Clause 13.—(Charge Of income tax for 1967–68.)
Mr. Iain Macleod
I beg to move Amendment No. 18, in page 16, line 35, to leave out ‘8s. 3d.’ and to insert ‘7s. 9d.’.
The Chairman
It would be convenient if we discussed at the same time Amendment No. 19, in page 16, line 35, leave out ‘8s. 3d.’ and insert ‘7s. 6d.’ and Amendment No. 21, in page 16, line 37, at end add:
(2) Section 220(1) of the Income Tax Act 1952 (reduced rate relief), as amended by section 2(7) of the Finance Act 1955, section 19(2) of the Finance Act 1959, section 12(5) of the Finance Act 1963 and section 1(2) of the Finance (No. 2) Act 1964 shall be amended, as respects the year of assessment 1967–68 and subsequent years of assessment, by the substitution for the words ‘eight shillings and threepence’ in each place where they occur of the words ‘seven shillings and ninepence and by the substitution for ‘4s. 3d.’ and ‘2s. 3d.’ of ‘4s. 0d.’ and ‘2s. 0d.’
Mr. Macleod
That would be convenient, Sir Eric. [column 877]
We come now to what we regard as the most important Amendments. We had hoped to start the day with this debate, but it was decided otherwise. I think that the debates which we have had recently, particularly the debate on the Question, That Clause 11 stand part of the Bill, show that we can do things at midnight which are impossible of achievement at teatime.
The Chancellor of the Exchequer has a number of anxieties, exacerbated no doubt by recent events. He must, above all, try to walk the tightrope between the modest reflation which we and many other people have called for and his anxieties about the balance of payments. The Amendment suggests to him a way in which he could give an incentive to the people. I understand why the Chancellor of the Exchequer, with his many preoccupations, cannot be here for this debate.
The Chief Secretary to the Treasury (Mr. John Diamond)
He is coming.
Mr. Macleod
As I said in the Budget debate, all Chancellors of the Exchequer, in my view, wait too long to reflate. I believe that the right hon. Gentleman has already waited too long. What was possible, and perhaps is still just possible, in 1967 might well be impossible in 1968.
The Amendments highlight a distinction between the two sides of the Committee. We on this side put our view quite plainly. The levels of personal direct taxation have increased and are increasing and should be diminished. Our pledges are entirely firm on this matter, and we would wish in due course to register our view in the Division Lobby.
The first question is whether there is a need for a reduction in personal direct taxation such as we propose. The Chief Secretary, speaking on the Second Reading of the Bill on 2nd May, addressed himself directly to this point. He gave the figures of total taxation, and he included social service contributions and local rates, as a percentage of the G.N.P. at factor cost. That is fair enough. He then used the average figure for three years—1963–65. But this enabled him to use two Tory years to counterbalance the additional taxation which was imposed in 1965. [column 878]
If we look at the individual years, we clearly see why an Amendment such as we propose is necessary. Taking the Chief Secretary's points alone, in 1964 the percentage figure for the United Kingdom was 32.3; in 1965, 34.6; in 1966, 37.6; and estimated for 1966–67, 38.2, and for 1067–68, 39.1. Therefore, the percentage taken in total taxation has increased from 32.3 in 1964 to an estimated 39.1 in 1967–68. This shows the hideous nature of the burdens of taxation, particularly direct taxation.
Secondly, the countries which the Chief Secretary selected to compare with this country were remarkably selective. On 19th January, he gave figures for seven countries. When he used them on 2nd May, he left out two of the E.E.C. countries, because these were the two lowest figures and they did not suit his argument. He brought in Sweden which has a high figure, and therefore suited him. Having done that, he left out the United States which has a low figure and did not suit his argument, and produced an average of the remaining high taxation countries in Europe and claimed that we were one of the least heavily taxed countries. With respect, that is almost childish in the selection of statistics to put before the House, and whatever truth there may have been in this argument—and indeed there was some during the Conservative years—it is quite clear that there is little or none as we move into the Socialist years, which is what we are considering.
It seems that the severity of direct personal taxation in this country is greater than in any other remotely comparable country, except perhaps Sweden. I think, also, that it bears heavily on large families, and the reason—I do not want to pursue this; I am not sure that it would be in order to do so anyway—is that this is aggravated by our preference for a few specific indirect taxes on tobacco, petrol and alcohol, as against the general consumption taxes which so many of the other countries have. Nor can we argue—and this is a matter which the Chief Secretary argued—that our present system is more equitable to the bottom income groups, because, with heavy drink and tobacco duties, our indirect taxation structure is regressive in comparison with those of most Continental countries. [column 879]
It therefore seems to me that the level of taxation in this country, particularly of personal direct taxation, is clearly too high however one studies the matter. I think there can be little doubt that this contributes very substantially to the brain drain. There can be little doubt that, with levels of taxation as we have them at the moment, if we succeed in getting into the E.E.C. considerable impetus will be given to some of our senior management in particular to seek service in countries which do not take such a high percentage of their incomes.
Perhaps I can illustrate that by referring to an article in The Times of Monday, 15th May. It gave the graphs for eight countries, including E.E.C. countries, France and Germany, and including Austria, New Zealand and the U.S.A., which are “brain drain” countries from our point of view, and said:
“Comparing the eight graphs above showing marginal rates of taxation in various countries it is not hard to see one good reason for the brain drain. A £50,000 gross salary in Britain would be worth only a little over £10,000 net while the same gross level in the United States would leave the employee with over £25,000.”
The high marginal rate in this country means that it is almost impossible—and this is a problem which has confronted the nationalised industries—to have proper differentials in a salary scale, and if one wants to have a distinction—quite a modest one—in real terms between the top man and his number 2, or the number 2 and the number 3, there must be a really staggering difference in the gross income that is offered to them.
We come, then, to what we suggest here, a reduction in the standard rate of Income Tax, and I am addressing my remarks in particular to Amendment No. 18. The Chancellor—and he and I have argued this before, so I need do no more than touch on it now—argues whenever he can that all that matters is the average rate of tax. I hold firmly to the view that that is absolute nonsense and that what matters is the marginal rate of tax. It is true that if one is a Minister of the Crown, or a civil servant, with a fixed income, it does not matter whether one works harder, or not so hard, it makes no difference, but to the people who take risks—and this is what matters, and it is to this that the Amend[column 880]ment is directed—it is the marginal rate of taxation above all that matters. This point was made by the hon. Member for Ashton-under-Lyne (Mr. Sheldon) at an earlier stage of our debates.
Quite clearly the answer to the problem which I have been posing is too wide even for the debate which I am now introducing. We want to see economy of choice, and we feel that we should tax consumption wherever possible rather than income. We therefore wish to reduce taxation on income in the way that I am indicating.
The best estimate that I can make about the cost—and no doubt the Chancellor will come to this in his speech—is that it would cost £127 million in a full year to implement the 6d. off Income Tax, and that the amount for reduced rate relief would bring the total bill for the two Amendments in my name to about £200 million. Unquestionably this is a formidable amount of money, and it may well be that the Chancellor will base a large part of his rejection of this case—because I feel confident that he will reject it—upon cost alone.
I have made it clear on a number of occasions how I think this money should be found. I do not believe that in this year, 1967, even for such a worthy aim as the reduction of personal direct taxation, one should make slashing reductions in the call which the public services make on our resources. I think that would merely exacerbate a serious economic situation which, for various reasons, I see as more serious than the Chancellor does at the present time.
I think that it would be right to find a large amount of money through transfer payments. I need not go into the various proposals, such as prescription charges, school meals, and so on, which have been put forward from this side of the House. When he is confronted with a proposal—and he did this again last night as I was listening to him during the Green Paper debate—the Chancellor almost invariably says that any increase in taxation or any reduction in one case must mean an increase in another. It is recorded in column 748 of yesterday's Hansard that my hon. Friend the Member for Ormskirk (Sir D. Glover) said that this could be achieved either through growth or savings. I think that I made the remark, but anyway in Hansard it is attributed to [column 881]my hon. Friend. The Chancellor said that that was true up to a point, but it comes to an end, and with respect one can say that again, because growth and National savings have nearly come to an end under the administration of the present Chancellor of the Exchequer.
We are arguing now about a minimal rate of growth and the Chancellor at least will not deny that, for whatever reason, the decline in National Savings since he took office has been quite appalling. Perhaps I might quote the figures for recent years giving the increase in total outstanding which includes interest paid out, accrued interest, and Defence Bond redemptions. In 1963 there was an increase of £315 million. In 1964, £357 million. In 1965 the increase amounted to £73½ million, a staggering change, and in 1966, although this is an estimate, it was minus £38⅓ million. If we were to get back even to the level of National Savings attained under the Tory Administration we would not have the slightest difficulty in meeting this and indeed many other claims or suggestions for additional expenditure which are put forward on the Notice Paper.
