§ 3.28 p.m.
§ Baroness Serota rose to move, That this House takes note of the Report of the European Communities Committee on Income Taxation and Equal Treatment for Men and Women (1st Report, 1985–86, H.L. 15).
§ The noble Baroness said: My Lords, I beg to move the Motion standing in my name. I do so with some diffidence and not a little trepidation, as it is the first occasion on which I have had the responsibility for presenting such a report to the House for debate.
§ Following so able and well-regarded a chairman as the noble Lord, Lord Seebohm, is no easy matter, especially as I speak on the difficult and sensitive issues that the report raises as some of the many people who, as we say in the first paragraph of the Select Committee's report, find the subject of income tax systems both complex and forbidding. But the subject is obviously a very important one, affecting all our lives very directly—sometimes even painfully! And it is linked, in the context of our inquiry, with another matter of wide public interest and concern; namely, the question of the equality of treatment of men and women in our society. Moreover, it so happens that the committee's consideration of these matters, stemming from what is in fact a discussion document, issued by the European Commission, has come at a particularly opportune time for the United Kingdom, when arrangements for personal taxation have been under review by the Government for some time and when the need for radical change in the present system is now widely accepted. The Select Committee were therefore in no doubt that their report should be drawn to the attention of the House in view of the important questions it raises.
§ To assist the committee in handling the complexities of the subject, Mr. Nicholas Moms of the Institute of Fiscal Studies acted as our specialist adviser, and I should like, on behalf of all of the members of the sub-committee, to take this opportunity to thank him for the invaluable advice and guidance he gave us throughout the inquiry. We are all also greatly indebted to our Clerk, Mr. Lionel Rutterford, for his constant help and support. I must also express the 418 thanks of the committee to all those individuals and organisations who submitted evidence, both written and oral, during our many sessions.
§ As I have said, the European Commission document, the Commission memorandum to the Council on Income Taxation and Equal Treatment for Men and Women, is essentially aimed at promoting discussion and encouraging member states to review their arrangements for personal taxation within the general context of the Community's firm and long-standing commitment to the promotion of equal treatment for women. I must stress here that the document is solely concerned with earned income from employment and not with the taxation of unearned income. The memorandum makes no specific proposals on the characteristics of the taxation systems which individual member states should adopt.
§ As we point out in Part 2 of our report, the Commission have been taken to task by both the European Parliament and by the Economic and Social Committee for not having come forward with firm proposals and a draft directive on equal treatment in fiscal legislation. The memorandum, very usefully in my view, surveys the taxation systems of the member states and analyses the ways in which these systems exhibit direct or indirect discrimination against women. Its concept of indirect discrimination is an important one, and I shall return to it in a few moments.
§ The Commission conclude that a system of "totally independent" taxation of earned income is to be recommended from the viewpoint of achieving equal treatment of husband and wife. As we note in the report, however, there does seem to be a deal of confusion about just what is intended by "totally independent" taxation. I hope that, if it does nothing else, our report will serve to clarify understanding of these complicated matters.
§
There is no doubt that many taxation systems do discriminate against married women and that the system in the United Kingdom must be among the most objectionable from this viewpoint. As stated in the memorandum—and quoted in paragraph 7 of our report—one can assume that the various systems of income taxation in member states are not the result of any deliberate discrimination against married women, but of the historical fact that married women were regarded as economically dependent upon their husbands, in whose name property was held and income received. The position in the United Kingdom in this context is succinctly conveyed by a comment we received in evidence (and I quote):
A distinguished judge and legal historian announced, in the 18th century, that in marriage husband and wife are one, and the husband is that one".
§ As recently as 1970, Section 37 of the Income and Corporation Taxes Act of that year provided that the income of a married woman shall be deemed for income tax purposes to be her husband's income and not hers; but in society today, when the role of married women in the economy has radically changed, this provision is now widely regarded as objectionable in principle and even offensive to many. Other aspects of the system that cause concern stem from this basic position. For example, the system discriminates in not requiring husbands to divulge information about their 419 income, whether earned or investment, to their wives, whereas wives enjoy no such right. I shall return to this question of privacy shortly.
§ There is no need for me to catalogue further the deficiencies in our taxation system; these are generally recognised and now widely accepted, not least by the Government themselves. In 1980, the Government published a Green Paper The Taxation of Husband and Wife, the relevant aspects of which are referred to in Part 3 of the report. The foreword by the then Chancellor pointed to the growing criticism of a taxation system which takes no account of the enormous changes that have occurred over the last hundred years or so in the economic status of women, and particularly of married women. The Green Paper accepted that the time was ripe for a review and discussed the various options, including a move to a new system of mandatory independent taxation.
§ It must be said that there then followed a long period during which, so far as the outside world could discern, nothing further seems to have happened, and no analysis of the views of interested organisations has so far been published by the Government. But we point out in our report that there is an analysis on record undertaken by the Institute for Fiscal Studies of the responses that were received to the Green Paper, a large majority of which were in favour of a change to a mandatory independent taxation system. But in his Budget speech last year the Chancellor announced that another Green Paper on personal taxation was to be issued later in the year. In fact, this second Green Paper has yet to materialise, and I hope that the noble Lord the Minister who is to reply to the debate will be able to give the House some firm information today on when it will finally appear.
