§ Order of the Day for the Second Reading read.
§ THE UNDER-SECRETARY OF STATE FOR THE COLONIES (LORD ARNOLD):My Lords, last year there was a debate on the Second Reading of the Finance Bill in your Lordships' House, and during that debate the view was expressed that there should be some financial discussion on the day when the Second Reading is moved. This year there has been intimated to the Government, through the usual channels, a desire for some discussion this afternoon. In these circumstances, and as this Bill enacts the first Labour Budget which has been presented to Parliament, it may not be inappropriate if, in moving the Second Reading, I touch briefly upon some of the broad principles of Labour finance. I do not, however, propose to deal with individual taxes in detail, because I understand that it is not usual to do so in your Lordships' House. I will confine myself to certain general principles and considerations bearing on the raising of revenue. I will not to-day go into questions of Expenditure. This is a Bill to raise money not to expend money, and there are other occasions for discussion on expenditure. Indeed, one such debate took place in your Lordships' House two or three weeks ago.
Now, Labour financial policy as regards taxation is, in the main, based upon two principles. First, the taxes should be equitable, and, secondly, they should be economically sound. That a tax should be equitable means, of course, that it should conform to the well recognised maxim of ability to pay. The view of the Labour Party is that there is a figure of income, which is at present fixed at £250 a year, below which there should be exemption from taxation on income and on necessaries. I maintain that the theory underlying this policy is based on an unshakable foundation, which is that there is a certain minimum standard of living below which there should be no taxation of income or of the necessaries of life; for example, food taxes, because such taxes would eat into the margin which is essential for health and efficiency. In short, to impose food taxes on persons with less than £250 a year would be wrong for two reasons. In the first place, 6 there is no real ability to pay such taxes, and, in the second place, they would be economically unsound. They would be economically unsound because they would decrease the physical efficiency of the people which, of course, it is the duty of the Government so far as it can to maintain at as high a level as possible.
The Budget of this year has been constructed in accordance with these principles of which I have been speaking; so when the Chancellor of the Exchequer found himself in a position to make remissions of taxation it was only natural that the food taxes—that is, the taxes n sugar and tea—were the first to receive his consideration, and out of total remissions under this Bill, which in a full year will amount to £47,943,000, the relief given in the remission of the sugar and tea and other food duties amounts to £25,193,000, and of the balance of £22,750,000 rather more than half, or £12,500,000, is absorbed by the abolition of the Corporation Profits Tax. The main lines of the Budget met with a large measure of support, at any rate in the first instance, in almost all quarters; in fact, the Chancellor of the Exchequer was told that had the late Government been in power their Budget would have been practically the same as his. I must confess it is a little difficult to believe this.
§ THE MARQUESS OF SALISBURY:By whom was he told this?
§ LORD ARNOLD:Words to that effect were used in another place. I confess it is a little difficult to believe this in view of what happened in 1922 and 1923, in each of which years it was possible to give substantial remissions of taxation. There was a substantial surplus in each of those years; that is to say, the Chancellor of the Exchequer had the same opportunity as the Labour Government has had. But what happened? In those two years, 1922 and 1923, taking them together, remissions were made from direct taxation to an amount of about £90,000,000 a. year while, on the other hand, the remissions made in respect of indirect taxation in those two years, taking them both together, were only about £22,000,000. That is to say that the relief which was given to the direct taxpayers in those two years was about four times as great as the relief which was given to the indirect 7 taxpayers. In these circumstances, I think that a little scepticism may be pardoned when it is suggested that if our predecessors had been still in office the Budget would have been practically the same as the present Budget.