The truth is that the Chancellor has been wrong again, and that he will have to go into reverse once more, for the third time, either in June or in July. He was saying last weekend that he had some shots in his locker to fire. With respect, that was not the impression that he gave at Budget time. The Chancellor is rather long on metaphors, but he is a little short on ideas. We thought that we would offer him this idea as a contribution towards his present thinking. There have been pressures for reflation and also demands for the Chancellor's resignation. I hope that he will not take any notice of those. He is my man. I may not be fond of some of the things he does, but the thought of anyone else occupying his position from the Government Front Bench fills me with horror. I prefer to stick to the couplet:
“Always keep a hold of nurse For fear of getting some one worse.”
I hope that the Chancellor will stay in his present office for some time.
All the same—and I say this quite sincerely and with considerable regret—in the 20 years or so that I have been concerned in one way or another with Finance Bills, and have known Chan[column 882]cellors of the Exchequer, I have never known a Chancellor who was so docile to the Treasury and the banks. This is a great pity. It may have been fortunate, in a curious sense, a year ago, but it is quite wrong now.
To sum up, the view of my hon. Friends and myself is, first, that our taxation structure is hopelessly lopsided because of the emphasis it places on personal direct taxation and a few indirect taxes. To adjust that would mean, in general, moving towards taxation of consumption rather than taxation of income. Although that is too big a subject to tackle tonight, we can at least make a start along the lines that I have suggested.
Secondly, we hold the view that what matters to people—especially those upon whom we most depend; the people who have to take risks if we are to survive and prosper as a country—are the marginal rates of taxation. Whatever arguments we may have about the total weight of taxation it is not and cannot be in dispute that the marginal rates of taxation are savagely penal. There can be little doubt, also, that this is a major contribution towards the brain drain.
We feel that the Chancellor should move, especially in terms of personal direct taxation. That is why we regard this as one of the most important Amendments before the Committee. As for finding the money, the right way in this year—I do not say that it would be so in other years—is, first, through transfer payments and the reduction or cancellation of such expenditure as premium payments and others which my hon. Friends have consistently condemned. If we do these things not only can we find the money required; we believe that we shall give a great impetus to individuals throughout the country.
Sir G. Nabarro
I support my right hon. Friend, and in doing so I commence in a directly personal vein. Last year, I was privileged to move precisely the Amendment which my right hon. Friend has moved this evening, namely, a reduction in the standard rate of Income Tax by 6d. in the £.
Last week, my right hon. Friend commented on the fact that he sought, on occasions, to persuade my hon. Friend the Member for Yeovil (Mr. Peyton) and [column 883]myself as to Divisions on certain Finance Bill Amendments. He can at least congratulate himself on the fact that he was eminently successful last year. He persuaded me not to force a Division at that moment because of the condition of the Revenue. But I deployed my arguments and attracted a great deal of attention, in my party and in the country, to the punitive levels of taxation.
I refer at once to the Chancellor, who sneered at my efforts and who took the line that the marginal rate of taxation, at 18s. 3d. in the £ for the top Surtax payer—and, in the present year, 19s. 3d. in the £—were irrelevant, because what mattered was the effective rate of direct taxation. I said that the whole of my case was based on the fact that the punitive marginal top level of direct taxation—that is, the aggregation of Income Tax and Surtax—was hopelessly out of line with that of our principal industrial competitors oversea; that it was purely political in its inspiration in this country that the rate should be so high; and that a substantial group of the Tory Party, including myself, intended to apply its efforts in the next few years in seeking a reduction in these very high levels of taxation.
This year, we start with Income Tax. My right hon. Friend's Amendment, which is the official Tory Party Amendment and which I entirely support, seeks to reduce the standard rate by 6d. Sir Eric, you have kindly associated with that Amendment, Amendment No. 19, in the names of my hon. Friend the Member for Yeovil, my hon. Friend the Member for Glasgow, Cathcart (Mr. Edward M. Taylor), my hon. Friend the Member for Gosport and Fareham (Dr. Bennett) and myself, which seeks to reduce the standard rate to 7s. 6d. in the £—a reduction of 9d.
There is a technical reason for that. I shall not stray out of order by alluding to it at great length, but the Chancellor will observe Amendment No. 23, which seeks to recast the levels of Surtax so that the highest rate payable is 7s. 6d. in the £. Our exercise is designed to associate a standard rate of Income Tax of 7s. 6d. in the £ with a top range of Surtax at 7s. 6d. in the £, thereby giving an overall rate of direct taxation, at the highest marginal level, of 15s. in the £, instead [column 884]of 19s. 3d. this year and 18s. 3d. in the ensuing year.
We shall no doubt return to Surtax on the next selected Amendment, and I am again grateful to you, Sir Eric, for selecting the Amendment setting out my recasting of Surtax alongside the official Tory Amendment which seeks to reduce Surtax by 10 per cent.
There will always be acute controversy between the two major political parties as to what extent high levels of direct taxation impinge upon incentives in industry, trade and commerce. The hon. Member for Heywood and Royton (Mr. Barnett) constantly contradicts me when I say that these high marginal levels of direct taxation are a gross disincentive to additional effort. The wealth of this country is created at the highest level by men who lead large industries, companies and firms. One has only to look at the contribution which the large companies make to the nation's export trade to realise that these large companies predominate, and that the men who lead them are the men who are paid more than £10,000 a year. They are the captains of industry. All the skill in the world on the workshop floor is brought to naught without the enterprise of the men at the top of industries, companies and firms.
The Socialists may not like that philosophy, but it is my philosophy, and it is a capitalist philosophy. I sit on these benches because I believe in capitalism and not in Socialism. I have learned all the way up in industry that, unless men are rewarded commensurate with their efforts and the risks they take, the optimum achievement is never realised. There are few of them in this country. There are increasing numbers, of course, in the bracket between £2,000 and £10,000 a year and there are millions of P.A.Y.E. personnel contributing sums of between £100 and £1,000 a year in indirect productive effort in minor management tasks and duties and, of course, as skilled, semiskilled and unskilled men on the workshop floor.
Although I have often been shouted at at public gatherings on this point, I have never believed that it would be good fiscal policy to try to ameliorate P.A.Y.E. on overtime earnings. The only way to give incentives to men on the workshop floor to work harder and longer is to [column 885]reduce P.A.Y.E. It is because I am utterly convinced of that that I support my right hon. Friend's Amendment so strongly.
As to general economic and financial strategy in this context, I strongly disapprove of the Chancellor's speech at Leicester last Saturday. It was a deplorable speech. The reception in the Sunday Press was exactly what I did not want in the nation's contemporary economic position. The principal Sunday newspaper, that is, the one with the largest circulation, the News of the World—[Laughter.] I am sorry to have caused merriment opposite, but it does sell 6.8 million copies and is, therefore, the principal Sunday newspaper. In 2-inch tall headlines, it said:
“The Freeze is Over—Official” .
That is an invitation to every working man or woman, whether a wage- or salary-earner, to demand a substantial pay increase on 1st July. The Chancellor did it—and after war had broken out in the Middle East——
The Chairman
Order. I must remind the hon. Gentleman that the Amendment with which we are dealing relates to the standard rate of Income Tax.
Sir G. Nabarro
A passing reference only, Sir Eric.—[Interruption.] I am sorry. War actually broke out 24 hours later. I withdrew that and say instead that war was imminent and only a few hours away.
The Chancellor's strategy is wrong. He has created the impression that everyone can ask for an increase in rewards on 1st July. The floodgates will be opened——
The Chairman
Order. I have tried to indicate to the hon. Gentleman that we are not discussing general economic policy or the freeze, but the rate of Income Tax.
Sir G. Nabarro
Yes, Sir Eric. I am about to come to that——
The Chairman
Order. I should be obliged if the hon. Gentleman would come to it right away and omit the other parts of his speech which he intended to make.
Sir G. Nabarro
I have delineated the main parts of the Chancellor's strategy and then compared what it [column 886]should be—an early reduction in the standard rate of Income Tax to give greater incentives for greater productive effort. I want none of the nonsense about the claim that the revenue should immediately be made good by additions to other taxes, as mentioned by my right hon. Friend, because the steady downward trend of National Savings and other forms of personal savings shows why the Chancellor has to continue direct taxes at these punitive levels.
