Silvester, Fred	TELLERS FOR THE NOES:
Meyer, Sir Anthony	Sims, Roger	Lord James Douglas-Hamilton and
Miller, Hal (Bromsgrove & Redditch)	Skeet, T. H. H.	Mr. Robert Boscawen
Morgan, Geraint	Speller, Tony

Question accordingly negatived.

Mr. Horam

I beg to move amendment No. 8, in page 11, line 14, leave out paragraph (b).

The Second Deputy Chairman (Mr. Richard Crawshaw)

With this we may take amendment No. 22, in page 11, line 16, at end insert except in the case of a retired person over the age of 70 when the figure of £5,500 shall be £6,500".

Mr. Horam

We now turn from the poor to the rich and from the reduced rate band to the investment income surcharge. In the debate that we have just concluded I said that the Government had come very close to abolishing progressive taxation in this country. The same basic rate of taxation is now paid by 97 per cent. of all taxpayers. That is certainly a higher proportion than that in any comparable country and is about the same as when super tax was introduced in Lloyd George's Budget in 1909. The Government have not abolished the surcharge on investment income but they are itching to do so, judging by the Chancellor of the Exchequer's remarks. They have reduced its incidence substantially in the two Budgets since the general election. This substantial reduction is unwarranted, particularly in view of the treatment which the Government have meted out to people at the other end of the income scale.

My right hon. Friend the Member for Leeds, East (Mr. Healey) left investment income surcharge at 10 per cent. over a threshold of £1,700 and 15 per cent. over £2,250, with more favourable treatment for people over the age of 65. In his last Budget he indexed the surcharge. In 1979 the Chancellor raised the threshold from £1,700 to £5,000 and consolidated the rate at 15 per cent. As he said then, he set a higher threshold than Lord Barber when he introduced the investment income surcharge in 1972. He said that he was giving people who paid that surcharge a better deal than when it was introduced. At a stroke, he halved the coverage of the tax. In 1978–79, 670,000 people paid the surcharge. Last year the number was reduced to 300,000. In its coverage of the last Budget, even the Financial Times described that as a dramatic drop in the incidence of taxation.

We are talking about wealthy people. The Government have often said that many wealthy people are elderly and deserve special consideration. That is an odd argument in view of the debate that we have just had. One of the reasons that the Government gave for abolishing the reduced rate band was that many people in that band were over 60 and therefore had lower costs than people with a large family and had reached that stage when an extra £5 a week did not make much difference to their personal standards of living. It is contradictory to adduce an argument about the elderly when considering the wealthy and not use it for the poor. It contrasts with the mean treatment that the Government are giving the pensioners with the two-week delay in paying the pensions increase in the autumn.

Many people with investment income are elderly, but about half are not retired and often have a large earned income as well as a large unearned income. A man earning £30,000 a year gained £355 a month from the Government's first Budget. A man whose income is composed of £25,000 earned income and £5,000 investment income gains £389 a month from tax handouts. The Institute of Fiscal Studies said that, compared with last spring, a person receiving £30,000—some earned and some unearned—is £60 a week, or 21 per cent., better off than he was three years ago. These are the people who have benefited, as no one else has, from the Government's actions.

Is it right to maintain these huge benefits when the Chancellor admits that he cannot protect the vast majority of taxpayers against the rate of inflation? The Government have been unable to fulfil the spirit of the indexation as set out in the Rooker-Wise amendment. They have had to renege on that. The protection is to the extent of only 11 per cent. rather than the 18 per cent. that should be the case.

Is it right that such a situation should exist in present economic circumstances when the Government, despite their belief in monetary policies, are forced to appeal increasingly to trade unionists to exercise restraint and to reduce their living standards during the next round of wage settlements to help the country while, at the same time, those putting this request to the trade unionists are managing directors on income levels, to which I have referred, who benefit from enormous tax handouts from the Government? Are not the Government aware that this is bound to sour the atmosphere for the critical negotiations that are important for the success of their economic policy? Do they feel it is right to go ahead with these increases? It is morally wrong and economically foolish.