I think this scepticism is all the more justified in view of the fact that whereas, as I have said, in the first instance the Budget was received with a great deal of approval, there gradually emerged a more critical line which concerned itself, in part, with a proposition which always seems to excite great interest in Conservative circles. What is that proposition? It is that there ought to be a certain balance—what exactly is the balance is never very clearly defined— between the proportions raised by direct and indirect taxation. I want to deal with this matter because, in my view, there is hardly any other financial subject on which there is more unsound discussion than on this one. It is true that it used to be deemed desirable to maintain a balance, formerly half and half, between the amounts raised in our Budgets by direct and indirect taxation. But this theory is not really based upon any scientific principle. It had been abandoned in practice before the war, and it has been abandoned still more since. I have agreed that taxation should be imposed, in the main, in accordance with two principles—that it should be equitable, and economically sound. Those are the main principles which should govern the tax system, irrespective of how the proportions between direct and indirect taxation work out in the result. In short, the theory that you must maintain a certain balance between the two kinds of taxation is purely arbitrary, and leaves out of account altogether the overriding considerations of equitable and economically sound finance.
I believe this view that I have been advancing about this question of the proportion between direct and indirect taxation is one which is based on scientific principles of taxation and finance; in fact, I do not believe that scientifically it can be attacked. There is, however, another standpoint from which what I have been saying may be criticised; that is, that it is wrong to raise too small a proportion of the national Revenue from indirect taxation because such a policy means that large numbers of the people 8 of the country who have votes have not a sufficient responsibility for national policy and national expediture. This is an argument which, I confess, has never seemed to me to have much real substance in it. Irrespective of anything else, there is, I submit, one supreme consideration which is, in itself, a sufficient reply. It is this—that the workers more than any other class feel the effects of any mistake in policy. They feel it first, and most, and last. Therefore, apart from taxation (and the workers do pay heavy taxes), they have every interest and motive to exercise the suffrage wisely and with a full sense of responsibility.
While many opponents of Labour policy will agree that indirect taxation in the shape of the food taxes has been too heavy, yet they contend, on the other hand, that the Labour Party is not sufficiently mindful of what are deemed in certain quarters to be substantial reasons against the present direct taxation and particularly the present high Income Tax. I should like to examine two or three of the reasons. The first one which I will take is that the Income Tax ought to be reduced, because in this way a great stimulus will be given to those engaged in industry and commerce. My reply to that is, not that the argument is untrue, but that it is greatly exaggerated. Let me look at the actual facts and analyse what would happen. A reduction of the Income Tax would, if it could be a considerable reduction, act as a stimulus to those classes of the business and commercial community who are working for themselves—that is, who are in business on their own account—but only a very small proportion of the Income Tax comes from, such persons. On the other hand, a reduction of the Income Tax could not act as a stimulus to those who are drawing their income from War Loans or other loans, or from rents or mortgages, or from debenture interest, or preference dividends, or who are ordinary shareholders in public limited companies. It must be remembered that the work of limited companies is for the most part carried on by paid officials and employees, who will continue to perform their duties and conduct the business much the same whatever the Income Tax is, and therefore their activities cannot really be stimulated by a reduction of the Income Tax. I have now enumerated some of the chief sources from which the Income Tax is derived, 9 and I say that if the whole matter is examined closely, it will be found that very much the major portion of the Income Tax is paid in one way or another by persons who are, as a matter of fact, entirely outside the area where this stimulus theory could operate. It is for these reasons that I maintain that too much is claimed by the advocates of what I may call the stimulus theory.
There may be more force, it is true, in the contention that the effect, especially psychological, of a reduction of the Income Tax would be to act as a stimulus as regards extensions of business, new enterprises, and so forth. But for this factor to operate in any material degree it would be necessary for there to be a much bigger reduction of Income Tax than seems at all likely in the near future. If the Income Tax were to be halved, the psychological effect and the stimulus might be appreciable, but it can scarcely be contended that a reduction of the Income Tax by, say, sixpence or so would be sufficient in amount to cause persons to engage in new undertakings which otherwise they would not enter upon.
