I beg to move Amendment No. 1: In page 19, line 33, to leave out "8s. 3d." and to insert "7s. 6d.".

With this Amendment the Committee can discuss Amendment No. 164: In page 19, line 33, leave out "8s. 3d." and insert "8s.".

I am grateful to you, Sir Eric. I suppose that much of what I say on this Amendment might have been said on the Motion, "That the Clause stand part of the Bill," because when one is considering the annual Clause in a Finance Bill to determine the standard rate of Income Tax for the ensuing year it is of course indisputable that an amendment to the standard rate must embody much comment of what would normally be said on the Motion, "That the Clause stand part of the Bill". Income Tax makes a massive contribution to the revenue. In 1966–67 the total revenue from all taxes is £10,224 million. The estimated revenue from the Income Tax, after consideration and acceptance of the Budget proposals, is £3,600 million, or approximately 35 per cent., of the total revenue. The Income Tax is, therefore, even more than Customs and Excise revenues, the largest single contributor to the revenue.

The standard rate of Income Tax, I shall aver, being 8s. 3d. in the £, is inflationary, is punitive to individual endeavour and enterprise, and ought seriously to be considered by the Committee in its proper context and perspective. It is about eleven times as important in a fiscal sense as the Selective Employment Tax. The Selective Employment Tax, if accepted in the form proposed, would yield £315 million in 1966–67. The Income Tax at 8s. 3d. in the £ standard rate will yield more than eleven times that figure at £3,600 million.

The rate is 8s. 3d. in the £ due to an increase of 6d. carried by the present Government in 1965. I want to say a few words in retrospection about standard rates of Income Tax. When the last Socialist Government but one, left office in 1951, the standard rate of Income Tax was 9s. 6d. in the £. In 13 years of fiscal propriety by the Tory Party the standard rate was reduced progressively from 9s. 6d. in the £ to 7s. 9d. in the £. In fact it had been reduced from 9s. 6d. in the £ to 7s. 9d. in the £ in eight short years by 1959. There it got stuck for the ensuing five years, I am sad to say, though I enjoined successive Conservative Chancellors of the Exchequer between 1959 and 1964 to reduce it further.

But in those 13 years there was this important and—I stress it to the Committee—progressive reduction in the scale of Income Tax. When I use the word "scale" I say it in a generic sense, not only to embody the standard rate which came down from 9s. 6d. to 7s. 9d. in those 13 years, but also the tremendous increase in allowances for Income Tax, notably the child allowance, which in 1951 was £70 for all children in full-time education or below that age and which in 1964 had risen to a graduated scale of child allowances which went as high as £165 in a year for a child over 16 years in full-time education.

The whole gamut of Income Tax showed, in those 13 years, a progressive reduction in its scales. That is eternally to the credit of the Tory Party, because throughout those 13 years I was from the Government benches, aided by a large number of my hon. Friends, expounding the fiscal theory, which I believe to be one of substantial propriety, that the levels and incidence of direct taxation on earnings should be brought down as low as possible and that, if compensatory measures were necessary, those measures should be directed to increase in taxes on sumptuary consumption and personal expenditure.

rose——

No; I will not give way to the hon. Gentleman. I am at the moment directing my remarks to the Chancellor. As I pay the top rate of 18s. 3d. in the £, I might be allowed to know. Apparently the Chancellor will not withdraw. I shall press him in due course. However, that was an aside about Surtax. [Interruption.] Do not call me "Gerald" in Committee. It is most improper.

Not only are these levels of taxation— I referred to the top scale only as an aside—derogatory to individual effort and endeavour, but they have a very serious effect on the level of personal savings. I shall return to the question of personal savings later, because I propose to equate the loss in revenue that acceptance of this Amendment would entail to the whole question of personal savings and the importance that the Treasury attaches to that aspect of our financial affairs.

I am not alone in adducing these opinions about the level of direct taxation. I select one recent quotation reported in the Financial Times of 6th June last, 14 days ago. It is from one of our captains of industry, often used in quasi-official capacities by the Government. I refer to Sir Donald Stokes, Managing Director and Deputy Chairman of Leylands, surely one of our most successful exporters and one of our most enterprising, forward-looking and progressive industrialists. He said this:

"The Government must, urgently, put some incentive into the tax system: why not a sales tax instead of Income Tax, for a start?"

There is this to be said for the Finance Act, 1965, and this year's Finance Bill. It has achieved a limited reformative advance—I give the Chancellor this point —in two senses. Last year the Corporation Tax, subject to the two caveats that it was badly conceived and wrongly drafted, in my opinion, achieved something very important. It dissociated the taxation of companies from personal taxation. It separated the two, whereas previously any alteration in the rate of Income Tax affected personal incomes as well as company taxation.

That was an advance in tax reform. Associated with it this year is the broadening of the tax base with the Selective Employment Tax. I shall not talk about this yet, except to say that again it is badly conceived and extremely badly drafted, but I would always accept the principle that progress towards a payroll tax, as I said in a speech on the Budget Resolutions on 5th May, if it were linked to a direct reduction in personal rates of Income Tax and increased incentives for investment in industry, would be correct.

But having said that, I would draw attention to the important advance of separating taxation of companies from taxation of individuals, which was achieved in the Finance Act, 1965, and this year embarking on a new venture of the taxation of services which, if it were properly drafted and, subject to the caveat that I have entered, I would find acceptable. I believe that this lays us open to a broad advance, not only this year but in ensuing years, in the reduction of the level of taxation on the individual workers, and I include in that generic term every man subject to Income Tax from the shop floor level up to the most heavily taxed class, those earning more than £15,000 a year—they are all in this net—and it is that reduction of the level of direct taxation which is sought in this Amendment.

The cost of this Amendment—9d. reduction in the standard rate of Income Tax—would be £240 million in a full year. I hope nobody on the Treasury Bench will contradict that figure. It is approximately correct. The Chancellor did not do his sums very well on Income Tax last year. In fact, he never does. The right hon. Gentlemban has indicated dissent twice, but I always do my homework before I talk about figures of this magnitude. Last year—I quote from the Chancellor's Financial Statement for 1966–67—he budgeted for proceeds from Income Tax of £3,592 million. He made an error of £86 million. That figure of £86 million was the extent of his Income Tax error last year. [Interruption.] I do not expect the Treasury to be more accurate than to estimate the yield of this important sector of taxation to closer than one half of one per cent. Actually, it made an error last year amounting to a lot more than that. It made an error in excess of 2 per cent, in its estimate of the yield of Income Tax.

Therefore, I appeal to the Chancellor if he is going to reply—I do not know whether he or somebody else is going to reply—that when I say that the cost of this Amendment would be £240 million in a full year, the cost of this Amendment depends on the out-turn of Income Tax as a whole in this year. But I am near enough for all practical purposes in saying that it would cost £240 million. Sixpence was estimated to cost £160 million; 9d. might cost £240 million. But it is approximately correct for the purposes of my argument.

I am grateful to my hon. Friend for giving way. I am a little confused. He quoted a statement by the Chancellor last year and then he has given figures showing what the cost of this Amendment would be. Can he help the Committee by saying whether, in his calculations and in his original statement about the proportion of the total revenue which is contributed by Income Tax, he has taken account of the introduction of Corporation Tax? I for one am not clear about this.