Mr. Bruce-Gardyne

I hoped that the hon. Member for Gateshead, West (Mr. Horam) would explain the purpose of the amendment. I understand that, if the amendment is approved, it will abolish the investment income surcharge. The hon. Gentleman shakes his head. He might have done the Committee the honour of informing us what other conceivable purpose the amendment has. The amendment, as it appears on the Amendment Paper, is designed to abolish the investment income surcharge. It is no good the hon. Gentleman shaking his head. That is what it would do.

If the hon. Gentleman seeks to divide the House, I think that some of us may have difficulty in voting against him. Some of us believe that the investment income surcharge represents nothing more than the politics of envy. It has nothing to do with the management of the economy or the generation of income for the Government. The hon. Gentleman might at least have offered an explanation for inviting the Committee to vote in favour of its abolition in the light of the argument he advanced.

Mr. Horam

The hon. Gentleman has been a Member long enough to know that the rules of order sometimes restrict what hon. Members, can achieve through amendments. The amendment is clearly a probing amendment designed to extract from the Minister his reasons for maintaining the enormous benefits given to this group of people over two Budgets. The amendment may not be expertly phrased in putting forward that point, but we are limited in what we can propose.

Mr. Bruce-Gardyne

The amendment is expertly phrased to achieve precisely the opposite purpose the hon. Gentleman advocated. The dilemma he places before the Committee is that those hon. Members who have the strongest objections to the investment income surcharge for reasons that I shall advance would find it extremely difficult to oppose the hon. Gentleman's amendment in the Lobbies.

11.15 pm

The argument against investment income surcharge, I understand, is that it is based on the assumption that there is something intrinsically worthy of penalisation about direct investment by individuals. The case I wish to put—I hope that my hon. and learned Friend will deal with it—is this. If I won £150,000 on the football pools, which I do not think I have either the skill or knowledge to accomplish, I would have the choice of putting that money into a large and luxurious house or into the purchase of shares in ICI. If I bought the house, I would enjoy the benefit of the £25,000 mortgage interest relief. Provided I used the house as my principal residence, I would get the benefit of exemption from capital gains tax liability. In addition, my asset would appreciate inexorably, at least in pace with inflation and, over the years, judging from past experience, a good deal more.

If, however, I put the £150,000 into shares in ICI, not only do I take the risks of the market as to how ICI may perform—the value might rise or fall—but I know for certain that if it rises I shall face a liability to capital gains tax on the value of the appreciation of those shares, regardless of the impact of inflation during the period between purchase and disposal. In addition, I shall face investment income surcharge on the income from the investment.

I cannot see that it is in the interests of the British economy that I should be encouraged to divert that £150,000 into the purchase of a house rather than into investment in ICI. On balance, the interests of the economy must be served in the opposite direction. I should put the money into a major industrial company rather than into a house which does not add to the cumulative stock of industrial and manufacturing wealth in this country.

Mr. Budgen

The probability is that anyone who has £150,000 to invest does not invest it in such a way as to attract the investment income premium. The right hon. Member for Llanelli (Mr. Davies) will be able to explain that very well. The rich, on the whole, avoid the effect of the investment income surcharge. It is the poor who pay it—the relative poor who have perhaps £50,000 to invest and who perhaps have their wealth knocked about by inflation more than any other group in society.

Mr. Bruce-Gardyne

I agree to the extent that, if one had won £150,000 on the pools, under the present tax arrangements, including the investment income surcharge, one would be out of one's mind if one put the money into a direct personal investment in shares in ICI.

Mr. Derail Davies

I wish the hon. Gentleman would be more precise. He is not talking about investing £150,000 in ICI. He is buying a piece of paper—a share certificate—and the money that he pays for those shares does not go into ICI. We get these speeches from Conservative Members about investing in industrial companies. There is no investment in ICI.