The next reason in favour of a reduction of the Income Tax which I will examine is that a reduction ought to be made in order to increase the amount of capital which is saved, or, at any rate, to increase the possibilities of savings. It is, however, by no means clear that anything like the whole amount remitted by a reduction of the Income Tax is saved. Indeed, in these post-war days, when so many people are feeling the burden of high taxation and high prices, it seems reasonable to suppose that a considerable proportion of money coming from reduced taxation is not saved but is spent. At any rate, what exactly happens must be a matter of considerable doubt, and I pass on to another consideration in this connection, which is that about £300,000,000 of national Revenue goes back to the wealthier classes in the form of interest and redemption of War Debt. Therefore, looking at the matter in this way, more than the whole of the Income Tax and more than half of the Super-tax are not raised for expenditure in the ordinary sense of the word; that is to say that this large amount of about £300,000,000 goes back again to the taxpayers, in this way adding to the reservoir for savings.
10 Another reason advanced against a high Income Tax by some people is that they think it is so keenly felt, that in order to avoid it capital will be sent abroad. Those who make this objection overlook, for one thing, that sending capital abroad does not help a man to escape Income Tax, unless he is prepared to try to defraud the revenue, which, by the bye, it is not very easy to do. A man in this country is liable for Income Tax wherever the income is derived, either here or abroad. Therefore, if a man sends his capital abroad he is just as liable to pay tax on the income from that capital as if he had kept it at home. I will only add that the number of people who, in order to escape taxation here, not only send their capital abroad but who go with it and live abroad must be very small. The price to be paid—that is, exile from England which is involved—is too great.
But there is another argument, which, though somewhat vague, seems to come to this, that our higher rate of taxation has such a generally depressing effect upon the whole trade position of the country that capital can find more remunerative markets abroad. It does not, however, seem necessary to take these suggestions too seriously. The question naturally arises if capital is to go abroad, where is it to go? Let me examine this problem. Investments in our Dominions, Colonies and Protectorates are, for the most part, in the shape of Government and similar Loans, but there is, of course, a limit to the demand for Loans, though I am glad to think that as an outlet for British capital such investments are as good as ever they were. Let me, however, look at the position in some other parts of the world. South America does not offer the same scope nor the same attraction for new issues as in pre-war days. The same applies to the Far East, though I should be sorry to think that some capital cannot profitably find a home in that quarter of the globe. As regards the United States of America, if investors choose to send their money there, they will find that they have the privilege of paying not only Income Tax in this country, but also United States' Income Tax.
I do not wish to press any of these points too far. All I am saying is that the opportunities for investment abroad are not so unlimited as some people seem 11 to suppose. A certain amount of such investment year by year is desirable, but when it is suggested, because of high taxation and so forth here at home, that the export of capital abroad will take place in undue amount, the reply is, as a review of the position shows, that such a proceeding is not likely to happen. The good opportunities are not sufficiently numerous. At one period prior to the war it became the fashion for certain people to make nearly all their investments abroad. But I know that in not a few cases this course was repented of and later on investors brought much of their money back home again. They had found that the old country was the best and they were wiser, if poorer, men.
I submit, then, that some of the prevailing objections against the present rate of the Income Tax are a good deal overstated. Moreover, whatever differences of opinion there may be as to that, it is necessary in these questions of taxation and finance to survey the problem as a whole and to balance various considerations, and then try to arrive at a policy which possesses the greatest net advantages for the country as a whole. I will not weary your Lordships with going through various figures and calculations in order to prove the point I am going to make, more especially as I said I was not going to deal with questions of Expenditure to-day. I scarcely think, however, it would be disputed that at present further reductions in the Income Tax will in the main be made at the expense of long overdue outlay on social objects. Therefore, your Lordships will scarcely expect a Labour Government to do otherwise than scrutinise closely suggestions that a further reduction of the Income Tax is of greater importance than anything else.