I am always indebted to my hon. Friend for his constructive interventions, and that is a very good point, but perhaps he will be good enough to go to the Vote Office and get the Financial Statement for 1966–67. All the figures that I have quoted are in the Financial Statement. The yield of Income Tax in the current year is £3,600 million after Budget changes. This is on page 10 of the Financial Statement. The total yield of all taxation is £10,224 million. The one related to the other is 35 per cent. Perhaps my hon. Friend will get the document. All my figures are quoted from the Treasury documents issued at the time of the Budget.

I want to go on to the important question of revenue. The Chancellor will spring to the defence of his Budget proposals this year, and will say that he cannot afford reduction of the standard rate of 8s. 3d. in the £ to 7s. 6d. He will say that he cannot afford a reduction in the revenue of £240 million. But the same Chancellor of the Exchequer and all his predecessors for years and years past have stumped the country saying "Give me National Savings and I will abate tax revenue by an equivalent sum." Every Chancellor, the present Chancellor included, makes dynamic speeches in support of personal savings and National Savings and says "If I can get an increase in National Savings it is as good to me as tax revenue."

Let me examine the record of the Labour Government in National Savings, which is deplorable. In the last year of Tory Government in 1964 there was a surplus on National Savings of no less than £1951 million. That was in the year 1964–65.

It is in order for the hon. Member to make a passing reference to National Savings on this Clause, but it is not in order to refer to it in great detail.

I am grateful to you, Sir Eric. If I might complete what was intended to be a passing reference, in 1964–65 the surplus was £195T million. In the following year 1965–66, a year of Labour Government, there was a deficit on National Savings of £54 million. The two put together exactly equate themselves, the changeover from surplus to deficit producing a total of £245 million, in the context of National Savings, to the cost of this Amendment, a reduction of 9d. in the £ in standard rate of Income Tax.

If it is true—and every Chancellor since Mr. Hugh Dalton in 1945 has told us this—that the tax revenue is the equivalent of National Savings revenue, the Chancellor ought, if he promoted National Savings on the scale that the Tories promoted them in the years up to 1964, to be able to afford this important reduction of 9d. in the £ in the standard rate of Income Tax.

Now I pass to broader philosophical considerations in fiscal matters. I am not alone in these sentiments about a reduction in the level of direct taxation, notably Income Tax. I have powerful allies, of course. However, I do not want to do more than quote just a couple of them to indicate what is going through the minds of contemporaries of ours in the same sense, for I believe that all thinking people realise today that this punitive level of Income Tax, especially when added to Surtax on the present scale, is the gravest deterrent to increasing production in industry. It is the gravest deterrent on the shop floor. Every capable, skilled worker in industry today has worked out to a frazzle exactly at what point the full standard rate of 8s. 3d. in the £ applies to his income, and at that point his individual and personal effort begins to decline.

Ask the Coal Board.

I should have to earn approximately £700,000. This is not unearned income. I should have to earn approximately £700,000 in order to be left with a net sum, after Income Tax and Surtax, of £63,114, which is what this lady won with an investment of a few shillings, and her winnings were tax-free. Good luck to her.

I do not envy her, but we have the whole of our scale of fiscal and social values wrong when a person can invest a few shillings on football pools and win up to £300,000 largely tax-free, whereas the nation's best brains, all of the nation's inventiveness and genius, from not only the top level of industrial management but right down to the shop floor, are savagely taxed as an amalgam of an Income Tax and Surtax.

It is for all those reasons, and because I wish to make good for the Revenue the £240 million loss which this Amendment would entail by a dynamic increase in National Savings and other forms of personal savings, which have flagged so badly since 1964, that I have put the proposition to the Committee. I hope that we shall have a full and satisfactory reply from the Chancellor, and that he will not continue to dissent when I tell him that the top rate of direct taxation is 18s. 3d. in the pound. I hope that I shall have his apology within 48 hours on that important matter, for I have stated it correctly. I ask all my hon. Friends to support me in this important Amendment.

I am sure that the whole Committee was deeply impressed by the plea which my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) has just made. I am sure that the Committee was also impressed by the great nobility of his character which he revealed when he told us that he did not envy the lady who won £63,000 for a 5s. stake. I must confess that I—I do not know about you, Sir Eric—could not compete with my hon. Friend in such a matter. I envy that lady from the bottom of my heart and I am sorry that I did not make a similar investment.

I regard the Amendment with the utmost seriousness, and I hope that it will not be argued against us that we are seeking to make an irresponsible and inflationary proposal. Although I should be out of order and should quite properly be rebuked by you, Sir Eric, if I went into detail, I must put the Amendment at least in the context of the new Clauses which have been put down in my name and those of my hon. Friends to abolish Purchase Tax and to replace both what would be lost to the Revenue now as a result of this proposal and the yield from Purchase Tax with an across-the-board sales tax.

Although I shall not go into any details here, I wish to make it absolutely clear that the Amendment, which would cost a considerable amount of money to the Revenue, is not put forward irresponsibly or lightly, or in any spirit of unwillingness to find the money which the Government need to finance their policies, no matter how much we may disagree with them.

The Amendment is put forward with the intention of condemning direct taxation at its present penal level. We believe firmly that this is a bad thing, which has had, is having, and will continue to have, disastrous effects upon the country. Some hon. Members opposite see direct taxation not merely as a means of providing revenue but also as a means of levelling incomes. With this object of taxation my hon. and right hon. Friends and I emphatically disagree; we do not believe that it is right or proper for the Government to impose their dogmatic or social views in such a manner. Three major results follow from the imposition of direct taxation at its present level.

First, as my hon. Friend has made clear, the edge is taken off all endeavour. Secondly, a great deal of effort, quite wrongly and improperly, is diverted to seeing how the tax bill can be put at its lowest level. Once taxation reaches penal and punitive levels—and it has existed at those levels now for too long—the inevitable consequence is that far too much effort goes into the business of avoiding it. I do not mean that it is dodged in an improper manner; tax liability is merely reduced to the minimum.

Then there is the question of the brain drain. Who can doubt that many of our intelligent young men, on whom our future depends, feel deeply discouraged by the present level of direct taxation? There are also a few people who stand to benefit from a high level of taxation —those who become skilled and highly successful manipulators. I do not know whether the Chancellor recalls reading a recent article in the Financial Times regarding Corporation Tax, by Mr. Harold Wincolt, entitled, "Jim Helps Charlie." The point was that some of the provisions concerning Corporation Tax were so designed as to give direct and quite uncalled for assistance to the take-over bidder.

The third point to remember about the penal level of taxation is its effect upon savings. My hon. Friend the Member for Worcestershire, South has already mentioned this. To maintain direction taxation at its present level does monstrous and irreparable injury to the cause of savings. There can be little doubt that any Government who seek to maintain taxation at this level are merely blowing hot air when they talk of growth, purposiveness, planning, dynamism and all that sort of thing.

I do not want to quote too much what the Prime Minister has said, but the targets which he and his Government have set themselves will be defeated without question if they adhere to this level of taxation. Nothing is to be gained by flying in the face of human nature. The Government have committed themselves —as has the Socialist Party for a long time—to the ghastly error of seeking to create a society in which neither hope nor anxiety has any place.

To do that is to disregard the joker in the pack—human nature. There can be nothing wrong with people seeking to better themselves. There can be few things more foolish than for a Government to seek to remove the hopes of reward from those who are successful and, at the same time, to remove all anxiety from the community. By this we are extinguishing much-needed endeavour.

We are all familiar with what the Socialist Party said before the 1964 General Election, namely, that there was no need for any general increase in taxation. Taxation has increased by over £1,000 million in 18 months. We believe that to the extent that that increase has been piled upon direct taxation it has been a double offence. If the edge of our country's endeavour is to be sharpened again it is no good preaching sermons or dousing the nation with pious exhortation from the television screen or political platform. We have to show the country that effort gets its reward and failure gets its penalty.