Mr. Bruce-Gardyne

I am surprised that the right hon. Gentleman, who has considerable knowledge in these matters, should advance such a proposition. To the extent that I am prepared to place £150,000 which I have realised from the winning of a football pool at the disposal of ICI—

Mr. Douglas Hogg

We all agree that it is a rights issue.

Mr. Bruce-Gardyne

It does not matter whether it is a rights issue. The availability of my £150,000 will reduce the cost to ICI of additional capital for manufacturing purposes. I submit that it must be more to the advantage of the United Kingdom economy as a whole that I should do that than invest in a house, which I should logically do under the present tax structure.

I do not wish to make a long speech, but I was provoked by the manner in which the hon. Member for Gateshead, West sought to shoot down his amendment and by his failure to explain why he was doing so.

If I seek to make provision for my old age—if I ever get that far—and I choose to do so through an employee pension scheme, when I receive the benefits of that scheme they will be treated as so-called earned income. If I make arrangements to purchase insurance annuities to provide for my old age and make that investment through an institution, similarly the income that I receive will be treated as so-called earned income. But if, instead, I choose to make provision for my old age through direct investment in British industrial companies, the income, when I receive it, will be subject to the investment income surcharge. That is utter nonsense in economic terms, because it diverts investment more and more into institutional hands. That is highly undesirable.

I have heard some of the mandarins of the institutional investment industry explaining how they are so much more sophisticated than the private investor, and how they give greater stability to the market for industrial shares. I believe that the reverse is true. All the evidence suggests that the institutions act like lemmings—and they move in both directions. Invariably they buy at the top of the market and sell at the bottom. They are more inclined to do that than private investors. I should like us to move to a tax regime, and the sooner the better, which treats all forms of investment neutrally and which allows people to choose.

I accept, if this is the point that the right hon. Member for Llanelli is trying so vociferously to make, that we should eliminate the privileges which at present attract investment in, for example, housing. But the counterpart of that is that we want to get rid of the investment income surcharge. It has no economic justification. It diverts and distorts the patterns of investment, and the sooner we get shot of it the better.

If the hon. Member for Gateshead, West wishes to press his amendment to a Division, I shall find it difficult to oppose it.

Mr. Hooley

I admit that I was a trifle baffled by the amendment, but I accept that my hon. Friend the Member for Gateshead, West (Mr. Horam) was endeavouring to attract a debate on a matter of concern to all—the general question of the investment surcharge.

In my naive and unsophisticated way, I have endeavoured to table an amendment which means what it says. I have no intention of abolishing the investment surcharge—indeed, there is probably a good argument for increasing it—but I think that the Government need to have rammed down their throat the effect on the elderly of their incompetence in dealing with inflation, even if those elderly people are comparatively well-heeled and much better blessed than the categories of people whom we were discussing on the previous amendment.

My amendment seeks to give some slight compensation to the over-70 victims of Tory inflation who rely to some extent on investments for their income. People who are following a vocation, profession, or whatever, can be expected to work harder, or whatever the Tory objective is, if they want to increase their income and should not need to rely on investment income. But, by definition, the retired, particularly the older retired, the over-70 retired, are presumably not in a position to offset the ravages of inflation under this Government by increasing their earned income. Therefore, it is perhaps appropriate that they should be given some modest additional defence, as proposed in my amendment, against the ravages of inflation, by a slight adjustment to the investment income exemption. I hope that I have got it right. On my calculation, it would give them £150 a year extra. That is certainly a lot by the standards of most retired people. It would undoubtedly go a little way to offset the ravages of inflation which the Government have set in train. It would not offset it altogether, but it might help a little.