It is perfectly in order, I believe, to describe how the loss of revenue caused by a reduction in Income Tax of 6d. or 9d. in the £ should be made good and I choose, with the deepest respect to my right hon. Friend, to quote these figures in a different form, and from a Treasury publication.
In parenthesis, I would refer to every Chancellor since Sir John Anderson, which is a quarter of a century ago. Mr. Hugh Dalton, Sir Stafford Cripps, Mr. Hugh Gaitskell, Mr. R. A. Butler, Mr. Harold Macmillan, Mr. R. A. Butler, Mr. Derick Heathcoat Amory, my right hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd)—they should all be my right hon. Friends, of course, in the last three or four creations—and then my right hon. Friend the Member for Barnet (Mr. Maudling), were all unanimous in one material regard, and this policy has been enunciated by the present Chancellor since 1964. He has always said, “If I cannot have direct taxation revenue, I will accept savings as an effective substitution” . His predecessors all said the same thing. But does this Chancellor practise it? Of course not.
I will quote comparative figures from the National Income and Expenditure Blue Book for 1966 issued by the Central Statistical Office and presume that there will be no altercation this year between the Chancellor and me about the source of my figures. The aggregation of National Savings, net surplus, were as follows: in 1955, under a Tory Government, £40 million; in 1956, £82 million; in 1957, £68 million; in 1958, £204 million; in 1959, under my right hon. Friend, £396 million. Why? To offset the reduction of 9d. in the standard rate of Income Tax from 8s. 6d. in 1959. [column 887]
The figures continue: in 1960, £338 million; in 1961, £211 million; in 1962, £240 million; in 1963, £318 million—we are still in those halcyon years of Tory rule—in 1964—£358 million. In 1965, the first year of Labour Government, with the collapse of confidence, there was a collapse to £74 million, a loss of £284 million in National Savings in the first year of Labour Government.
My right hon. Friend contends that this Amendment would cost about £200 million a year. If the Chancellor acted dynamically and positively over National Savings, instead of just scraping the surface, it would be easily practicable and possible to finance the reduction in Income Tax sought by my right hon. Friend and, in slightly larger measure, by me.
The Socialist Front Bench is beginning gradually to learn the facts of fiscal and financial life. It takes a long time to teach hon. Gentleman opposite. We even had the Chancellor of the Exchequer paying his tribute and respects to company profits this year—a long shot from the sort of drivel he used to put over from the Opposition Front Bench when he was attacking company profits.
Mr. Callaghan
The difference between us must be that I at least have stopped talking drivel.
Sir G. Nabarro
I had not recognised it. I welcome the right hon. Gentleman's conversion and I am delighted to have him in my camp.
Mr. Iain Macleod
It has been hard work.
Sir G. Nabarro
As my right hon. Friend says, it has been hard work getting him there. However, he is now in my camp paying tribute to company profits. I welcome him and hope that he does not retract any of those I thought somewhat altruistic words which he spoke during the Budget debate.
I come to one of the right hon. Gentleman's colleagues who is exactly on my line on Income Tax. The Home Secretary said in a speech which he delivered on Saturday, 13th May, to the London Labour Party—a significant date; 48 hours after the London elections:
“We must make up the ground which has been unavoidably lost.” [column 888]
He had to tell them something about their dismal failure. He went on:
“To believe that we could avoid the need for this by savage increases in direct tax and would be to turn into a blind alley which would lead us directly away from our main objective. We must face the fact that the two and a half years of Labour Government … the growth rate we have been able to achieve has been a disappointment Policies for the redistribution of incomes would not modify the pressing need for a rapid growth.”
The right hon. Gentleman continued.
“Taxation policy must be fair and must be directed firmly in favour of those to whom unrestricted economic forces would be most harsh and unjust. But redistributive taxation would not solve all Britain's problems. Its effects could not possibly be large enough either to make a real impact on the position of the lower paid or to finance a big advance in the social services.”
His pregnant words which followed were:
“In addition, we cannot be indifferent to the disincentive effect which very high taxation on earned incomes might have.”
I am waiting for the Home Secretary to be translated to the Treasury and the Chancellor to be translated elsewhere.
Mr. Iain Macleod
indicated dissent.
Sir G. Nabarro
Perhaps my right hon. Friend does not agree.
At least I shall have this in my armoury to quote to the right hon. Gentleman, because that was the purport of my speech last year, when the Chancellor's altercation with me led him to sneer at me as one of the “rich, well-booted company director class” .
Mr. Callaghan
Oh, dear.
Sir G. Nabarro
The right hon. Gentleman sneered at me. Is he aware that the well-booted company director class very largely creates the wealth of the nation? On that occasion, the Daily Mail printed not a word of the argument for incentives derived from lower levels of taxation, but the following morning wrote:
“Poor old Nab—18s. 3d. in the £.” I wish that the Chancellor would not laugh so much. This is a serious matter.
Mr. Callaghan
I am crying my eyes out.
Sir G. Nabarro
I was not pleading for myself. I sincerely believed the [column 889]philosophy which I endeavoured to expound and which is now formal and official Tory Party policy. It is that we must reduce the standard rates of Income Tax and Surtax.
My right hon. Friend the Member for enfield, West alluded to competitive industrial Powers and their levels of direct taxation. There is only one industrial Power with which I ask the Chancellor to compete, and that is the United States. The largest income earned by any American is taxed as to 70 cents on the last dollar that he earns, which is 14s. the £. It is called the marginal rate. I am not talking about average or effective rates or anything else. It is 70 per cents on the last dollar earned, and that applies to the President of General Motors or the President of Honeywell—to people earning 500,000 or 700,000 dollars a year. Whatever their earnings, they, keep 30 per cent. of the top slice. Here in Britain we are taxed not as to 70 cents, but as to 96¼ cents. That is the rate this year. Perhaps it is slightly less in other years, but certainly it is equivalent to 91¼ cents even in those years.
The purpose of my two Amendments is to persuade the Chancellor this year—and my party in the longer term, if the right hon. Gentleman rejects them—that we in Britain, if we seriously wish to compete with out big industrial neighbours, must have top levels of taxation which are approximately equivalent to their top levels. I believe that the highest level in this country should be 15s. in the £, irrespective of income. People should be allowed to keep a quarter of their income, while the rest should be paid in taxation. I would accept that as a reasonable compromise.
Much has been written about the brain drain. My hon. Friend the Member for Horsham (Mr. Hordern) contributed a magnificent article to the Daily Mail on Tuesday, 23rd May, entitled, “Operation Brain Gain” , in which he asked:
“What makes them think it will work?”
He was addressing his remarks to the Government. We are making altogether too little of the impact of the punitive levels of direct taxation on the emigration of our best brains from this country. My hon. Friend devoted his article to technological considerations and incomes. [column 890]
A Worcestershire Evening News and Times article of 28th April alluded to a Mr. William Douglas, an American in this country, whose task is to entice foreign specialists to join the ranks of industry in his country. The article stated:
“He is seeking more scientists and engineers for American industry, aviation and space projects.”
Among other things, incomes in America before tax are three times those offered in this country, and after tax they are a great deal higher, because American levels of direct taxation all the way up the scale are lower than our.
Mr. Douglas was reported as having said that of the “… 532,000 graduates from United States universities this year, only 37,000 would be engineers, while at least 10,000 engineers would leave British universities. So Britain can afford to lose some brains” .
Does any hon. Member believe that today we can afford to lose science graduates—our greatest single requirement in industry, trade, commerce and the teaching profession? It is true that sometimes for these men who emigrate it is the attraction of the sun, sometimes it is the attraction of better opportunities or better living conditions—I do not know. Personally, nothing would ever make me emigrate from Britain, but different men have different ideas about these things. I am quite certain that the mercenary aspect conquers their innate sense of patriotism, and I do not always blame them. If they can earn three times as much gross in foreign competitive industrial countries where their levels of taxation are much lower, there is a powerful mercenary inducement to go abroad.
If the Chancellor of the Exchequer really means what he says, with his colleague the Minister of Technology, about energetically tackling the “brain drain.” whereas I know that, his policies having been settled, he cannot concede the formal and official Amendment of my right hon. Friend to reduce the standard rate of Income Tax by 6d. in the £, or my Amendment to reduce it by 9d. in the £, I entreat him, in the strictest non-party political sense, to think carefully about this major problem between this year and his next Budget—or the Budget of one of his colleagues—because I believe that the first priority must be to reduce direct taxation, Income Tax, by at least [column 891]6d.—I hope by 9d.—coupled with a reduction in Surtax, at very small cost to the Revenue, which would adjust the top marginal level of taxation at a maximum of 15s. in the £.