I hope that the Chancellor and the Government will not regard this plea as being put forward in any frivolous fashion simply because they disagree with it. Some of us believe that the granting of such relief as we ask for is fundamental to the recovery of our country.

I had not intended to intervene, but it is right that before the Chancellor gives his welcome to the hon. Member who moved the Amendment a back bencher on this side should say how much he appreciates the raising of this important subject, in his characteristic manner, by the hon. Member for Kidderminster—I am sorry, but I have not yet got used to his new constituency; perhaps his new constituency has not yet got used to him.

It is Worcestershire, South. My hon. Friend the Member for Kidderminster (Sir T. Brinton) is sitting at the back.

The hon. Member for Worcestershire, South (Sir G. Nabarro) has raised a very important issue, and I want to comment briefly upon it.

First, he and the hon. Member for Yeovil (Mr. Peyton) seemed to resent the aspect of direct taxation that takes into account the fact that some people are better off than others. It is not our desire to level that makes us feel that it is the better off who should bear the heavier burden of taxation, but our desire that the burden should be borne in proportion to the breadth of back of those who are to bear it.

We still believe that that is right. It is not an act of class spite or any malign feelings on our part, or on the part of the Chancellor that makes us support the notion that the State's expenditure and fiscal needs should be satisfied having due regard to the financial strength of those who have to satisfy them. Although it is popular cant at present to say it, it is not enough to take the view that wherever we have savings we can reduce taxation. I do not say that this principle has not some relevance, but we must not overdo it and imply that as long as we replace the tax by savings we are dealing adequately with the situation.

When we have a saving it represents a charge on the next generation, and it is the Chancellor's duty in raising money to ensure that the present generation bears its fair share of taxation in proportion to its means. Although nobody is averse to the general concept, in modern society, of examining how we can fairly switch some of the burden of taxation from direct to indirect taxation, we must do so without prejudicing the very deeply felt principles of social justice which lie behind our present tax structure—principles which have been accepted by all parties.

We must also bear in mind the fact that our taxation system was fixed in the days when a small number of rich people had to bear the cost of Income Tax and the idea of taxing expenditure would have been brutal, unjust and regressive. I am not sure that the same considerations apply to the same extent in a society in which there is mass purchasing power on the vast scale which, I am happy to say, exists in our present society. All this makes it right that the Chancellor should always examine—he has shown this in the most practical way in his introduction of the Selective Employment Tax—the possibility that, when burdens have to be borne, they may take the form of indirect taxation on a broader base than we have been accustomed to in the past.

I have always wished to raise the unexplained paradox in the thought which lies behind our finance in this country. I refer to the question whether high taxation is inflationary or deflationary. As I understand it, the hon. Member for Worcestershire, South is anxious to deflate the economy further because, according to him, the present rate of taxation is inflationary and it is to be assumed that, if it is reduced, it would be deflationary. He is, therefore, calling for further deflation.

I am not certain how this would work out because of the unexplained paradox in all this thinking. When the Chancellor imposes a high rate of Income Tax, for instance, in order to deflate the economy, if he succeeds he gets in less revenue than he expects. If he fails to deflate the economy, he always gets in more revenue than he expects. So one has the oddity, which has never been explained by any pundit to me, that a tax designed to deflate the economy produces more revenue if it fails in its object and less if it succeeds. This seems to call for some explanation.

Conversely, when we reduce taxation in order to inflate the economy, if our measures are not adequate we find that the reduction of taxation does not apply, but if we succeed, again conversely, the tax brings in more money, not less. This is one of the technical points which has always occupied my mind when we have these discussions, and perhaps it may provoke a passing word from the Chancellor when he replies.

By and large, however, our taxation system must continue to be structured upon the well-established principle that the broader the back the greater the burden it may fairly bear. I have some sympathy with the hon. Member for Yeovil. I have never quite overcome my childhood experience in relation to the Income Tax some 40 years ago when my father first informed me that there existed such a tax. I learned of this fact with some horror, a horror which was not at all mitigated by the further fact that my father informed me that the gentlemen who collected it were the only licensed burglars permitted by the Government. I have partially recovered from that instruction, but never wholly.

Like my hon. Friends the Members for Worcestershire, South (Sir G. Nabarro) and for Yeovil (Mr. Peyton), I believe that nothing has so great or so widespread an effect on the health of our economy as the standard levels of direct taxation. I have no doubt whatever that these high rates are thoroughly bad for our industrial health, thoroughly bad for the competitive capacity of our trade, and thoroughly bad for the initiative of our people and for our reputation. Nothing discourages effort so much as high levels of direct taxation. I am absolutely at one with my hon. Friends in that.

I have put down a slightly different Amendment, not because I disagree with my hon. Friends in any of their arguments but because I wanted to keep my point as far as possible—sometimes I find it difficult—within the context of the Chancellor's Budget this time. I also have done my figures. I cannot paint a broad canvas in the way that my hon. Friend the Member for Worcestershire, South does, producing so many figures that there is hardly room for another one —though, no doubt, the Chancellor will try to bring some in in a few minutes —but I have done my figures and I have come to the conclusion that it would be very difficult, purely on the figures at least, not to put the argument as I see it.

I have often had figures thrown at me. At times when I was sitting on the Government side, having the almost more difficult time of arguing with my own Government on Finance Bills, I have had figures thrown at me and had it said, "How could you possibly justify this in the light of the economy?" On this occasion, I am quite certain that what we propose can be justified, for the simple reason that we do not accept, as my hon. Friend the Member for Worcestershire, South pointed out, the present setting of the Selective Employment Tax. My right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) has made this clear. We do not accept it. We do not agree that there is any sense, real encouragement or purpose in this messing around with contributions in order to try to give an alleged bonus to people who will, in fact, get very little after they have paid their increased costs and their further taxation.

It would be very much better to go about things by another method. What method is a matter of opinion. I want to be reasonable. I have taken part in many of these debates, and I like to keep my arguments on a reasonable level. Whether this would in the end be the most reasonable way instead of for instance, rejection of the Corporation Tax, is another question. I cannot anticipate it at this stage, but it is down for discussion and I hope that there may be an opportunity. One cannot debate everything now. One must be reasonable, but we are still entitled to advance our argument that we consider that there would be a very much better way of dealing with the economy, even in the mess and muddle which the present Government have got it into, than the way they themselves propose. My Amendment is more modest on that account.

The hon. Member for Manchester, Cheetham (Mr. Harold Lever) has, quite rightly, said that broader backs should carry a greater burden of taxation. There is no difference of opinion in the Committee on that account, and I do not think that there has ever been. We are not arguing from that premise at all. None of my hon. Friends has argued in that way. What we are arguing is that these rates of taxation are now so high and penal that they are discouraging effort. Inevitably, therefore, they minimise the capacity for growth in the economy, which is becoming thoroughly stagnant under the present policy. In fact, if we have the growth in the economy, we shall have the money to meet the bill. Gracious me, this has been the argument of right hon. Gentlemen opposite at the last two elections— that they would bring about a miracle through the growth of the economy. In fact, of course, they are now taking every step they can to prevent it.

My father spoke with even greater passion than the hon. Gentleman in regarding Income Tax at 4s. 6d. as being destructive of the incentive to work and to earn.