The hon. Member for Knutsford (Mr. Bruce-Gardyne) must support my amendment if he supports the one moved by my hon. Friend the Member for Gateshead, West, because its purpose is to single out a precise but small group of people who will need help and protection against the ferocious rate of inflation that has been set in motion and to which we can see no end. [Interruption.] If some Conservative Members had been here earlier in the evening they would have heard the Chief Secretary say that he saw no end to the present troubles for two years, three years, or the whole of this Parliament. The Chief Secretary, quite cheerfully, said that the problems which they seem to think will disappear in a few months will do no such thing. They will be with us, according to the Chief Secretary, for two or three years or five years and, according to the Chancellor a little while ago, for 10 years.

Conservative Members must square up to the taxation implications of the incompetence of the Government's policy objective. The central objective of their policy, proclaimed from the rooftops, in their manifesto and in every speech from the Front Bench, is to reduce inflation. Of course, as we know, exactly the opposite has occurred, with incalculable damage to the standard of living of the elderly, who cannot defend themselves against it because they have no bargaining position to increase their income.

I have no special affection for people who rely on investment income, and I do not go along with the rococo argument of the hon. Member for Knutsford, but, in all fairness, the Government should face the consequences of the incompetence of their policy and say to the group of people, who I suspect are by and large among their supporters rather than ours, " We have bungled this inflation business. Our Chief Secretary tells us that it will go on for another year, three years or perhaps for a whole Parliament". He said that the austerity and the problems would last for the whole of this Parliament. Those are not my words, but——

11.30 pm

The Second Deputy Chairman

Order. This is not a debate on the economy. The hon. Gentleman should address himself to the amendment.

Mr. Hooley

I am addressing myself to this specific amendment, which relates directly to the problem of inflation and its impact on a person over the age of 70 who relies on investment income for a substantial part of his standard of living. My amendment seeks to offset to a modest extent—nothing drastic—the ravages of inflation on the standard of living of a person in that situation. I was endeavouring to point out, no doubt in an incompetent manner, to those Conservative Members who pretend that there is no problem, or that any problem will be over in a short time, that the Chief Secretary said the opposite this evening. I am sorry that some hon. Members did not bother to come to the debate at an earlier stage to listen to the right hon. Gentleman's remarks, but that is what he said. If hon. Members do not wish to take my word for that, they can read it in Hansard tomorrow. If I have made a mistake, I shall happily withdraw the remark.

The incompetence of the Government's policy has placed people, especially the elderly, in an extremely damaging and difficult position if they rely entirely on a relatively fixed source of income. I am endeavouring to give a modest and simple relief to a category for whom I should have thought Conservative Members would have a certain affection. I am sure that the Minister will tell us how many millions the proposal would cost—not very many, I suspect. That is the only purpose of the amendment. I am sure that it will attract support, at least from the hon. Member for Knutsford.

Mr. Douglas Hogg

I support the remarks of my hon. Friend the Member for Knutsford (Mr. Bruce-Gardyne). He suggested that the investment income surcharge had the effect of diverting investment away from manufacturing industry. The right hon. Member for Llanelli (Mr. Davies) denied that and suggested that an investment in share equity was not, in any sense, an investment in manufacturing industry. I am sorry that the right hon. Gentleman is not in the Chamber, but he is wrong in a number of material respects. He entirely ignored rights issues, loan stock secured by debentures, new issues designed to raise new capital and, most important of all, direct investment in private companies, often in the manufacturing sector. Those are areas in which the investment goes directly into the wealth-creating sectors of the economy. I have little doubt that the investment income surcharge diverts investment away from those sectors. The point made by the right hon. Gentleman that an investment in equity does not have that effect shows a remarkable ignorance of economic reality.

Mr. Budgen

Will my hon. Friend, on reflection, agree that our hon. Friend the Member for Knutsford (Mr. Bruce-Gardyne) did not say that it prevented investment in manufacturing industry? He merely said that it distorted all forms of investment. I hope that my hon. Friend will not say that manufacturing industry is a preferred form of investment. We want a neutral system, not a favoured system.