Mr. John Cronin (Loughborough)
I listened with interest to the speech of the hon. Member for Worcestershire, South (Sir G. Nabarro), but his political points seemed to be made very largely for the benefit of his constituents. I was puzzled to hear him say that the Labour Party has always been opposed to profits. I used to take some interest in financial matters some years ago and I cannot recollect any objection ever being taken to profits, provided that they were reasonable. I do not think that it is Labour Party policy that we should encourage losses. What is business for, other than to make profits?
This country must be one of the most highly taxed of all countries, and that, by itself, is not a desirable circumstance. Nevertheless, these three Amendments are of an entirely michievous nature and I am quite sure that my right hon. Friend will not require any encouragement from me to reject them. It is quite obvious that if, in our present economic situation, there were a reduction in taxation it would have a most adverse effect on our balance of payments and on the position of sterling. It would, therefore, be most undesirable. At the same time, the Chancellor of the Exchequer might well give some serious consideration, at an early and convenient time, to reducing the standard rate of Income Tax.
There can be no doubt that the present rate must have some disincentive effect. These are mere truisms, but everyone who works does so not only for the enjoyment of his work, but for the amount of money he can obtain by doing the work. If the amount is reduced it must to some extent, in the nature of the economic context, reduce his desire to work. We see that industrially, when negotiations between trade unionists and employers so often take into account the effect of Income Tax will have on earnings. There is no doubt about the disincentive.
The hon. Gentleman referred to the brain drain, but I think that he has his facts wrong to some extent. The brain drain often indicates the frustration which scientists, doctors and others feel in their [column 892]working conditions or in their ability to carry on research or the scientific work in which they wish to take part. But I believe that the high rate of taxation must have some marginal effect, and must therefore, make some contribution to the brain drain.
I suggest, too, that a high standard rate of Income Tax must have an undesirable political effect. Sooner or later, during the next few years, we will have to face another General Election, and I do not think that it will be politically helpful to us if we are always considered to be the party that has the highest taxation. Although I would not in any way support these Amendments, I suggest that my right hon. Friend might well give consideration to reducing the standard rate of Income Tax during the course of the next year or two.
Mr. Robert Sheldon (Ashton-under-Lyne)
One of the annual events we await—to say that we look forward might be to overstate the case—is the hon. Member for Worcestershire, South (Sir G. Nabarro) telling us about his difficulties in paying Income Tax and Surtax at a marginal rate of 18s. 3d. in the £. He always goes on to say its disincentive effect, while applying to everyone else does not apply to him.
One of our main difficulties is that for social justice, as well as to distribute burdens equally on the shoulders of those who are able to pay, Income Tax must be progressive and, because of that, at each level of taxation as it progresses upwards there must be a marginal rate. Another difficulty is that we publicise the general marginal rate so well in the manner of the worst public relations that could be devised. No one selling motor cars would add the price of the accessories to the cost of the car.
The trouble is that 8s. 3d. is a marginal rate for a small proportion of the people who pay tax. Out of 22 million taxpayers, three-quarters do not pay tax at the standard rate, and of those 22 million, the 21 million who pay tax on earned income do not pay even at the marginal rate of 8s. 3d. Because of the two-ninths relief, they pay at a rate of 6s. 5d.
I am not saying that problems of taxation would be alleviated by making it [column 893]appear less, but there is no need to make the marginal rate, that applies to a few people by comparison with the very large number who pay tax, appear more. The Amendment we have put down tried to how that 6s. 5d. was, in effect, the actual marginal rate corresponding to the 8s. 3d. which in itself applies to a few people. It may well be that we should be spending our time trying to introduce a system of taxation which would show rather more clearly than does the present system the levels of taxation that people should pay, and not giving them the wrong impression that they are paying very much more than they are, which arguments are widely used on the shop floor in industry and elsewhere.
My right hon. Friend the Chancellor of the Exchequer, by introducing these wide ranges of taxes—which I have always said will turn out to be most valuable in the future—has the opportunity of using taxes in a different way one against the other, but one of the things we constantly hear is the need for incentives and the disincentive effect of taxation. It is an extraordinarily difficult thing to prove quantitatively. We know, for example, the regional employment premium is being introduced to encourage firms to move to development areas. It is an incentive for them.
The Selective Employment Tax provides an incentive for the firm to save labour. Corporation Tax provides an incentive to a firm to plough back. How real is the incentive effect of all the legislative economic changes we bring about? If these are incentives it is right to say that Income Tax, too, is bound to have some disincentive effect. The difficulty is that we are unable to quantify this disincentive effect.
Although then, almost certainly, Income Tax acts as some sort of disincentive, Corporation Tax does not act in anything like the same disincentive way, because it will bear rather differently on the individual in a company. The executive is not likely to be influenced as to the hours he puts in and the manner in which he works because Corporation Tax may go up, but employees are likely to be influenced by the way in which Income Tax affects their overtime rates. What Corporation Tax does is to act as a disincentive to risk which can be offset by investment grants. [column 894]
We have here the nature of some sort of bargaining between the reduction of Income Tax and an increase in Corporation Tax offset by investment grants, but the steady barrage we have heard and will continue to hear about incentives and disincentives must be, as I believe it can be, resolved if the Commissioners of Inland Revenue set about research projects. It is wrong that such an organisation does not consider one of its main duties to be to find how incentives are affected by various kinds of taxation and in what manner they work on the economy. This I would urge very strongly on my right hon. Friend.
Mr. Ian Lloyd (Portsmouth, Langstone)
This is always an interesting stage of a Finance Bill when the whole question of the rates of Income Tax and Surtax are discussed. I am delighted to see the Chancellor here, because the point I shall make is very brief and I think it will interest him.
The Daily Mail may have referred to my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) in his attempt, as it appeared to the newspaper, to further his own particular interest. I certainly am not furthering any particular interest of mine, because my tax rate comes by no means anywhere near that of my hon. Friend. Therefore, anything I say, although it may benefit him and a large number of people, certainly would not benefit me. That is quite irrelevant to the point I wish to make.
The Chancellor is concerned—I hope he will admit this if I make the point specifically—primarily and fundamentally today with the export performance of this economy. He is concerned with the relatively small number of firms—I put it at probably between 500 and 1,000, that is the order of magnitude—which statistically account possibly for 80 per cent. to 90 per cent. of the exports of this country. In the personnel of this group of firms there are probably, again I refer to orders of magnitude rather than specific figures, 4,000 to 5,000 export sales managers or export salesmen who do the hard work, go abroad and do the selling. If one wants to broaden this, as I think it could be broadened if it were given sufficient thought, possibly half a million industrial [column 895]operatives could sustain the export production of this group of firms.
The Chancellor, as has been suggested this evening, will probably decline any invitation to tamper with his tax structure. He has stated in his Budget what he proposes it should be, and I should be surprised if he says he is convinced by our arguments and will take 6d. or 9d. off Income Tax or tamper with the structure in any way. If he can be offered a cast-iron guarantee that he will not lose, if he can be convinced that such a guarantee could be made to work, would he in the broad national interest, and if he were convinced that what I am saying is in the national interest, be tempted or prepared to take a risk?
In the case of this fairly narrow but overwhelmingly important sector of national production, he should as it were give the firms and individuals concerned an option to stabilise their tax payments. He could offer them the right to choose for a period he could determine—this obviously would have to be experimental—the right to pay next year exactly the same tax as they paid this year irrespective of their earnings or performance. If the Chancellor accepted this he could have a cast-iron guarantee that he would not lose, but what a tremendous incentive would be offered to the firms and individuals concerned, particularly in exports, to increase their performance in a way which probably would stagger them as well as him.
It may well be that the Chancellor thinks this is something so difficult to work out in detail and practice that he is not prepared to consider it, but I do not see any reason why the country would not accept an apparatus of discrimination which would justify it solely on this basis. If this were to succeed, if these 500 firms, given this tremendous opportunity possibly only for one year or two years to make a tremendous increase in their earnings, and if as a result they improved their export performance by 30 per cent. or 40 per cent., the incidental income effects throughout the economy would be so buoyant that incidental losses would probably be compensated directly and the individuals concerned would be given an opportunity, possibly for a limited period, of increasing their income by the whole [column 896]of the amount of the gross earnings in exports. They would have a tremendous incentive to increase that proportion of their earnings which they could show was derived wholly from exports.