I emphasise again that in these matters it is necessary to survey the problem as a whole and to take into consideration large questions of policy. It will, I am afraid, always be found that the problem of taxation chiefly consists of a choice of evils. It is a question of balancing things and having regard to the fact that there have already been substantial reductions of the Income Tax in both 1922 and 1923, amounting to 1s. 6d. in the £, or a total remission of £80,000,000 a year, and that this Finance 12 Bill abolishes the Corporation Profits Tax and the Inhabited House Duty, both really forms of Income Tax—and the repeal of these two taxes will mean in all a further loss to the Revenue in a full year of £14,500,000, making £94,500,000 in all—I say, in view of these facts, it seems not unreasonable to proceed for the time being upon the plan of doing something so far as possible to meet other and even more urgent claims. Please observe, my Lords, that I say for the time being, and I am not suggesting that the present rate of Income Tax should continue indefinitely.
I have now dealt with some of the main principles and considerations which underlie the provisions of this Bill. As I stated at the outset, I do not intend to discuss individual taxes in detail, because that is not usual in your Lordships' House on this occasion. If it were customary I should certainly have wished to say something about the McKenna Duties. I do not, however, propose to detain your Lordships longer this afternoon, though there are many tempting themes in connection with the Budget which I should like to touch upon. In view of the fact, however, that the Finance Bill passed both its Second and Third Readings in another place without a Division, it is evident that there have often been Budgets more controversial than this one, and, indeed, it seems only fair to assume that the main provisions of this Bill are deemed to be just and right. I beg to move.
§ Moved, That the Bill be now read 2a —(Lord Arnold.)
§ THE EARL OF MIDLETON:My Lords, it is well known that discussions on Finance Bills in your Lordships' House are, in a sense academic, and I should not have risen after the speech of the noble Lord had it not been for the fact that he laid down certain principles which ought not to pass without brief comment. The noble Lord has made statements which we must challenge as being entirely opposed to our view. He spoke, without apology, of the difference in regard to the reduction between direct and indirect taxation during the last three years, and he said that the balance rested on no ascertained basis.
§ LORD ARNOLD:No scientific basis.
§ THE EARL OF MIDLETON:He, if I may say so, is comparing like with unlike. He proceeded to say that last year, or the year before, some £90,000,000 had been taken off direct taxation and only £22,500,000 off indirect taxation, but he forgot to remind your Lordships that the amount levied in direct taxation is out of all proportion to the amount levied in indirect taxation and, therefore, the comparison he made in this respect is wholly inapplicable. As a matter of fact, nearly two-thirds of the Revenue is raised by direct taxation—Income Tax, Super-Tax and Estate Duties—and it is not a question of whether or not the sum raised is out of proportion merely; the question is whether it is not acting in a burdensome way on trade and actually checking the entrance into the Exchequer of other revenue to which the Exchequer is fairly entitled. As an illustration, let me deal with the strange statement of the noble Lord that we need not worry if we do pay extra Income Tax because £300,000,000 comes back to us in the way of Grants. In the first place, I challenge the statement, and I do so after having listened to many Budgets in the House of Commons. I have heard Chancellor of the Exchequer after Chancellor of the Exchequer admit that of all Government expenditure the most profligate is that on Government Grants.
§ LORD ARNOLD:The noble Earl will allow me. My point was that it comes back in interest on the War Loan into the pockets of the taxpayer without any interference.
§ THE EARL OF MIDLETON:The noble Lord used the word Grants.
§ LORD ARNOLD:No, pardon me.
§ THE EARL OF MIDLETON:I think he will find that he used the word Grants. If not, I apologise for my observation. My point was that any Government Grant is often dissipated and does not produce the result intended. There is one other point in the Finance Bill which I hope the noble Lord will consider. Some progress has been made in regard to the fairer taxation of land. The only thing I ask is that land should be treated as a business; that operations with regard to landed properties should be treated in the same way as you treat a business. If 14 that is done all cause of complaint will end, I do not know whether the noble Lord has had to study this particular question. It is only by very slow steps that successive Chancellors of the Exchequer have come to regard the taxation of landed property as if it were not something abnormal. But there is nothing abnormal about it. Such profits as it produces should be taxed in exactly the same way as the profits of a business.