Mr. Hogg

As I would expect from my hon. Friend, that was a valuable intervention. The point that I wish to make is that we should encourage investment in the wealth-creating sectors. That could be manufacturing, retail or investment itself. We should not support a tax system that diverts investment away from the wealth-creating sectors of the economy. That is what I understood my hon. Friend the Member for Knutsford to say. I am certain that the right hon. Member for Llanelli denied that proposition. For that reason, I support my hon. Friend's comments.

Mr. Peter Rees

We have had a particularly interesting debate, not least because we discovered at a rather late stage that the amendment in the names of the right hon. Member for Leeds, East (Mr. Healey) and his right hon. and hon. Friends was a probing one. I say in response that I think we are entitled to probe the intentions of the Opposition Front Bench because, as my hon. Friend the Member for Knutsford (Mr. Bruce-Gardyne) perceptively pointed out, the consequence of the amendment would be to abolish the investment income surcharge. Like all facets of income tax, it is an annual charge, and on this occasion it is imposed by clause 17(1)(b), which the amendment is designed to repeal. We could have an interesting debate on that.

My hon. Friends are right to say that the investment income surcharge builds in a meaure of distortion, and in some other year, when we are less constrained financially, it will be important to review radically the whole area of capital taxation and we shall not hesitate to do it. As my right hon. and learned Friend explained in his Budget speech, with the financial constraints within which we are operating it would obviously have unbalanced the Budget had we done what we set out to do, what was clearly marked out in our manifesto and what we hope to do over the lifetime of Parliament in the matter of capital taxation.

Until I heard the rather lame explanation of the hon. Member for Gateshead, West (Mr. Horam), I was delighted to see what I thought was a change of heart in the Labour Party. I thought that this again must be the aftermath of Wembley—that it, too, was going to abolish investment income surcharge—and I was disappointed when I heard that it was only a probing amendment.

I heard trembling almost on the lips of Labour Members "massive handouts to the rich ". In fact, we have done something rather modest this year. We have valorised by 10 per cent. the threshold for investment income surcharge. I say to the hon. Member for Sheffield, Heeley (Mr. Hooley) that the point that he made does not have to be rammed down our throats. It was one that we made with great consistency during the years that we were in opposition. We are acutely aware of the plight of those who have built up a small investment portfolio over the years and perhaps have not seen it perform too well latterly and have seen the real value of the return diminished very sharply. On top of that they have had to carry a swingeing burden of taxation.

I have great sympathy with the sentiments expressed by the hon. Gentleman. Indeed, as I said, I made comparable speeches in opposition. On this occasion we have felt it possible—and some of my hon. Friends may feel that it is not enough, but I hope they will bear with us—only to revalorise by 10 per cent. and put up the threshold from £5,000 to £5,500. I assure the Committee that this is an area to which we shall, and indeed must, return.

I conclude by saying to members of the Opposition Front Bench that they, or the organisations which they affect to represent, all too often press for greater investment in British industry and yet in the same breath are prone to discriminate against the investor. I hope that that is not an inconsistency of which we shall ever be accused, because I remind the Committee that, as the hon. Member for Gateshead, West casually pointed out, last year we raised the threshold for investment income surcharge fairly substantially.

I hope that I can reassure the Committee, those who are involuntarily pressing for the abolition of investment income surcharge, those who want its amelioration for the retired and those who, like my hon. Friends, feel that it is necessary to take a far-reaching and radical look at the whole area of surcharge that we shall come back to this. I hope that on that basis the Committee will not feel it necessary to vote on this group of amendments.

Mr. Horam

This has been a brief but rather happy debate, and I feel that my small probing amendment has achieved its purpose.

The hon. Member for Knutsford (Mr. Bruce-Gardyne) put a fair point when he said that investment in any sphere should be treated in the same way, and that there should be no distortion as between housing, industry, and so on. I entirely agree with him about that. I was delighted to find that there was some accord between us. Needless to say, Knutsford having united us for once, Wolverhampton came along in the nick of time to divide us once again.