This may sound a somewhat far-fetched idea. I know that the Chancellor and many others have sought many ways of improving export performance and of segregating it from the rest of the economic performance, not that we do not want to improve the other part of the agreement, but this is a possibility which should be considered seriously, perhaps not in the precise form I have suggested but at least as a mechanism which could be employed. It would guarantee to the Treasury an income not less either in the individual case or the broad from the whole range of export firms so defined and not less than that which the Treasury received this year. It would guarantee to the country the whole of the incidental non-fiscal non-tax benefit of an outstanding increase in export performance. This is something which ought to tempt the Chancellor. I am sure that the ingenuity of his officers would not fail him in devising methods of implementing such a scheme.
Mr. Barnett
I am not opposed to the idea of reducing the standard rate by 6d., but I am opposed to the dishonesty of some of the Opposition's arguments. There have been a whole series of assertions. The hon. Member for Worcestershire, South (Sir G. Nabarro) said that there would be some relief for a man paying £100 a year. Twenty pounds of that £100 would be at the standard rate; therefore, such a man would, under the Amendment, get relief of slightly under 6d. a week. I suppose the contention is that for this massive incentive a man paying £100 a year in tax would work a lot harder. The average working man, married and with two children, earning £20 a week, is not paying tax at the standard rate. Indeed, if he has a mortgage, he is not paying any tax.
Sir G. Nabarro
I think that the hon. Gentleman is deliberately misrepresenting what I said, If he will read the Hansard report of my speech in the morning, he will find that I referred to the man who is paying Income Tax of £100 per annum, not the man who has an income of £100 per annum.
[column 897]Mr. Barnett
The only difference between the hon. Gentleman and other hon. Members opposite who make assertions is that the hon. Gentleman makes them more arrogantly. On Second Reading I dealt with the question of incentives. The right hon. Member for Enfield, West (Mr. Iain Macleod), in winding up that debate for the Opposition, managed to unearth a Canadian report on taxation which, he said, was only a few weeks or a few months old, as compared with the surveys which I had quoted. In fact, the Canadian Royal Commission was set up in 1962 and the quotation which the right hon. Gentleman made from the Report—I refer the Committee to HANSARD, 2nd May, 1967, cols. 435 and 436—begins with the words, “We are persuaded” . This is the opinion of the members of that Royal Commission. What the right hon. Gentleman was not doing was reporting, as I was attempting to do, the results of an objective survey.
Further, the latter part of the quotation that the right hon. Gentleman made was to the effect that the Canadian Royal Commission thought that the top marginal rate should not be greater than 50 per cent. This is what the right hon. Gentleman recommended to the House of Commons.
It is important to know just what effect such a recommendation would have. Page 76 of Cmnd. 3200—this is the Inland Revenue Report for the year to 31st March, 1956—states that the total number of Schedule E taxpayers for the last year available—1964–65—was 20,873,000. Of those, 48,000 were earning more than £5,000 a year. Not all of those 48,000 will be paying a top marginal rate of more than 50 per cent., because up to £7,000 a year the top marginal rate would be about 10s. 6d. Therefore, 48,000 out of a total of 20,873,000 is the number that would be helped if everybody was brought down to a rate below 50 per cent.
This might be worth doing, but the Committee should be clear about precisely what we should be doing. The Opposition have said that such a reduction would help key management in, for example, the export field. It would have the massive effect that the Opposition are constantly telling us that a reduction [column 898]in direct taxation would have—I am not opposed to a reduction in direct taxation—only if the Opposition are saying that management of that sort is at present hopelessly inefficient. Otherwise, it makes no sense. If the Opposition are saying that management is hopelessly inefficient, or, which is, perhaps, an even worse slander, that it is not working as hard as it might if there were a reduction of 6d. in the standard rate, let, them make it clear that this is what they are saying and that the situation would be transformed by such a reduction. I have not heard that suggestion by the Opposition.
When I refer to the dishonesty of the Opposition, I mean, in particular, the fact that they talk at one and the same time of a reduction in public expenditure. It is right that the country should ask precisely where the Tories would cut public expenditure if, at one and the same time, they would cut taxation. The Opposition tell us—it has not been sufficiently clearly spelled out—that they would reduce public expenditure on health and education by putting more of the burden on private expenditure. In other words, they would transfer some of the present public expenditure on these services to private consumption.
Let us be clear about it. I assume that the Opposition are not suggesting that, as a nation, we should reduce the amount of money we spend on health and education. Their suggestion is that more of it should be spent by the individual. If that is their suggestion, what they are really saying is that, by reducing the level of taxation for those in the very highest tax brackets, we should make things inevitably harder for those paying no tax at all, paying tax at the lower levels or even paying a small amount at the standard rate, That is the dishonesty of their argument.
Another argument is that we could have tax cuts if we had more savings.
“As we did” , they say, “in our 13 years” . The hon. Member for Worcestershire, South gave some savings figures. I shall quote from the same document. In 1955–56, the total of National Savings was £6,115.5 million. In 1964–65, the total was £8,385.8 million. At first sight, that seems a worthwhile increase in total National Savings, about 37 per cent., but, unfortunately for that argument, between [column 899]1955 and 1965 retail prices rose by between 35 and 38 per cent. So there was no real increase in National Savings.
Both sides of the Committee constantly make appeals for an increase in the level of savings, particularly National Savings. Every Chancellor has said that, if we could increase National Savings, particularly small savings, we need not raise the level of taxation. I have myself advanced a similar argument from time to time. But in considering the whole question of whether we can have a massive increase in savings in order to offset a tax reduction, we have to bear in mind the ingenuity of those who have looked at the problem in the past. Almost every possibility has been covered already. There is ease of purchase through the Post Office Savings Bank and the trustee savings banks. We have a small unit in the National Savings Certificate. Attractive “gimmicks” like the Premium Bond have been used, and there has been an increase in the number of Premium Bonds bought over the period. However, there has clearly been a great amount of switching. There has been no real increase in National Savings, taking the overall figures. There are many ways, apart from National Savings, by which people can save, life assurance and the like, and these would be less used if, for instance, there were a State unit trust.
It is, therefore, positively dangerous to suggest that we can have a massive reduction in taxation as a result of some new and ingenious form of saving. It could be foolish to rely on the hope of achieving massive new savings. Of course, one would hope to have an increase, but much would depend on general economic conditions. It is no use pretending that, by the wave of a magic wand, we can have increased savings and reduced taxation. It is just not on.
It would be wonderful if we could devise a new tax system at a level so low that it did not hurt and yet provided for all the public expenditure which both sides want while being fair, at the same time, to all sections of the community, including non-taxpayers. The Opposition certainly have not found such a system. Perhaps they are so naive as to believe their own words, perhaps they are so dishonest as to know that they are talking nonsense and misleading the public, as I believe they are, or perhaps they plan to [column 900]do what they say, that is, to have a tax system which would be demonstrably unfair to the great mass of the people. If this is what they are suggesting, they should make it clear. The Amendment is put forward on a totally dishonest argument, and it should be rejected.
Mr. Tim Fortescue (Liverpool, Garston)
I do not want to detain the Committee for very long, but I feel bound to intervene briefly since at this time last year I intervened to support my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) when his Amendment did not have any support from our Front Bench. I am delighted that it has that support this year, especially as my entire election campaign at this time last year was fought on this very issue.
I am more delighted still to find that, despite what the hon. Member for Heywood and Royton (Mr. Barnett) has been telling us, the Amendment is also supported by the Government this year. According to my Sunday newspaper last weekend the Chancellor informed the country at large that between now and the end of the year—I quote from memory—every family in the country will have its standard of living raised.
I have been trying to puzzle out how that will happen by any other means except a reduction in the standard rate of Income Tax. That will not affect the families below Income Tax level, and I assume that he means that there will be a special arrangement for family allowances for low-income families, but no one else. But he was talking about every family in the country, and there seems to be no other way except reducing the standard rate.
There is talk of relaxation of hire purchase on cars and many other things, but these would affect only comparatively few families. The one way of increasing the standard of living of every family will be to go along with the Amendment. If that is what the Government will do, let me assure the Chancellor, if it will make the slightest difference to him, that he will have at least my full support.
The Deputy Chairman
Amendment proposed——
Mr. Iain Macleod
With respect, Mr. Irving, we are waiting for the Chancellor to speak on this. We cannot come to a conclusion on it without the Chancellor replying to the debate.
[column 901]Mr. Callaghan
I shall be very willing to reply to the debate when it is concluded.
Mr. Macleod
It is not a question of when it is concluded. At that moment the Chair began to put the Question. If the Chancellor does not rise now the debate is concluded. He must surely give the benefit of his advice to the Committee.
Mr. Callaghan
I understand that there are still more hon. Members to speak.