I will give the noble Lord one example, and this is the last matter with which I shall venture to trouble your Lordships. At this moment there exists, in regard to the taxation not only of land but of other settlements, a system which presses in a most extravagant way upon land. Supposing, for the sake of argument, that a man, through business or by other means, obtains a sum of £2,000 a year free of tax. His assessment for Super-Tax is at £2,000 a yearplus Income Tax—say, for the sake of argument, £2,700. That is fair. He has also covenanted to pay, or it has been covenanted to be paid for him, as a portion of his estate, £2,000 a year free of tax, and when he comes to deduct that sum, over which he has no control whatever and of which he does not see a farthing, he is told: "You could have done that, but it is not £2,000 a year plus the tax, but only £2,000."
That is because, in the year 1918, by a rule of the Finance Act which I do not suppose was ever read by any member of the Lower House who could deal with it, it was specially stated that all such settlements free of tax should be disregarded for the purposes of that Act, and therefore the unfortunate person, who finds himself tied down to pay a sum which perhaps he has no desire to pay, finds that he has to pay Super-Tax of 4s. or 5s. in the £ on £700 a year of which he receives nothing. I have put that case before the Treasury. It was perfectly indefensible, but they said that to change it would be to reduce the amount coming into the public Exchequer. I do not think that this argument would stand the racket of fair consideration, and I suggest to the noble Lord that it should be considered for another year.
Speaking in general terms, the noble Lord told us that the problem should be stated as a whole and that it was a choice of evils. I sincerely trust that, when the 15 choice of evils takes place next year, he and his colleagues will not forget that, unless they see their way to reduce the burdensome taxation on trade, now far in excess of that of any foreign country, the difficulties of unemployment must unquestionably continue to be not merely pressing but permanent.
§ VISCOUNT GREY OF FALLODON:My Lords, I wish only to offer a very few and, I am afraid, somewhat perfunctory observations on the Finance Bill. I am not sure that they will be entirely in line with the objections taken by any particular Party. The reason why my observations will be few is that I want to point out that I do not think it possible to have any really useful discussion by following the arguments of the noble Lord who introduced this Bill. And for this reason: he started with a premise that the Chancellor of the Exchequer was in a position to remit taxation. It is that premise that I think is mistaken. If the Chancellor of the Exchequer were really in a position, looking not only to the present but to the future, to remit taxation I should not be prepared to find much fault with this Budget. I should regret the remission of a portion of the Entertainment Tax, because I doubt whether that will really inure to the benefit of those whom it is intended to benefit, and I think that if you wish to convey a benefit you might have found better means of doing so than by the remission of the Entertainment Tax. But that is a detail into which I will not go.
My feeling is that, although at the moment the Chancellor of the Exchequer is in a position to do without the money which is remitted in the Budget, he had before him, and he and the Government knew that they had before them, a very large increase in the expenditure of this country. The taxes which they are in a position to remit, so far as the expenditure of this year is concerned, will have to be replaced by increased taxation in the coming year. To consider the expenditure lying ahead was part of their old policy, and to some extent of the policy of every Party, and with the admitted necessity for increased expenditure on a very large scale ahead of us, and, apparently, without the prospect of corresponding economies in other branches of expenditure to meet them, I think that 16 this is really an improvident Budget. I know that it is a popular Budget, but nearly everything that is improvident is popular at the moment. My real objection to it is that it will, in the long run, be found to be an improvident Budget, and that next year the Chancellor of the Exchequer, whoever he may be, will be faced with the necessity of imposing new taxation. That will really bring us to the test of whether the Government, if they are in office a year hence, really think that they can get much more revenue on economically sound principles by increasing direct taxation.