I am afraid that I could not agree that the system should be wholly neutral. Indeed, if I had any preference at all, I should be in favour of commercial investment as opposed to other sorts of investment, whether it be in housing or anything else. The economy has for too long been adversely affected by excessive investment in housing as opposed to poor investment in other spheres. That is something which I hope the Government will tackle much more toughly than they have done so far.

However, I think that all who have participated in this brief exchange will recognise that this is a subject that goes far wider than the investment income surcharge. One is dealing with a whole range of economic matters here, which have to be got right if this sort of distortion, which has been prevalent for many years under various Governments, is to be changed in a way that will help the economy. Equally, however, it is fair to say that if one wants to do something about that, it does not imply any change in the differential between unearned and earned income. It simply means that one should have horizontal equity between different types of investment. That is all that one should have.

Mr. Budgen

What on earth does that mean?

Mr. Horam

It simply means that one treats all types of investment in the same way for tax purposes.

Mr. Douglas Hogg

Will the hon. Gentleman give way?

Mr. Horam

No, let me finish the point. [Interruption.] I think that the hon. Member for Wolverhampton, Southwest (Mr. Budgen) simply does not understand the point. The hon. Member for Knutsford was making the point that there was distortion in the system as a result of the way in which it operates now. All that I was saying was that that does not mean that one should change the arrangements as between unearned and earned income. It simply means that one gets the system for unearned income on the same basis for all types of unearned income, wherever it may be disposed. That is the simple point.

Mr. Budgen

I see.

Mr. Horam

I am glad that the hon. Gentleman understands these Byzantine arguments.

It should also be said, in reference to what the Minister of State said, that Lord Barber as he now is thought fit to carry on with some differential between unearned and earned income when he looked at the whole system of taxation in 1972. He was not persuaded, therefore—and nor, presumably, have any Conservative Government so far been persuaded—that it was right to abolish the differential about which we are talking. The Conservatives have recognised therefore that, whatever minority views there may be, there is justice in taxing unearned income more heavily than earned income. That is surely right.

I was sorry, none the less, that it was made plain that the Government intend to embark on a further series of reliefs for these people. We are talking about people who have very considerable wealth, and in the final analysis we are talking about an equitable taxation system, as we have been for the last three or four hours. I am sorry that the Minister of State did not address himself to this point. I know the arguments that he has put in the past about the considerable effect of inflation, for instance, on the incomes of people with small amounts of investments. That is a fair point. None the less, there is a wider point, to which he simply failed to address himself, about the treatment of people in this category and those who have no investment income at all, who are the vast majority, and the sort of lifestyle that they have to adopt as a result of the tax changes made by the Government.

Mr. Budgen

I should like to take up the hon. Gentleman's point about this being concerned with people with considerable wealth. Does he agree that people with considerable wealth are able to avoid the effect of the investment income surcharge? We are talking about people with modest capital sums, perhaps £50,000 at most, who cannot therefore avoid the effect of inflation and are very much affected by it.

Mr. Horam

The hon. Gentleman cited £50,000 as the modest sum that he had in mind. Offhand, I do not know what proportion of my constituents have £50,000 of capital. It is certainly less than 1 per cent. Even if one accepts the point that many very rich people avoid this tax to a considerable degree, the fact it that many affluent people pay it, and rightly so.

When this part of the Government's policy is set against that which they felt unable to do on the reduced rate band and the taxation of income at the lower end of the scale, the contrast is great. The Minister did not address himself to the issue of equity.

11.45 pm

We do not intend to press the amendment, for the sensible reasons that have been given. It is impossible under the rules of order to increase taxation, which is what we want to do. It was not our wish to revalorise the investment income surcharge and we were not able to table an amendment that set out that which before us has stimulated a sensible debate and I am sure that we shall return to it subsequently. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 17 ordered to stand part of the Bill.