PERSONAL RELIEFS (Hansard, 1 May 1984)

§ Mr. John Maples (Lewisham, West)
I shall consider the underlying reasons for raising tax thresholds because the amendments debated so far have focused narrowly on the age allowance and not on the reasons for the measure.
The theory outlined by my right hon. Friend the Chancellor in his Budget statement was that by raising tax thresholds he would be able to alleviate the poverty and unemployment traps. Few people, however, will be taken out of the poverty trap by the measure. The answer given to a recent parliamentary question was that, of the 850,000 people who would be taken out of tax by raising the thresholds, only about 100,000 would have children and therefore be in the poverty trap and, possibly, the unemployment trap. According to a recent Institute of Fiscal Studies report, the others are mainly pensioners, married women earning a second income and young single people. Only 8 or 9 per cent. of those who are helped by over-indexing tax thresholds are in the poverty trap. It is an expensive way of taking people out of the poverty trap. As it applies to everybody, it is of greater help to those on higher incomes than to those on lower incomes. It is a massively expensive method of alleviating the impact of the poverty trap, because it requires an enormous rise in tax thresholds.
At present the tax threshold starts at about 35 per cent. of average earnings. Thirty years ago it was 83 per cent. of average earnings. If we seek to cure the poverty trap by 258 raising tax thresholds, we shall have to raise them to 50 or 55 per cent. of average earnings. That is why it is so expensive.
The impact of taxation is only part of the poverty trap. The greater part is the rate at which benefits are withdrawn. That applies to the unemployment trap and the trap which faces pensioners who receive an increase in occupational pensions, because that results in a decrease in housing benefit. They may find themselves paying an effective rate of tax of over 100 per cent.
The extent to which income tax is a factor in those poverty traps depends more on the high rate at which tax starts to bite than the threshold. In effect, people pay a 39 per cent. tax rate, of which 30 per cent. is tax arid 9 per cent. national insurance contribution. If the rate were reduced to 19 per cent. — 10 per cent. tax and 9 per cent. national insurance contribution—it would have a far greater impact on alleviating the poverty trap.
That could be done by lowering, not raising, tax thresholds. By lowering thresholds one can reduce dramatically the rate of tax. Most problems associated with the United Kingdom tax system are the result of the enormous number of exemptions, including personal allowances, which result in more than half of personal income not being taxed. Consequently we have high rates of tax.
One of the most interesting tax statistics is that total income tax revenue as a percentage of total personal income is only about 12.5 per cent. That has been true under both Labour and Conservative Governments since 1955, and probably before. It has varied between 11.5 per cent. and 13.5 per cent. A flat rate tax of 12.5 per cent. —I do not suggest that this can be done, because it would be massively regressive—would raise as much revenue. The average taxpayer in Britain would be amazed if he were told that.
Instead, our system has a low average rate of about 12.5 per cent., but high marginal rates. That is exactly the opposite to what an efficient tax system should be and is caused by the many deductions that are permitted. The major deductions are personal allowances, pensions and mortgages, for all of which there are extremely good reasons. Nevertheless, they cause the high marginal rates of tax which impact the poverty trap. Privileged saving, tax anomalies in saving, the tendency to pay people through fringe benefits rather than in cash, the effect on pay bargaining of employers having to pay a lot of money to give a relatively small net pay increase arise from the massive exemptions and the resulting necessity for higher rates.
I did some simple calculations that showed that if one adopted such a broad brush approach—which would obviously have to be tempered to cope with various problems—a basic rate of tax of 10 per cent. levied up to average earnings, of 20 per cent. to twice average earnings and of 25 per cent. thereafter would yield more revenue than the present income tax system.
There would be problems—now is not the time to consider them — regarding people with mortgages, working wives and the very low paid, for whom special provisions would have to be made, and the pensions system. However, those problems are soluble. If one finds solutions to them, possibilities will arise which will have an enormous impact on the poverty trap and on incentives.
My right hon. Friend the Chancellor, in his Budget statement, showed himself to be an imaginative tax 259 reformer regarding corporation tax. I hope that he will consider the theory of removing deductions and lowering the rates when he reforms income tax. The result would be a fairer, simpler and more economically neutral tax system with a basic rate of tax of 10 per cent. That would have a considerably greater impact both on incentives and on the poverty trap than continuously raising thresholds.