I do not care at all about the balance between direct and indirect taxation, as an abstract proposition. If the Revenue of the Exchequer were within such limits that the whole of it could be raised by direct taxation, and were so moderate in amount that it would not press upon the springs of industry, I would not mind seeing the whole raised by direct taxation. What I feel is that the present high rate of direct taxation does press upon the springs of industry, and really deprives the country of some of that elasticity which is necessary for its recovery from the ruin wrought by the war. If it is already pressing upon the springs of industry, I should very much like to know—though we cannot expect the Government to tell us now—how it is in their minds, if they are in office next year, to meet the gap between Revenue and Expenditure which will undoubtedly arise next year, and will be larger than ever because of the remittance of taxation this year. If they are going to meet it by increasing direct taxation, they are going, I think, to deal a blow at the recovery of British trade.
There does really lie between us and some of the supporters of the Labour Government, if not the noble Lord opposite, this difference of opinion, that some of his supporters believe that all surplus income should go to the State. We believe, or I, at any rate, believe, that if the State is to have all surplus income, that is to say, if the capital of the country is to be placed at the disposal of the State, then those resources which are now used in the form of surplus income to increase and develop the productive capacity of the country will not be used by the State to anything like the same extent. If the Government, by these 17 remissions of taxation, were not preparing the way for new direct taxation which will have to be imposed, I should not desire to criticise the Budget, but it seems to me that the Budget as it stands, with its remissions of taxation brought in with the knowledge of the increased expenditure which is ahead of us, and apparently without much prospect of economies in expenditure, is a Budget which is really clearing the way, if it is not actually intended to make a case, for some new taxation next year. I do not believe that you can find new taxation next year, if it is required to replace that which could now be imposed, without pressing more hardly upon the trade and prosperity of the country than the actual taxes which are removed under this Budget.
Then I come to the other point which seems to me to make it rather unprofitable to follow the arguments of the noble Lord. He said, as he was entirely justified in saying, that this Budget took no account of Expenditure. Now, Expenditure is really, it seems to me, of the essence of the question.
§ LORD ARNOLD:Will the noble Viscount permit me to interrupt? I said that I would not this afternoon deal with Expenditure. I did not say that Expenditure had nothing to do with the Budget.
§ VISCOUNT GREY OF FALLODON:I entirely accept the noble Lord's statement as to the way he put it, and I said he was justified in saying that he would not in this discussion deal with the question of Expenditure. That is my whole point. It is most difficult on the Budget, of course, if no account is taken of Expenditure, to have a profitable discussion. If it were not for Expenditure ahead I should not be discussing the Budget. I am, however, not going into it any more than I have done, but I wish to point out that no reduction of taxation will be really equitable or economically sound if you have heavy Expenditure ahead and you do not see your way to meet it. I am sure of this, that however much you reduce taxation on the wage-earning classes, what the noble Lord opposite said is perfectly true, that if there is distress—he did not use that word but I think he meant that—in the country, and trade is bad, it is those classes who suffer most.
18 It is not enough to say with regard to Expenditure ahead, as the noble Lord did say, that it is long overdue. That is not the question. The question is whether the country can afford it, and I feel the Budget has not taken account of what Expenditure is ahead, and that if we find new taxes are necessary next year, and those taxes have to be taxes which press upon the industry of the country, this Budget, though it appears to be equitable in relieving taxation on the wage-earning classes, will really, in the future have provided for a position which is not economically sound, and in which the greatest burden must inevitably fall upon the poorer and wage-earning classes. That is my real objection to the Budget—that it is put before the country as a popular and equitable Budget, but unless the Government can justify the remissions of taxation by economies in the national Expenditure, and by keeping the national Expenditure within the national means, this cannot be said truly to be a Budget which is either equitable or economically sound.
§ On Question, Bill read 2a: Committee negatived.