§ The fact that we are in this position in the United Kingdom with regard to tax reform naturally affected our inquiry. If there had been no clear commitment by the Government to change and no indication of the Government's thinking, we could have done little more than highlight the objections to the present system from the viewpoint of equal treatment and urge upon the Government, rather as the Commission has done, the merits of independent taxation. As it is, we felt hound to consider how far the new system that is apparently to be proposed by the Government, so far as this had been defined, meets the Community's stated aim of equal treatment. Specifically, we felt bound to examine the system of fully transferable allowances which the Government now seem to favour. Indeed, much of the evidence we received during the course of our inquiry was concerned with this topic.
§ The idea of transferable allowances certainly has attractions. In such a system, every adult would receive the same, single allowance. A husband whose wife was not working could set her allowance as well as his own against his earnings. The same thing would happen the other way round: a wife supporting her husband could use his allowance. The system would thus be symmetrical as between spouses; there would be no direct discrimination against women. The committee, however, after careful consideration, concluded that there would be substantial indirect discrimination against women in any such system. 420 This arises because of the very different position of women in society—the fact that, generally, husbands are the main earners in families and that the paid employment of wives is much more likely to be interrupted, not least of course by having, and caring for, children. Certain effects of transferable allowances would therefore, in practice, bear unequally on men and women. A husband supporting his non-earning wife would enjoy her single allowance. But this would mean that if his wife were to take up paid work every pound of the additional income she contributed to the family would be taxed at her husband's marginal rate. The committee received convincing evidence that this would act as a significant disincentive to married women seeking paid employment.
§ There is another aspect of this disincentive effect. A wife starting employment would expect to enjoy her allowance but it would first have to be recovered from her husband; and he would then suffer a reduction in his take-home pay. Some witnesses expressed great concern that many husbands would resent this reduction and would put pressure on their wives not to take up paid employment. The committee felt that this interaction between the tax affairs of husband and wife which would be caused by transferability would be difficult for many people to understand and could well lead to discord between spouses. The committee agreed with the view of the Equal Opportunities Commission, given in evidence, that such a system could not be regarded as truly independent taxation.
§ We are here touching on the delicate relationships between married couples on financial matters, and the committee received disquieting evidence on this subject. Many wives still do not know how much their husbands earn—and many who think they do know believe the amount to be less than it is. Often, it appears, increases in a husband's earnings are not fairly shared with his wife. We were particularly indebted to Dr. Hilary Land for her written evidence on these points. All this is no doubt reflected in the concern about privacy to which I referred earlier. I am sure that all noble Lords will agree with me that it is sad that privacy between spouses about their financial affairs should still be seen as such an important issue. However, we must deal with things as they are. The Equal Opportunities Commission commented that lack of privacy under the present taxation arrangements was "one of the sources of most intense criticism" they had received. But the scope for privacy would be little better with fully transferable allowances. Where a wife earned less than the single allowance—and it must be remembered that there will be many such women since the great majority of working wives are in part-time, low-paid employment—the husband would know her earnings from the effect upon his own of the recovery of her allowance.
§ Another factor that emerged from the evidence—particularly that from the Inland Revenue Staff Association—is that because of the interaction that would occur between the tax affairs of husband and wife with transferable allowances, the administration of any such system would be far more complex and certainly more expensive to operate. This is, of course, not an equality-of-treatment issue but it is 421 clearly an important public consideration in the choice by Government of any system to be adopted in the future.
§ It was for all these various reasons that the committee unanimously concluded that the balance of argument was firmly against the introduction of transferable allowances although we were all well aware that this conclusion might well be controversial. The idea that the tax system should support marriage—currently exemplified by the married man's allowance which would, in effect, continue with transferable allowances—is deeply embedded in our thinking. It was with this in mind that the committee comment in their report that the issue of transferable allowances provides a crucial test of the strength of the commitment to equality for women.
§ We all still tend to think in terms of the "traditional" family. A view expressed in the evidence from several bodies was that the system should not encourage wives to take up paid employment. But we must recognise the great changes that have taken place in our society, particularly in recent decades. The fact is, as we say in paragraph 7 of our report, that the traditional family, rightly or wrongly, is no longer the norm. In 1982, for example, the number of married men with working wives substantially exceeded the number with wives not in paid employment. Against this background and the trends in this direction, it seems more appropriate to assert that the system should not discourage wives from working. At the end of our analysis, therefore, we agree with the principal conclusion of the Commission that the aim of equal treatment is best served by a system of totally independent taxation of earned income.
§ I had hoped to deal briefly with three further points to which we all attach great importance; but in view of the time and the fact that a number of your Lordships are waiting for the business that follows, I will simply confine myself to saying that the questions of child benefit and payment of child care allowances, questions of child care expenses and the very complex but important issue of how to deal with investment income were all matters to which we gave very careful consideration. I know, however, that several noble Lords, and particularly members of the sub-committee who are going to take part in this debate a little later today, will be dealing with these issues and will deal with them from their experience and in far greater depth than I can at this moment of time.
§ I will only conclude by expressing my personal thanks to all the members of the sub-committee for their patience and courtesy and for the way in which they applied their knowledge and experience to this very difficult topic. We all hope that the Commission's memorandum and our report on the issues it raises will be fully taken into account by the Government in framing their proposals. I beg to move.
§ Moved, That this House takes note of the Report of the European Communities Committee on Income Taxation and Equal Treatment for Men and Women (1st Report, 1985–86, H.L. 15).—(Baroness Serota.)