The Chairman
Amendment proposed——
Sir G. Nabarro
I must press the Chancellor. I am not sure whether this is a calculated manoeuvre to avoid a reply from the treasury Bench. I am only speaking for a second time in the debate in order to be able to give way to the Chancellor now, because no hon. Member rose on the Government benches and no hon. Member rose on the Opposition benches, and we are therefore pregnant with expectancy awaiting pronouncements from the Chancellor and notably further explanations of his deplorable speech at Leicester last Saturday. I give way to the Chancellor.
Mr. Callaghan
There is still to be another speaker from the Opposition Front Bench.
Mr. Iain Macleod
With great respect to the Chancellor, we are on the Committee stage. He knows that we can all speak many times. He has no prescriptive right to speak last and end the debate. If he is to have any courtesy to the House, he should speak at this point. Whether other people, including myself, follow him is not a matter for him. When the Chair puts the Question, as it was doing a moment ago, if the Chancellor does not rise the debate would be concluded. It is therefore up to him now to give the Committee his reply.
Mr. Callaghan
I follow that, but I have been on more Finance Bills than the right hon. Gentleman has, and there has grown a tendency that the Government are never allowed to have the last words in these debates. If he looks up the record he will find that that is so. It is customarily the case that the Government concede the last word to the Opposition. It is not necessarily the case that [column 902]in an important debate of this sort if there are more arguments to be deployed the Government should concede the last word, as is the normal arrangement between the Front Benches. Frequently the Government have conceded the last word. If the right hon. Gentleman is saying that when I have sat down his hon. Friend intends to speak I am willing to deploy the arguments now, but I should like him also to consider the other aspects of the matter.
Mr. Iain Macleod
I do not want to get heated, but the Chancellor is wrong. It is not a question of conceding the last word or anything like that, nor can the Front Bench say—unless there be a Closure, which of course is not in anybody's thoughts in this debate—what will happen when anybody sits down. Each of us can speak as often as we like, subject to the good will of the Chair and ultimately of the Patronage Secretary. 8.45 p.m.
The Chancellor, who, I agree, has seen more Finance Bills than I have, is right in saying that sometimes the Government have the last word and sometimes not. But that is not so on the Committee stage. It is a matter perhaps for the Report stage, and certainly on the Second and Third Readings but it does not arise in Committee, when everyone can speak as often as they like.
Mr. Callaghan
It has been the case that when I was in opposition we often conceded the last word to the Government. If the Opposition do not want to do so on this occasion. I am happy to speak now, but I do want to register the fact that there are occasions when I or other Treasury spokesmen would expect the opportunity to have the last word.
As the right hon. Gentleman himself said, in a full year the Amendment would cost some £202 million. This year, it would cost £187 million. On any account, these are large sums of money. Amendment No. 19, put down by the hon. Member for Worcestershire, South (Sir G. Nabarro), would take 9d. off all the way round, not only off the standard rate but also off the reduced rate. I do not know whether that was his intention or not, but assuming that it was, the Amendment would cost £400 million in a full year and £360 million in 1967–68. If he intended to limit it to the standard rate, [column 903]we should be back to the figures of the Amendment moved by the right hon. Gentleman, because when the standard rate was last increased the reduced rates were not increased.
But, as both the right hon. Gentleman and the hon. Gentleman said, they were speaking more in the hope of making their arguments than in the belief that they would convert me suddenly this evening. I thought that my hon. Friends the Members for Heywood and Royton (Mr. Barnett) and Ashton-under-Lyne (Mr. Sheldon) made such a complete answer that there really is not a very great deal for me to add to what they said, but I shall add to a point which they did not fully bring out.
The point is that, when one makes a comparison of tax burdens in various countries, it is not enough just to compare Income Tax. That is only part of the picture. One must also consider other taxes and also the benefits. As my hon. Friends pointed out, Income Tax is only one of the many taxes paid by the ordinary citizen, and a reduction helps the ordinary wage earner very little. At £1,000 a year, which is the average wage, a reduction of 6d. in the standard rate of Income Tax alone would help the average wage earner to the tune of 3d. a week.
That means that one should look at alternative taxes which also bear heavily on the average wage earner as well as on the top wage earner and also at the benefits they are receiving. I want to say a word about these benefits because, if we are talking about reducing taxation, we should also consider the effect on the benefits the ordinary citizen is receiving.
There is a myth that this country is over-taxed. It is the same kind of myth under which the foreigner believes that every Englishman wears a bowler that, carries an umbrella and has the Financial Times tucked under his arm. A number of citizens do but the great majority do not.
By any international comparisons that are made, taking the total burden of taxation, it is not true to say that the average citizen in this country, by reference to his opposite numbers in other countries, pays tax in excess of what they pay. A number of international comparisons [column 904]have been made, and I shall not go over them again. The average level of tax in this country on the average citizen is much the same as it is in comparable cases overseas—in some cases higher and in some cases lower.
I will come back to that later. For the moment I will deal with not just Income Tax and National Insurance, the direct payment of taxes paid by the ordinary citizen, but the benefits he gets. A study has been made and some of the results have been published. Taking into account the direct tax paid by the average citizen—that is, Income Tax and National Insurance—and putting against it the benefits received in the form of family allowances, National Insurance benefits, the Health Service, education, school meals, milk, welfare foods, education grants, the school health service and pensions, what are the broad conclusions?
I give them to the Committee now. I will take two average families, a married couple with one child and a married couple with two children. The married couple with one child and earning up to about £950 a year, or £18 5s. a week, receives more in benefits than it pays in Income Tax and National Insurance. A married couple with two children and earning up to £1,750 a year, or £33 10s. a week, receives more in benefits than it pays in Income Tax and National Insurance.
That has to be put against the cries which are being made for a reduction in the standard rate of tax. Whom will it benefit? The hon. Member for Worcestershire, South is honest and courageous. I respect him and like him. He always gives all the sides of an argument and tries to put in all the facts. He is absolutely honest. I must give him some sort of good character, because I have known him for many years. He wants to reduce the burden of taxation on the very rich man who earns his living. He is not so interested in the taxes on investment income, but he is very interested in relieving the direct taxation burden on a man earning £15,000 a year and upwards. That is honest and straightforward and I understand it. What I do not find so agreeable is the suggestion by the right hon. Member for Enfield, West (Mr. Iain Macleod) that this should be done by increasing the charges for school meals [column 905]and prescriptions. These were the two positive propositions which he put forward as a means of helping the £15,000 a year man.
Unlike those hon. Members who are interrupting me, I have sat through the debate. I know that the reserves have been drummed up in order that this great attack on the Government should look a little more respectable, but I have sat and listened to the debate. What the argument has come down to is that we must help the £15,000 a year man, and the only two positive propositions put forward are increasing the charges for school meals and prescriptions. That can be a point of view which can be sincerely and honestly held and argued. I am delighted that my hon. Friends and I do not share it. There may well be a case along the lines suggested by the hon. Gentleman—I shall not argue that for the moment—but it is not met by increasing taxation on the ordinary citizen who is having difficulty in meeting all his obligations.
The right hon. Member for Enfield. West said that we should tax consumption wherever possible. He means that to relieve the £15,000 a year man we should increase Purchase Tax and general taxes on consumption. That is a little ironical when one remembers the squawk he put up about Selective Employment Tax, because that is a tax which is designed to increase and widen the tax net by taxing services. The Opposition have squawked and squealed about it ever since it has been put into operation. Now hon. Members opposite come along and tell me that I should do more, that I should tax consumption to an even greater extent in order to help to relieve the £15,000 a year man. Whatever the case for the £15,000 a year man may be, I am very glad to be able to repudiate any suggestion that the Government would attempt to relieve his burdens, the burdens of the very wealthy, by reducing the standard rate, which would adversely affect the great majority of citizens and improve the lot of only a small minority. My comparisons of benefits bear that out.
There is a persistent argument between the hon. Member for Worcestershire, South and myself about effective rates of tax and marginal rates of tax. I believe that the effective rates of tax, especially for the kind of company direc[column 906]tor of whom the hon. Member speaks, are of more importance than the marginal rates. I have forgotten what fantastic salary the hon. Gentleman said the managing director of General Motors received, but I think that it was 750,000 dollars. But it is a fixed salary. What matters to him is not the marginal but the effective rate of tax which he pays.
I agree that the marginal rate might matter to a distinguished surgeon, for example. We heard one speaking earlier this evening and he complained about the effect of tax upon him. I can well see that someone who has to decide whether to perform another operation is worth his while may say—although I doubt whether he does in fact—that he will not take on an additional operation, having calculated that the marginal rate of tax which he pays means that for cutting out a man's liver he will get only 1s. 5d. I suppose that a distinguished surgeon might argue that way, but I do not believe that he would.