I am appalled by what has happened since. I am glad that my hon. Friend the Member for Worcestershire, South paid tribute to the record of the Tory Party when in office on this matter, which gives us the right to be very critical today. As soon as we could get over the grievous muddle left to us by a Labour Government—no doubt, we shall have a similar muddle left to us after the next election—we set about cutting down the levels of taxation, both the standard and the reduced rates, and also we improved the allowances. I cannot remember the country's economy suffering particularly. The fact is that people were encouraged quite a lot and we had quite reasonable growth. It was not all we wanted—no one will get all he wants—but it was a jolly sight better than we are getting now. We shall get nothing like the growth we want until the present situation is substantially reversed.

I believe that to move over to some extent from a tax on income to a tax on expenditure is the right way to proceed. Everyone likes to feel that he has the spending of his own money. He likes to feel that what he earns is reasonably visible to him in his possession. In this way, he has an incentive, instead of, as he has now, the thought that his extra effort will suddenly be taxed at the present high rates, which, as I have said, discourage the greater effort which we simply must have.

I wholeheartedly support my hon. Friends in the move they are making. I hope that the Government will give a little better answer than we had when the Budget was introduced. The Chancellor is very busy talking about savings in preference to taxation, but we are little better off with that because, with the present taxation, there is no incentive to savings. Unless this situation is reversed and we get away from the system of penalising people for effort, there will be no encouragement in this country. We shall not be fit to take our part in any larger organisation in Europe. We shall not get the growth in the economy, not even the modest amount necessary to maintain the Government's face with their present or any other out-dated plans.

I believe that it is the practice that on the Government side hon. Members are expected to help the work of the Committee through as speedily as possible, and for that reason I shall not speak for more than a few minutes. There are, however, one or two things which ought to be said.

I do not know whether the hon. Member for Yeovil (Mr. Peyton) had me in mind when he spoke, because there is a later Amendment on the Order Paper in the name of my hon. Friend the Member for Cambridge (Mr. Robert Davies) and myself which would have the effect of increasing Surtax. I am one of those who take the view that taxation should be used for social purposes and for bringing about equality or at least assisting in the process of bringing it about. I wish that it were within the power of backbench Members in Committee to increase taxation, but I have been told that that is not permitted.

Something should be said in answer to the points raised by the hon. Member for Yeovil about incentives. He spoke about the brain drain. The principal problem here is that young people leave this country and begin a first career at the end of a long period of training, and they do not return.

Does not the hon. Member agree that most people who leave this country go to other countries of their own choice in which the level of direct personal taxation is lower?

That may be so. I shall come to that if the hon. Member will follow my argument. What is needed is not a lower standard rate but higher Income Tax allowances and, particularly, attention paid to the kind of allowance which improves the starting salary of persons entering their jobs. The first job is a job for life for many professional people. Once a man embarks on a particular career, he remains in that career. In many cases we lose these people when they have done their Ph.D. thesis. They then go abroad. The hon. Member is quite right to this extent: they go abroad because the level and character of taxation is such as to discourage people from staying here.

But the right way to deal with that is not to reduce the standard rate of taxation. It is to increase the allowances lower down the scale. My dream Budget would be one in which the first £1,000 of every income was Income Tax free. I realise that this is futuristic. In order to permit that to be done, I should be prepared to see no incomes in excess of £5,000 a year. I have not checked the figures recently, but I understand that if we sliced off all incomes in excess of £5,000 it would bring in about £300 million to £400 million in extra revenue.

Does my hon. Friend mean £5,000 gross or net?

I meant £5,000 gross. If there were no incomes in excess of that figure, the Revenue would be able to collect an extra £350 million in this way. This would make it easier to increase the allowances at the lower end and at the same time it would strike a blow for equality, which I should have thought we all want to see on this side of the Committee. I am sure that my hon. Friend the Member for Cheetham (Mr. Harold Lever) agrees with me.

rose——

I prefer not to give way again. I said that I would not speak for long and that it is the duty of backbench Members on this side of the Committee to assist the business through.

I do not agree with the Amendment and I hope that it will be rejected, but I agree with the hon. Member for Worcestershire, South (Sir G. Nabarro) and the hon. Member for Shipley (Mr. Hirst) in their plea for an expenditure tax. There are several reasons why we might eventually move over to this system of taxation. For one thing, in the race between the tax collector and the tax avoider we should start from scratch. It would make the task of the collector easier. Secondly, in so far as direct taxation is a disincentive to work, clearly an expenditure tax, which is more direct, would be less of a disincentive. Thirdly, it would provide a very good and efficient way of promoting savings, which hon. Members on both sides of the Committee wish to see.

I end with this plea to the Chancellor. One day the Government will bring in the collectivist society which hon. Members on this side of the Committee were elected to promote. When we have a fully nationalised economy there will be no need for Income Tax. [Laughter.] I do not know why that should cause laughter. When the whole of the economy is nationalised the Chancellor can collect his revenue from the trading revenue of the whole economy and not from individuals.

I should like to commend to the Chancellor the appeal of the hon. Member for Reading (Mr. John Lee). I hope that they will find extensive regions of agreement in their attitude towards the economy and that the hon. Member for Reading will be able to produce some response out of the Front Bench in his demand for all-out nationalisation. I have an idea that he will not get very far. As for his idea of cutting off all incomes over £5,000 a year, that would give most senior people in industry an opportunity for a very well-earned holiday because they would not have to do any extra work.

rose——

Members of the Government should be the first to set an example.

I should like to support the Amendment as an attempt to secure rectification of what we know is a deplorable intensification of a destructive tax. The tax at the present level is a penalty on energy and enterprise. I am sure that the Chancellor realises this and that he wishes that he were not in such a corner as to have to go on penalising people whom he must want to work more. Income Tax at this level can only lead to a national decline of effort and of achievement and I am sure that in his position he wants that no more than we want it on this side of the Committee.

I believe that it is the duty of Governments to induce people by suitable incentives to forgo the leisure which is now beckoning on all sides in order that they may put in extra effort and energy and achievement, but do so voluntarily. It is inconceivable that they will do that with Income Tax at the present level. The tax in its present form is old-fashioned and retrograde. It is bound to tempt people to coast when they might otherwise be making the effort which we need. It will be very costly—but this is a costly Government. I suppose that what is behind this higher level of Income Tax is the race between the Government and the inflation which they are inevitably causing. The Chancellor is therefore bound to try every conceivable expedient to raise more money in tax to catch up with the money which he is so freely spending.

The Labour Party themselves acknowledge that they are a high tax party. I hope that the country realises this. I am sure that their efforts while in office will produce a ready response in the electorate when it is seen just how they lead the electorate into distress. I support my hon. Friends wholeheartedly in this effort to secure a reduction in a tax which at present is iniquitous.

I am tempted to support the Amendment if only to allow the hon. Member for Worcestershire, South (Sir G. Nabarro) to have to earn £100,000 a year less in order to have the same amount of money as the lady won at Ascot last week.

The hon. Gentleman has it all wrong.

If the hon. Gentleman wants to earn slightly more than £600,000 a year or a little less in order to achieve the same amount as the lady won, I do not mind. I was interested to note the agreement of the hon. Gentleman and of the hon. Member for Shipley (Mr. Hirst) with the Chancellor's adviser, Mr. Kaldor, about expenditure tax. It was particularly interesting in the light of the vicious and personal attacks on Mr. Kaldor last year. Suddenly, the whole basis of his ideas are being accepted by the hon. Members for Worcestershire, South and Shipley. As I understand it, Mr. Kaldor was one of the first in this country to suggest this sort of tax.