§ Mr. Andrew Rowe (Mid-Kent)
I support with enthusiasm the speech of my hon. Friend the Member for Lewisham, West (Mr. Maples). We should proceed in precisely the direction that he suggested. It bears out what hon. Members have said previously—that if the surveys of the social security system which are being carried out are taken separately from the taxation system, we shall end up with embarrassing nonsense. I hope that the surveys of the social security system will be carried out in such a way as to make possible the sort of progress towards tax reform which my hon. Friend so ably outlined.

§ Mr. Hayhoe
I suspect that we shall not revamp the whole of the taxation and allowance systems at this hour of the night and on this clause stand part debate. I am sure that the Committee is grateful to my hon. Friends for putting their points so succinctly. These matters will be considered from many angles in future.

§ Mr. Fisher
The Government cannot get away with this matter quite so easily and quickly. Everybody, apart from the Chancellor and the Minister, recognises that the attempt to tackle the poverty trap, which must interest any Government with a heart and social conscience, by raising tax allowances is the most expensive and inefficient way that the Chancellor could possibly devise. The Chancellor had many options but perversely chose the most expensive and inefficient. That is a disastrous waste of taxpayers' money if it is his concern—it should be—to tackle the poverty trap. After the change the low paid will still pay more in tax than in 1978 and 1979, so the poverty trap will be unchanged.
The major factor is the unknown one of what the Chancellor will recommend later this month or early next month for child benefit. This is the first Budget in which child benefit has not been included. Why? He should have included child benefit in his calculations. The Minister still has an opportunity to give us a reply. When the Chancellor was asked in the Treasury and Civil Service Select Committee why child benefit was not included, he ducked the question.
Will the Minister have the courage to explain the Government's thinking? It is possible that it has been excluded because it has a different effect on public expenditure totals than does raising tax allowances. That would be a discreditable reason, and the Minister should come clean. It is not too late for the Minister to recommend a change of heart to the Chancellor as a result of this debate and what has been written in the press. Even the Sunday Telegraph and the Daily Telegraph have been urging him to increase child benefit and not to waste money on a general and inefficient attack on allowances. That is not the way in which to help the low paid.
The Minister should listen, even at this late stage, to the voice of the Tory press, get his act together with the Chancellor, and recognise that the correct amount by which to raise child benefit, if he is to give it the same 260 treatment as tax allowances, is at least 95p or £1. I hope that the Minister will take that point on board and that, when he makes an announcement on child benefit, that will be the rate, as anything less will be unjust and unfair and will increase rather than diminish the poverty trap.

§ Mr. Campbell-Savours
Perhaps I might have a few parting shots on personal relief, or the so-called jewel in the crown. Although the Government might claim credit for substantially increasing personal allowances — by 12.5 per cent. this year — the truth is that it is not possible to accept that as a single measure. It must be seen against the background of other taxation measures that the Government have introduced since 1979. They include the doubling of VAT, which is all too conveniently forgotten. It is easy to find money to reduce income tax if one is willing to impose the tax burden on other parts of the taxation system. As my right hon. and hon. Friends have said, the tax burden on the British people is now £18 billion greater than it was in 1979. We should not dismiss that sum as it is making possible the reductions that are now being made.
There have also been three increases in national insurance contributions since 1979. In 1981, the Government refused to index personal allowances for inflation, and they scrapped the 25 per cent. rate band. There might be arguments for and against the 25 per cent. rate band, but it is interesting that last Sunday the Prime Minister, when trying to contend with opinion polls that showed Labour in advance of the Conservatives leading up to the local elections, said that she looked forward to the possibility of reintroducing a 25 per cent. income tax rate band—the same as she was bequeathed by a Labour Government.
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There have also been substantial increases in rates, which are just a local form of taxation. Substantial rates derive from cuts in expenditure. All that has happened is that one tax has been substituted for another. According to the Government's own statistics given in parliamentary replies, it is clear that taxes in the United Kingdom have risen faster since 1979 than in any other European Community country. The truth is that the £1.27 tax benefit resulting from the change in personal allowances will be wiped out for the great majority of the population by the 91p a week duty increases that it has been calculated will fall on every one of our constituents. If we include the additional VAT that is to be imposed on home extensions and fish and chips, there will be no benefit for the average man from personal allowance changes. No one should be duped by the Government's propaganda that, through this Budget, the Conservatives have helped the British people by reducing their tax burden.