But that would not be true of company directors. Company directors engaged on a contract with fixed salaries and fixed remuneration are much more concerned, or at least should be, with the effective rates of tax and not with the marginal rates of tax on their salaries, because they do not get a little more salary if they do a little more, and that is why I stick to my argument that what matters to the group of people about whom the hon. Member for Worcestershire, South has been speaking is the effective rate.
Let us consider these effective rates. For a married man with three children and earning £1,000 a year the effective rate is 3½d. in the £, which means that he keeps 19s. 8½d. in the £. At £2,000 a year the effective rate is 3s. in the £, so that he spends 3s. and keeps 17s. of every £ he earns. At £5,000 a year—and we are here getting into high figures, for I would guess that there are only about 125,000 citizens in this country who get more than £5,000—the effective rate is 5s. 6d., so that the taxpayer is left with 14s. 6d. in the £. At £10,000 a year the effective rates is 8s., so that he is left with 12s. in the £. At £15,000 the effective rate is 10s. 7d. so that he is left with 9s. 5d.
At a time when we are being told of the poverty in our midst which has to be [column 907]relieved—and the right hon. and learned Member for St. Marylebone (Mr. Hogg) is not backward in telling us about this—it is monstrous, to use his own word, to say that the man on £15,000 a year should be regarded as hard done by when he keeps 9s. 5d. of every £ he earns. I agree that the marginal rate is much higher and I concede that to the hon. Member for Worcestershire, South, but the effective rate over all is not nearly as high as is commonly made out, widely believed, and propagated by the Opposition. 9.0 p.m.
My hon. Friend the Member for Ashton-under-Lyne and my hon. Friend the Member for Heywood and Royton did a good job in trying to simplify and make clearer what rates people actually pay, and there is a lot to be said for that. The Board of Inland Revenue is constantly applying its mind to this. My hon. Friends' Amendment was not called, and if it had been I would have had the dubious pleasure of pointing out that it would have had the effect of increasing taxation rather than keeping it as it is for the simple reason that if one taxes every £ at 6s. 5d. a man will obviously pay more tax if he is only given the amount of the personal allowances and not given the earned income relief. That was the technical difficulty about the Amendment, and I will gladly explain later if my hon. Friend would like me to. There is a great case for simplification here.
I come to another point, the question of the comparison of taxation between this country and elsewhere. I do not suppose that this speech will get rid of the myth, but it is a bad thing if the facts are not stated. This myth has persisted ever since the war and the facts ought to be stated so far as they are known. If one compares, as the international comparisons do, the yield from direct taxation on incomes, including social security contributions, as a percentage of the gross national product, the figure for this country is 18.4 per cent. That is the amount we paid in direct taxation as a percentage of the gross national product. In Belgium it is 19..8 per cent., in West Germany 23.3 per cent., France 24.7 per cent., Italy 19.2, and the Netherlands 26.5 per cent. [column 908]
The Common Market average therefore is 22.7 per cent. This is not always true. I have taken another figure which is taxes as a percentage of gross national product at factor cost. Here we come out about halfway. The United States is the lowest at 30 per cent., Canada is 31 per cent., Britain 34.2 per cent., Italy 33.3. per cent., Belgium 33.4 per cent., Holland 37.6 per cent., West Germany 39.6 per cent., France 45.5 per cent.
These figures certainly do not support the claim that the United Kingdom is heavily taxed, at any rate by comparison with the Common Market countries. There might be a case for saying that we are more heavily taxed than the United States, but by comparison with the Common Market countries these figures, which I have from the O.E.C.D., certainly do not bear out a comparison of that sort. I acknowledge that these comparisons are extremely difficult to make.
Before I conclude by referring to what has been called the “brain drain.” I ought to say one thing to the hon. Gentleman the Member for Worcestershire, South. The News of the World is a splendid paper, and I do not wish to get out of order as he did, because I always like to keep in order with the Chair. The News of the World is a splendid paper, but unlike the hon. Gentleman I do not read the headlines to find out what the Government's economic policy is. I beg of him to read it for other purposes on a Sunday morning. If he likes, I will gladly send him a copy of my speech and, without getting out of order, I would merely say that what I was making in my speech was not an invitation to anyone and everyone to go for large increases in wages. It was a simple statement and, on the advice that I am getting, we can look forward both to a balance of payments surplus and to a growth rate of 3 per cent. during the coming year which means an addition of £1,000 million in real resources to the yield of this country. That is what I was saying.
Sir G. Nabarro
rose——
Mr. Callaghan
The hon. Gentleman was out of order. I am now getting out of order.
Sir G. Nabarro
This is not out of order. I gave way to the right hon. [column 909]Gentleman on two occasions. I said that the effects of the reports of the speech of the Chancellor of the Exchequer at Leicester last Saturday were deplorable. Can one deny that? “The freeze is over—Official” , in screaming headlines: it is that which does the damage and which will cause every employee on 1st July to say, “The News of the World said that the freeze was over.”
Mr. Callaghan
I put my oath on this. I do not believe that any wage earner will say that the headline last Sunday in the News of the World was “The freeze is Over” . He will say that it was “My Private Life—by Jayne Mansfield” . As the hon. Gentleman knows, I have to shoulder a number of burdens, but I cannot carry the burdens of the headline writers of the News of the World.
The right hon. Member for Enfield, West had something to say about my personal position. I do not object to it. He is entitled to attack me on my deficiencies in policy, even in a personal manner. I take no exception to it. But it is difficult to say that the Government have been short of ideas, considering that we have been attacked over the last two Budgets for all the ideas which we have produced. The Opposition complain that they have not been properly worked out, but I have never heard it suggested that we are long on metaphors but short on ideas.
Since the right hon. Gentleman made a very substantial criticism of me, let me reply with equal candour and equal good temper. He is a representative of a very big institution in the City of London. He told us that he has been in and around the Finance Bill for 20 years. I must tell him in all candour that this is what surprises his friends in the City of London—that having been around the Finance Bill for 20 years his speeches should still be so superficial and threadbare when compared with those of the right hon. Member for Barnet (Mr. Maudling). The right hon. Gentleman has a great deal to live up to if he is to achieve the reputation for economic knowledge and penetration of his right hon. Friend. However, I say that in exactly the same spirit in which he referred to me.
I come to the serious question of those at the top of the income scale who are bearing a heavy tax burden. The hon. Member for Worcestershire, South was [column 910]partly right when he referred, as he always does when giving the complete argument, to the fact that in the United States incomes are three times higher than they are in this country. This is the root cause of the problem. When we look at the facilities for research and development, and the opportunities which are offered to people in this very wealthy democracy—the most wealthy democracy in the world—teeming with natural resources and a tremendously fast-generated national income, it is perhaps not surprising that incomes and rewards there can be so much higher than they are in the United Kingdom, which, since the discovery of coal, has had no discovery of natural resources, as far as I can remember, until we had the latest bit of luck with natural gas.
However, I do not think that the hon. Member for Worcestershire, South helps particularly by saying that if only we would reduce taxation rates by 6d. or 9d. we should make up to the young men who are looking abroad—and the hon. Gentleman did not complain that they went abroad—for the sort of shortages inherent in living in a country like Britain which is poor in natural resources and does not have the wealth of the United States.
I would offer to these men a word other than that offered by the hon. Member for Worcestershire, South. I do not complain about them going, but I hope that they will go, and learn, and come back. This is what I would like to see them do. I would like them to come back with their great skill and brains and knowledge and help us to overcome the natural disadvantage which this country has against the great democracy of the United States. I would like them to help us get a faster rate of economic growth, and to get the better management that is needed in industry. I would like them to bring back some of the ideas which they have acquired, and the research which they have done, and apply them here. If the hon. Gentleman puts his proposition in that way, I am at one with him.
We are examining the problem of what is called the “brain drain” . There are a number of factors in it. There has been set up under the chairmanship of somebody who is well known in private industry a working group of the Committee on Manpower Resources for Science and Technology. It is examining [column 911]What can be done both to encourage people to stay and to get those who have gone to return, and we are all waiting to see what the members will bring out from their practical experience, but if I had to give an interim report I would say that the problem comes down to the fact that the United States is a much wealthier country. They speak the same language, and this makes it easier for people who go there. We do not find many of our top executives cheerfully going to work in France, or that there is a “brain drain” to France, or to Italy, or to West Germany. I hope that there is some interchange, but it is not the same. The United States' problem is separate and unique.
There is a different attitude to young executives in United States' industry. It is much more willing to promote them earlier. There is a different approach to them, and I think that this is a factor in determining whether they go. These young executives can secure better careers over there because of the width of the opportunities open to them, and, as the hon. Gentleman said, salaries are vastly higher than here.