The hon. Gentleman will know from his own researches that, for about 10 years in this House, ever since the Millard Tucker Report, I have supported the principle of a Corporation Tax in order to separate the taxation of companies from personal taxation. Also, there is no objection to a payroll tax, so long as it is properly levied and connected to a reduction in Income Tax. That is my proposition.

It was not the point I was making. I enjoyed the hon. Gentleman's little intervention as much as I did his speech, which the Committee found most entertaining, brief, humble and interesting.

And modest.

Modest—yes.

The serious argument for the Amendment is that it would bring justice and do something about the deterrent effect of the present standard rate of Income Tax. But, on the subject of justice, I found it a little difficult to follow the argument of the hon. Member for Worcestershire, South. That argument suggested, in effect, that it would be more just to give relief to those paying the standard rate than to deal with those who earn so little that they do not pay the standard rate or pay reduced rates or no tax at all. I find it a little difficult to follow such an argument.

I am not against reducing the standard rate of tax or rates of taxation generally. I have stated before that I would like to see a reduction in direct taxation. But the case that the present rate has a deterrent effect is very much overstated. I do not deny—no one with experience could—that, in factories, there are workers who work out carefully at what level they should or should not work overtime. But what hon. Members opposite do not really understand is that, in a progressive form of direct taxation of this kind, wherever the line is drawn, someone will work out precisely where it helps them or where it does not. My hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever) spoke of the days of his father when it was 4s. 6d. in the £. This serves to illustrate the point.

To suggest, as is suggested so often, that an executive earning, say, £2,000 a year, would work very much harder if he paid slightly under £50 a year less in tax is something that I do not believe. I believe that young executives in particular work hard for some very good" reasons and not primarily because, by doing so, they pay £25 or £30 or £50 a year more or less in direct taxation.

Many of the workers who calculate at what point they will pay tax at the standard rate do so without taking into account that they are still entitled to two-ninths earned income relief. Does not the hon. Gentleman agree that the psychological effect of having relief couched in such a way is harmful to additional effort in industry?

I agree that many workers who make these calculations do so for odd reasons. I know of one case where, if they worked on Saturday mornings, they would earn £3 and perhaps pay between 10s. and 15s. of that in tax. Nevertheless, for psychological or other reasons they decide not to work overtime.

The point I make is that, in any direct taxation system, a line is inevitably drawn. One cannot have a foolproof system. Whatever the level, workers will always decide at what point they will or will not work overtime. Anyone with experience knows that the workers make these decisions for all sorts of reasons which are not necessarily connected with the particular level of taxation as it affects them individually. Indeed, in many cases they are not even aware of the level affecting them. The Amendment would be far from just, because if we are to give tax relief then we should consider those paying at a reduced rate. Nor would it deal with the question of deterrence, for the reasons I have briefly stated. I therefore hope the Amendment will be defeated.

Although I sponsored the Amendment I had not intended to intervene so that we might reach a rapid conclusion on a reduction in the standard rate of Income Tax. But I want to say something in answer to the point made by the hon. Member for Manchester, Cheetham (Mr. Harold Lever). My hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) adequately stated the case with his usual eloquence and facts and figures but the hon. Member for Manchester, Cheetham said that he and his hon. Friends believed that it was only fair to put the greatest burden of taxation on those most able to bear it—as though we on this side of the Committee do not believe the same.

The hon. Member for Manchester, Cheetham, did not prove his case. The mere reduction of the standard rate of Income Tax and the change from a lower standard rate to a sales tax or an added value tax—from direct to indirect taxation—would not mean that the burden would thereafter fall wrongly on those least able to bear it. Those with more money left to spend would be likely to spend it and would be taxed more.

I said that I thought this principle was accepted by all parties in the Committee. I did not accuse hon. Members opposite of holding a contrary view. I did not say that it would be impossible to produce a shift to indirect taxation without having regard to social justice but that, in making that shift, we would still have to have regard to that principle—a principle which, I hope, is respected by all.

I find that the hon. Gentleman and I are of one mind on the operation of social justice.

Unlike the hon. Member for Heywood and Royton (Mr. Barnett), I have some evidence that the present standard rate of Income Tax is a disincentive. It is one reason why young engineers, professional workers and others are leaving this country to go to places like the United States, where direct taxation is lower and where there there is a discretionary element in each person's lift which amounts to more than there is here at the moment.

In making a reduction in the standard rate of Income Tax, we would envisage replacing the money by a sales tax. We are not trying to deny the Chancellor of the Exchequer the sum of money involved. That would be irresponsible. He has his budget to meet. But there are ways of meeting it better than the present method. A move towards indirect taxation from direct taxation is urgent. People should be taxed not at the point at which they earn but at the point at which they spend.

I am sure that such a system would be of enormous benefit to the young executive class who are, for example, starting families and trying to save for the future expansion of their families. There would be no greater incentive to them than to have a bigger discretionary amount left to spend. It would leave them enough to save now and forgo certain things until a later date if they wished. It is not possible for young people to do this under the present taxation method.

I therefore hope that the Chancellor will look with sympathy, even though he does not necessarily agree with the Amendment, at the point which we are trying to make—that direct taxation is too high and should be reduced, that he should work out plans, if he has not already done so, to shift the burden of direct taxation more towards indirect taxation, so allowing a larger discretionary power to the person who earns the salary.

Like many other hon. Members opposite, the hon. Member for Sevenoaks (Sir J. Rodgers) has spoken about the disincentive effects of Income Tax. I am sure that he will admit, as will many others, the need at the same time to maintain the revenue. This highlights the two largely incompatible functions of Income Tax—the need to raise revenue, which is the historic reason for Income Tax, and at the same time the desire to reduce gross inequalities of income by using the only means, unfortunately, available at the present time.

Up to a point, both these aims may be realised, but there comes a situation in which the revenue needs to be so large that one runs into difficulties in covering both aims.

One of the problems is that people work and may wish to work up to the limit of their capacity, but as they reach that limit their inclination to work long hours in difficult conditions naturally tends to fall off. We know that in the industrial scene overtime rates are pitched higher than standard rates just to account for that. There is an incentive effect just at the period when it is required, when a person is working beyond his normal limits of capacity.

If Income Tax were directed to be in some sort of harmony with the requirements of the individual, the marginal effects of taxation would be to encourage people to work these longer periods, or in more strenuous conditions, and not the other way round. Taxation ought to work similarly to overtime payments, that is, it should give such work larger and not smaller assistance.

But at the same time the Chancellor of the Exchequer has to be concerned with the reduction of the gross inequalities of income. Whenever he attempts that, at the same time he reduces the incentive. In pitching the level of Income Tax, he has therefore to decide how much to weigh fairness against incentive. What we require ideally is some form of incomes policy to take on the burden of sharing fairness and to remove such considerations from Income Tax; but those hopes are a long way off and meanwhile, before we consider reducing the level of taxation, there are more important inequalities about which we ought to be doing something.

Income Tax as we have it today favours the self-employed as against the employed. Despite last year's Finance Act, it favours the speculator through the more favourable taxation of capital gains as against those who pay Income Tax. In particular, it favours those who pay Income Tax under Schedule D as against those who pay it under Schedule E. If there are to be concessions in Income Tax ideally it is those inequalities which call for our first attention. It appears to many hon. Members that too many advantages have accrued to those whose Income Tax is hardest to assess. At the same time, whenever we try to remedy this, we run into the difficulties and anomalies of reducing the incentives available to a very important section of the community.

In the short term, the answer to the problem is the broadening of our tax base. The imaginative proposals of the Selective Employment Tax are the first instalment towards such a broadening of the tax base and I assume that in principle, at least, many hon. Members who have spoken today will welcome it.

I strongly support the Amendment. Hon. Members have not given full credit to the tremendous psychological impact which a reduction of direct Income Tax on the lines proposed would have. When the Chancellor first announced his Budget proposals and the Selective Employment Tax, there was a certain amount of relief in the country, because he had avoided a further increase of Income Tax. There was relief because an increase in direct taxation was the one thing which people wanted to be avoided.

The hon. Member for Manchester, Cheetham (Mr. Harold Lever) felt that where the back was broad enough it was fairer that it should be called upon to carry a greater rate of taxation, but the views of some of my hon. Friends will bear further consideration. Even at the lower rates of direct taxation on lower incomes, Income Tax can be savagely high and can have a disincentive effect. It is commonly known how those at the top end of the scale earning the highest levels reach a point when they say that there is no point in adding to their total incomes because to do so means nothing to them as it all goes in taxation. I understand, and I have every sympathy with him, that that is the mood of my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro).

Is the hon. Gentleman suggesting that the hon. Member for Worcestershire, South would work harder if he got an extra 6d. off his Income Tax?

My hon. Friend could not possibly work harder than he does already and the hon. Member should bear witness to the denial of self-interest which my hon. Friend has exemplified by the mere fact that he sets an example to all by the vigour with which he is prepared to work in spite of the penalties which that brings upon his own shoulders.

I was saying that there are many for whom there comes a point when there is little further purpose in adding to their total gross earnings which their working capacity could achieve. But that applies not only to those on the highest scale. It is important to recognise that it also applies lower down the scale.

The Chancellor of the Exchequer should give much more careful attention than he has already paid to the impact of direct taxation on those currently working on the shop floor. I could produce example after example, along the lines of those given by my hon. Friend the Member for Worcestershire, South, of men manning the productive machinery of industry who have concluded that there is no further point in their working that extra bit harder if, as a result, they are to be pushed into the higher Income Tax brackets. They do not like having to pay more taxation.

In spite of the results of the last election, it was, none the less, my experience, going round a variety of constituencies, to come across many people, including active trade unionists, who were thoroughly fed up with the Labour Party and the Labour Government for the way in which they had directly increased taxation. Anybody who is even remotely engaged in industry must know how carefully the weekly wage packet is scrutinised and examined and what a damaging effect upon morale and the will to work the increasing amounts taken in taxation have.

It seems to me that the case for the Amendment rests upon two myths. The hon. Member for Worcestershire, South (Sir G. Nabarro), who moved the Amendment, suggested that it would involve a reduction of £240 million, but when he came to make suggestions about how this was to be made good he got a bit more difficult to follow. As I understood him, however, it was in part to be made good by increased savings. That is the first myth, that what is not taxed will be saved. Surely it must be obvious that if there is to be a reduction in taxation, people will treat themselves to a few more luxuries before they start to save.

The hon. Member for Yeovil (Mr. Peyton) referred to human nature as being the joker in the pack. I certainly agree with him to the extent that it would be natural for human nature to take some advantage of any reduction in taxation and not necessarily to save the full amount so reduced.

Was not my hon. Friend's proposition that what is taxed cannot be saved but that what has not been taxed gives an opportunity for saving?

That is so, but the question is surely whether that opportunity would be accepted. If it be not accepted, the benefit which it is suggested would follow would not materialise, unless it is suggested that by an increase in interest rates we should encourage further additional savings to take up the amount of money which is not taxed. Interest rates, however, are already quite high and a further addition would be a deleterious burden upon industry and commerce which I would not like to see.

The other myth is that somehow or other this level of taxation is a disincentive. I have always found it difficult to believe that it could be a positive incentive to industry to mess about with little alterations in the level of Income Tax. It was, I believe, Professor Galbraith who found a pack of business men howling collectively about the level of taxation, but when he went round to ask them individually whether each one would or could work harder in the event of a reduction of tax, they all replied individually that in their case it was not so because they were already working as hard as they possibly could but that it would, no doubt, apply for everybody else.

In the firm for which I worked before I came here an incentive scheme was in operation, but it did not apply to me because I worked in a side department and not in the main stream of the business. Nevertheless, there was an occasion when I worked late night after night on a certain matter. When it was done I sat back and asked why I had done it all and whether I had got anything extra as a result. I had no financial advantage, but I had the satisfaction of getting the contract done.

It is the case that people work for that kind of satisfaction. We should take this into account instead of supposing that financial considerations are the only ones that apply. It would be ridiculous to suggest that hon. Members would work twice as hard if they got twice the amount of money. Surely, it is equally ridiculous to suggest that hon. Members would work harder if they had a reduction in Income Tax.

The hon. Member is living in a fool's paradise. If he went to any major building site and questioned the men, he would find that many building labourers in particular and general workers work only a few days a week and then stop because they have to pay too much tax.

As I understand it, the case made by the hon. Member for Worcestershire, South (Sir G. Nabarro) and the hon. Member for Yeovil (Mr. Peyton) was referring particularly to those whom I call the captains of industry.

When I moved the Amendment, I said over and over again that the disincentive power of a penal level of Income Tax applied from the productive worker on the shop floor up to the highest level of the man earning £15,000 a year or more and subject to an aggregation of Income Tax and Surtax at the rate of 18s. 3d. in the £. I said that at least half a dozen times. It applies to everyone in productive industry.

I am grateful for that correction, but I still insist that I know of no reason to suppose that these alterations have any effect on the people to whom I was referring. These little penny packets of alterations do not have the significant effect that they are supposed to, and I feel that the Amendment is one which should be resisted.

I am grateful to have an opportunity to intervene in this most important debate. I should like to congratulate my hon. Friend the Member for Yeovil (Mr. Peyton) on his extraordinarily effective speech, which, despite its apparent simplicity, had profound philosophical implications.

I wish to support the Amendment equally simply for the extremely simple reason that the level of taxation is far too high.

Hear, hear.

In spite of that intervention, there is a wide difference between the parties on the issue. Again, that difference is basically a simple one. The Tory Party is the party of low taxation.

Hear, hear.

The Labour Party is the party of high taxation.

Hear, hear.

Deeds speak louder than words, and a comparison of our respective records bears out the truth of my analysis.

I want to turn briefly to the Tory record. It has been mentioned before, but there is no harm in mentioning it again. In nine out of the 14 Conservative Budgets from 1951 to 1964, taxation was reduced and the proportion of the gross national product taken in taxation declined from 31 per cent, in 1951 to less than 25 per cent, in 1964.

How many of the nine Budgets when taxation was reduced happened just before elections?

Ask Mr. Gladstone.

I shall come to Mr. Gladstone later. I do not think that the intervention by the hon. Member for Cornwall, North (Mr. Pardoe) was very significant. After all, even if I had the figure immediately available, which I do not, all that it would prove would be the intense desire of the electorate for a reduction in taxation. That is something which the ordinary man and woman desires very strongly, and they will not get it as long as the present Government are in office. That is the point of the Amendment, and it is the point which we want to get over to the public.

I made one.

My hon. Friend is not on the other side of the House. He will be, but I hope that I shall be with him when we are translated to our proper position.