If one adds all that together one realises that there is a tremendous attraction for these people, and with great respect to the hon. Gentleman I do not believe that the advantages can be offset simply by reducing Income Tax in this country by 6d. in the £, especially when one puts against that the social cost which would be involved, the cost to which I have referred, and the additional burdens which it would be necessary to impose on the ordinary wage earner. It is for these social and economic reasons, as well as because of the loss of revenue which would be involved, that I must ask the Committee to reject the Amendment.
Mrs. Margaret Thatcher (Finchley)
I am grateful to James Callaghanthe right hon. Gentleman for replying when he did and for letting us have the advantage of some of his thoughts on this subject. Perhaps I might follow him in one or two matters to which he referred. I cannot follow him in everything he said because he widened the debate considerably and we would be here for too long were I to do so.
My right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) said [column 912]last year, and he has consistently said this year, that £130 million would be available if the Chancellor did not repay the premiums under the S.E.T., so the right hon. Gentleman must take that into account in considering the Amendment.
Mr. Barnett
Surely the hon. Lady cannot regard the £130 million as of no value to industry? I go some way with her on this, but there is some advantage to industry in it.
Mrs. Thatcher
My right hon. Friend said that not all of it was needed for S.E.T. payments. If that money was added to the money which would accrue from the other suggestions made by my right hon. Friend there would be more than enough to pay for the cost involved in accepting the Amendment. If, in addition, £75 million was not made available to nationalise the steel industry, still more would be available. I do not think that the question of cost really enters into the argument. I was asked where the money would come from. My right hon. Friend has given a reply, and if one adds the figure to which I have just referred one sees that there is more than enough to meet the cost which is involved.
I come now to the burden of taxation. I agree with the Chancellor that at present this country is not the most heavily taxed if one considers the burden of taxation, although we are getting steadily more heavily taxed in relation to other countries the longer the Labour Government continue in office. A chart in The Times of Friday, 19th May, accompanying an article by Peter Jay, is an excellent advertisement for the years of Conservative Government. He shows that we were the only country, among Italy, the Netherlands, Germany, Sweden and France, which did not increase the burden of taxation between 1956 and 1964. Until 1964 we had the lowest burden of taxation of all those countries.
Nevertheless, in those years—and this relates to the Chancellor's point about social benefits—although we kept the burden of taxation below that of other European countries we raised the retirement pension on three occasions—once by 10s., again, in 1961, by 7s. 6d. and again, in 1963, by 10s. We also made increases in National Health Service benefits and education. [column 913]
Although we kept the burden of taxation below that of other countries, because we provided incentive, we were able over the same period to reduce taxes and increase social service benefits. That is a significant point.
Mr. Eric S. Heffer (Liverpool, Walton)
Is not the hon. Lady aware that on one occasion, when there was an increase in the retirement pension, the sweet and tobacco concessions were removed and in the end the pensioners ended up with an increase of 1s. 6d.?
Mrs. Thatcher
The hon. Member cannot have heard the period I mentioned. It was the period in Peter Jay 's article—1956 to 1964. The time to which the hon. Member is referring was before that. In any case, the other increases of 7s. 6d. and 10s. were not affected. Over the same period we increased social service benefits, reduced taxes, and kept the general burden constant. The three are not inconsistent.
Some of the other figures given by the Chancellor can be comparatively easily reconciled if we get the classification of direct taxation and indirect taxation right. From the figures the Chancellor gave he adduced that Europe paid more in direct taxes than we did. But he classified as direct taxes those which are more often classified as indirect. For example, the whole of the employer's social service contribution is normally classified as an indirect tax. Niall MacdermotThe Financial Secretary has constantly told us that S.E.T. was an example of an indirect tax: and the Richardson Report, to which J. Diamondthe Chief Secretary also referred, when giving these figures also classified the payroll tax as a direct tax. More often it would be classified as an indirect tax. We must get our classifications right before we can compare figures.
Mr. Callaghan
I do not like to be accused of not giving the correct classifications. The hon. Lady can adopt what classifications she likes. I am adopting the classifications used by O.E.C.D. for its own purposes. I have not extracted any figures; I have merely produced the O.E.C.D. classifications and the answers.
Mrs. Thatcher
Then perhaps when we have further S.E.T. debates the Financial Secretary and other Front [column 914]Bench Members will not refer to it as an indirect tax, because on that basis it is a direct tax.
It would be easier if we did not resort to particular classifications, but took comparisons from the Chief Secretary's figures of direct tax on income. On 19th January, 1967 in col. 122 of the Official Report, he gave figures of direct taxes on income in some of the countries listed, from which it emerged that Italy was the country with the lowest taxes on income, France was next lowest, Belgium next lowest, West Germany next lowest, we came fifth, and only the Netherlands had higher taxes on income. That largely negatives the Chancellor's point.
Among comments on the marginal rate of taxation and its effect on incentives, the hon. Member for Heywood and Royton (Mr. Barnett) challenged whether taxation has any incentive effect or whether people would work harder if they paid less tax. In a letter to The Times on 1st April, Mr. Ronald Grierson, who, I understand, has accepted the D.E.A. appointment of Managing Director of the I.R.C., so cannot be an official spokesman for the Tory Party, said: “By far the biggest obstacle to the dynamic development of industry lies in the absurdly disincentive effect of present taxation levels on earned income.” I think that that was right——
Mr. Barnett
The hon. Lady is quoting an assertion by an individual. I quoted an objective survey by the Royal Commission in interviews with thousands of people.
Mrs. Thatcher
No, the Canadian Royal Commission also took extensive evidence, as the hon. Gentleman knows. He quoted from my right hon. Friend's quote from the Royal Commission on Canadian Taxation. I have a single volume of the eight or nine volumes here, in which we read: “We are persuaded that high marginal rates of tax have an adverse effect on the decision to work rather than enjoy leisure, on the decision to save rather than to consume, and on the decision to hold assets that provide monetary returns rather than assets that provide benefits in kind.” ——
Mr. Barnett
rose——
Mrs. Thatcher
No, I will not give way. The hon. Gentleman can read all this before his next speech in the Committee [column 915]and we shall have something to argue about. There are other volumes as well if he runs out of reading matter.
Many people concentrated on the marginal rates of tax, which, I admit, are extremely high and much higher here than anywhere else. They are also imposed at a lower income level. Many have referred to the level of tax which comes right into the ordinary Income Tax brackets with regard to minor management levels.
I want the Treasury to be able to check all these figures, so I am giving exact references. The Economist of 25th June did an analysis shortly after a similar debate in the Committee last year, comparing the net take-home pay or tax levels of people in various countries in specific jobs. It took it not at an ordinary exchange rate, but by rates which match equivalent purchasing power, and came to this conclusion:
“Roughly, the point at which the British tax system becomes significantly more punitive than those of its main trading rivals is”
—the income of £1,500 a year. It gave the main trading rivals as the United States, Germany and France.
I specified that, because it comes right into the middle income groups who often bear the burden of the increased taxes imposed by a Labour Government. No one should think that we concentrate in this debate only on the marginal levels. This is a debate about the middle levels of management and the middle income groups as well.
Few people have mentioned the importance of reducing Income Tax as it affects savings. People holding large savings and paying very much higher rates of tax pay a standard rate of 8s. 3d. in the £. Anyone with a reasonable income also [column 916]pays immediately the standard rate of tax on his first few pounds of savings. This is a considerable disincentive to savings. It is, of course, impossible to say, on the one hand, “I want more savings,” but, on the other, to insist that they are taxed very highly.
I do not want to detain the Committee too long—[An Hon. Member: “Why not?” ] I must remember the next Amendment. There are many psychological factors here. We do not say that the Amendment would work wonders immediately, or do all that is required. However, the argument of the Government is to the effect that there could never be a case for reducing Income Tax because such a reduction would always benefit those who have more. I suggest that the psychological effect of the reduction which we are proposing would be tremendous, particularly since the Labour Government have become synonymous with the “high tax party” . Having listened to the remarks of the Chancellor tonight, I fear that hon. Gentleman opposite will become known as members of the “higher and higher yet tax party” .
The Government and the country would get a tremendous boost if the Amendment were accepted, because it would mean that people would get a little more. The Chancellor would then find it possible to achieve growth and improve our social services, just as we did during our 13 years of office. [Laughter.] It is obvious, from the attitude of hon. Gentlemen opposite, that it is about time we voted on this issue to show how strongly my hon. Friends and I feel about it.
Question put, That “8s. 3d.” stand part of the Clause:—
The Committee divided: Ayes 218, Noes 140.