We on our side want a reduction in taxation for itself, first of all. We regard it as something which does not require any external justification. We also want it as a means of encouraging saving. We believe that savings should be carried out as much by the private individual as by the Government, and we trust the individual. If he is given the opportunity to save, he will save. If I may adopt the very striking phrase which was used some months ago by my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod), we believe in a capital-owning democracy. If we are to get that, we must lower the present level of direct taxation. We believe that Income Tax in particular should be reduced, because this is the principal means of encouraging the young, the professionals, the scientists, the technologists, and all those innovators whose help we so desperately need in our present situation, and who are precisely the people who are most burdened by the present high level of Income Tax.

The Official Opposition have been entirely consistent in their attitude to this Tax. We were consistent when we were in Government when we reduced it, and in Opposition we voted against the increase in Income Tax which was brought about in 1964. I cannot say that of the third Party in this House, which, in regard to this matter of taxation—and I hope that I will be forgiven for saying this—behaved in its normal unprincipled way of voting for a rise in Income Tax in the Budget before last, so abandoning one of the few principles of historic liberalism which was left to it, that of fiscal rectitude, or, as my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) would say, fiscal propriety.

Does not the hon. Gentleman think that it was rather dishonest of the Conservative Party to vote against an increase in Income Tax at that time while not opposing the increase in retirement pensions that it was designed to pay for?

I do not think that that was dishonest in the least, because the increase in retirement pensions could have been paid for by other means. Had we had a Conservative Government, our emphasis would have been on an increase in general wealth, not on a reduction in economic activity brought about by an increase in taxation.

I have listened with great interest to the hon. Gentleman. Throughout his learned discussion there has been no mention of the £800 million deficit which we faced, which is extremely relevant to the issue of taxation.

I do not think that that will be a matter of general complaint in the Committee.

Let me return to the Liberal Party and its lack of principle. It might be said that it was Mr. Gladstone who reintroduced Income Tax in 1853, thus reviving an impost which members of the Committee will recall was imposed when the country was in extremis, and attempting to get rid of the regicide régime in France. It disappeared under subsequent administrations, only to be revived halfway through the nineteenth century.

The significant point about the Income Tax imposed then was that it was designed as a means of streamlining our system of taxation, and when Mr. Gladstone introduced it in that Budget a large number of duties were got rid of which were clogging the economic effort of the nation. The difference between the present Government's situation and that one is that this increase in taxation was introduced in a Budget which at the same time made sweeping increases in indirect taxation of a very different character.

There was an increase in petrol duty, the import surcharge was imposed, and in addition there was the increase in the rate of Income Tax. Within six months of these increases we had another sweeping series of tax increases on tobacco, spirits, wines, beer, and motor vehicle licences.

The point which the Amendment highlights—and I hope that this will be appreciated by the country—is that there is no hope of any reduction in direct taxation as long as this Government remain in office. On the contrary, all that can be held out is the likelihood of increases. The Amendment symbolises the determination of the Tory Party to reduce direct taxation as soon as possible after our return to office, and by so doing liberate the moral and commercial energies of our people on which our past greatness has been founded.

I should like briefly to state why, should it come to a Division, as I understand it may, my hon. Friends will not find themselves able to vote for the Amendment. It is not because we are not in sympathy with reducing taxation. I do not believe that there is any Member in the House, on either side, who is not in favour of reducing taxation. We are a low-taxation party, and I call Mr. Gladstone in evidence for this if evidence going back that far is needed, but of course it is typical of the Conservative Party that it has to go back that far.

In this debate we are suffering under the delusion—and it started with the speech of the hon. Member for Worcestershire, South (Sir G. Nabarro)—that the standard rate of Income Tax for income from work is 8s. 3d. in the £. It is no such thing, and it would do a great service to the country if we stated clearly that the tax on work at the standard rate is 6s. 5d. in the £, after deducting two-ninths earned income relief. This does not sound anything like as emotive as 8s. 3d. in the £.

The hon. Gentleman's figures are accurate, but it does not alter the fact that the standard rate is 8s. 3d. and that the allowances were brought in by the Conservative Party when it was in power.

I am not concerned with past records. I am concerned with the present Budget and the problems which face us, and I am glad that the hon. Gentleman has confirmed my figures.

I do not agree with the hon. Member for Yeovil (Mr. Peyton) when he said that it was not legitimate for a Government to use the taxation system to foster certain political objectives. I believe that it is legitimate to do this, and one of the objectives of taxation—to me at any rate, and I am sure to many hon. Members— is the redistribution of income. I believe that it is legitimate for a Government to use the taxation system to achieve that.

One of my criticisms of Income Tax and of our taxation system since the war, is that it has not redistributed income by as much as many of us would have liked. As Professor Titmuss has pointed out, an incorrect picture is arising out of the Inland Revenue figures because there are a large number of people at the upper end of the scale whose interest it is to reduce the amount of income on which their taxation is assessed.

Is the Liberal Party in favour of redistributing wealth as well as income?

It is. I mentioned the distribution of income first, only because it had been mentioned during the debate, and I merely said that the redistribution had not gone as far as I wanted. The Liberal Party wants to redistribute wealth, and we find that taxation policies since the war have not gone far enough. Private wealth is still concentrated in far too few hands.

I am sympathetic to a tax on spending, but whenever one considers this, one comes up against the stumbling block that such a tax would draw more revenue from those who can least afford to pay it. If we impose a sales tax, the lower income groups are inevitably hit hardest. I am particularly concerned about this in my constituency, which is a low income region. But if somebody can devise an expenditure tax which will not hit the lower income groups, I think that there will be a broad measure of support for it. I do not agree that heavy taxation is the major disincentive to initiative in British industry today.

Would the hon. Member specify occasions when there have been increases just after elections?

There were reductions in taxation certainly before the 1955 and 1959 elections——

rose——

No, I will not give way. I have answered the question.

I have a final comment on all this nonsense——

Withdraw.

I have no intention of withdrawing.

I have a comment in the form of a letter from Conservative Central Office, which is in answer to some queries of mine about facts and figures about Conservative fiscal policy which they published on posters last year. I made the point that those figures were untrue, the answer which I received from Central Office was that, of course, if I took the base as being the year when the Tories came to power, 1951, I was quite right, but that it was most unfair to take this as the base and indeed any year in the first two years of the Conservative Government, because they were engaged then in clearing up the mess left by the Socialists and that I should not take figures in the first two years of any Government. I have this in writing in a letter from the Central Office.

This makes total nonsense of all the debate about what happened ten, 15 or 20 years ago. The important point is that we are discussing the future. We are deluding ourselves if we think that we can reduce any sort of taxation by fiddling around in increasing or reducing rates here and there. We can, in the long term, reduce taxation only if we are prepared to cut our commitments.

Until we take the positive decision to opt out of these very expensive commitments, particularly in foreign affairs, until we make the decision to recast the whole of our social welfare services, it is totally dishonest to pretend that we shall be able to reduce taxation in any significant or substantial way.

The Committee must have been indebted to my hon. Friends the Members for Worcestershire, South (Sir G. Nabarro) and Yeovil (Mr. Peyton) for the way in which they moved and seconded this important Amendment. Whatever view the hon. Member for Cornwall, North (Mr. Pardoe) may take of the merit of the Amendment, he must agree that it should be viewed in the total setting of our taxation. It is our view that the country has been and is being grossly overtaxed.

My hon. Friend the Member for Worcestershire, South recalled to us those 13 years of glorious Conservative achievements, those years when not only did the standard of living improve more than ever before, but taxation was steadily and significantly decreasing, those years when the ownership of property was more widely distributed than ever before——

Is not the hon. Member aware of the fact that, when the Conservative Government left office in 1964, more than 50 per cent. of the wealth of the country was still owned by less than 1 per cent, of its people? Would he not agree with me that—[Interruption.] Let him deny it. Is it not a fact that all we had at the end of 13 years of Conservative rule was a society of speculators, manipulators and fiddlers?

In case the hon. Member did not hear me clearly, I repeat that these were 13 years of glorious Conservative achievements and the wider distribution of the ownership of property than ever before——

Deny the figure.

years of a greater general increase in the standard of living than in the previous half-century and a significant reduction in all kinds of taxation——

Deny the figure.

My hon. Friend the Member for Worcestershire, South also pointed out that reduced taxation is in accordance with the basic Conservative philosophy. I should have thought that the hon. Member for Cornwall, North and his colleagues on the Liberal bench would have shared the view that this was in the broad classical tradition of Liberal thought as well. It was surely a Liberal who said that it was preferable that money should fructify in the pockets of the people. We still take that view. Of course, taxation must be levied to fulfil the essential requirements of the State, but we have very different views about some of the other objectives which have been described by hon. Members.

It has been suggested from the other side of the Committee that the effect of a mere reduction of Income Tax might not be very great. I dissent from that view. The psychological effect would be considerable because it would be a declaration of intent by the Chancellor. About 10 years ago, under Conservative Government taxation was expected to be reduced in each Budget. People used to argue what might be the most likely subject for reduction of taxation in the coming Budget.

Already today, most people are resigned to a long succession of tax increases. Therefore, a reduction of this kind would be doubly valuable. It would be a declaration of intent that it is the long-term objective to reduce taxation and particularly direct taxation which, as hon. Members on both sides of the Committee must admit, has important disincentive effects on all sections of the community who work. Surely we have all had evidence of this in speaking to our constituents. I certainly have. For these and the other reasons which have been adduced in the debate, I hope that the Committee will support the Amendment.

I support the Amendment because I have long thought that heavy direct taxation is a disincentive to enterprise, to effort and to saving. Although he is no longer with us, I want to dissect the argument deployed by the hon. Member for Heywood and Royton (Mr. Barnett).

We were debating whether this partially graduated system of direct taxation which we have is a disincentive to people because they feel that if they earned more they would get into a higher tax bracket. He particularly stressed that this is not so with the young executive. Most of us admit that, because the young executive is on a salary which is fixed certainly for a period of a year, and these weekly fluctuations in earning do not occur for him. The way in which he is affected is that he may be induced to go overseas to another country where salaries are higher and taxation is lower.

But where this form of taxation, and the very heavy weight of it which we have today, has an effect, is on the worker who is paid an hourly rate. His weekly earnings fluctuate according to the amount of overtime that he works. We have all met men and women who have said to us, "Is it worth our while? Our bosses ask us to work overtime, to do a little more to catch up with the weather, or to catch up with the next export order, but when we do so we get ourselves into a higher tax bracket. What good does it do us?"

One frequently hears in the House of the more exotic forms of tax evasion and tax avoidance. But there is a common form of tax evasion by the person who is in regular income and who, after going home and having his tea, puts on his overalls again and does an odd job round the corner, for Tom, Dick or Harry.

Or Jim.

It may be for Jim. The payment is by cash, which passes hand to hand, and the Income Tax inspector is never the wiser. This is not an extraordinary form of evasion and I am sure that the Chancellor is as aware of it as are most of us.

Another aspect is not so much the brain drain as the skill drain. The people who catch the headlines in this respect are the high-powered executives or the scientists who go to America and elsewhere and offer their services to people who are in competition with our own manufacturers. But there is a lower level which is equally important because it is of much greater volume. I refer to the plain skill drain of ordinary men and women of no great eminence but of considerable skill. I have met many of them who have said to me, "We are fed up with this country. There is a lack of go and of enterprise. We are packing up and taking our families with us. We are off to America, Australia or Canada". This happens frequently, and the sheer volume of it must be as significant and important to this country as the so-called brain drain.

It was like a breath of fresh air to listen to my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) and my hon. Friend the Member for Yeovil (Mr. Peyton) when they introduced the Amendment.

The debate has been spoiled for me by only two things. One was the quite unfounded attack on our record by the hon. Member for Aberdeenshire, West who refused to give way, refused to withdraw and simply went ahead with his speech and tried to consolidate the popular front which seems to have been established between the radical and left-wing parties in the Committee. I suggest to him that this popular front which has been emerging more and more during the discussions will be extremely unpopular before a few months are out.

When we on this side of the Committee are insisting on accuracy, it is not inappropriate to remind my hon. Friend that the hon. Member of whom he is speaking is the hon. Member for Cornwall, North (Mr. Pardoe).

It is about time that the hon. Member for Glasgow, Cathcart (Mr. Edward M. Taylor) knew the Scottish Members.

I am sorry and I withdraw unreservedly. I direct all my criticisms at the hon. Member for Cornwall, North (Mr. Pardoe). I am convinced that he was speaking for more than one Member of the Liberal Party, but their policies diverge from constituency to constituency.

In the last Finance Bill I greatly enjoyed the contribution of the hon. Member for Manchester, Cheetham (Mr. Harold Lever), but on this occasion he seemed to be completely absorbed by the policy which has been pursued in the Bill by the Chancellor. He seemed to regard the various measures affecting the people of the country as he would regard battery hens: one increases taxation and something automatically happens; one reduces taxation and, again, something automatically happens. He has not taken into account, nor have the Government, many other factors, such as how taxation affects confidence, enterprise, initiative and so on. Unless these factors are taken into account we cannot properly consider the matter in all its aspects.

The only real criticism of the Amendment so far has been that if we do not raise taxation in the way proposed by the Government we would not be able to pay the nation's housekeeping bills. However, it is clear that taxation is not used solely as a means of raising revenue to pay these bills but as a means of trying to influence the economy, and the influences in the last few Budgets have been adverse.

The Chancellor has been looking happy throughout our discussions on the Bill. He should be looking desperate, because all his measures, particularly his successive increases in taxation, have not worked in the way he hoped they would. All these measures have operated in the opposite direction to what the Chancellor declared he would like to achieve. Apart from the movements in the economy which have upset his plans, the Government are under an obligation here because of the promises they made at the General Election that their policies would not lead to increased taxation.

In the short period in which hon. and right hon. Gentlemen opposite have been in power we have had dramatic rises in taxation and we can now see the effects of the various increases that have taken place. How have they affected production? We know that the only way to solve the difficulties we face—with wages going up faster than production—is to increase production. However, the effect of increased taxation in 1965 was that production did not go up but remained static.

What has been the effect on wages? With prices being bound to effect the level of wages, wages have increased by 9 per cent, this year and this is acting against the position which the Chancellor wants to achieve. What has been the effect on savings? With prices and taxation rising, the incentive to save is not there. In 1964 savings went up by £232 million while, in 1965, they declined by £26 million. Prices have also been soaring. In the last two months we have seen a sudden increase in the cost of living index and this trend seems like continuing.

The effect of all this on our national wealth has been disastrous, because I regard our national wealth as more the people who work in Britain than it simply being a question of gold and dollar reserves. When we remember that more than 200,000 people left Britain last year and that more than half of them were under 27 years of age, we must consider the loss that is taking place in our national wealth. In these young people we as taxpayers invested a great deal of money. We must take measures to prevent them from wanting to leave these shores so that we get a return on our investment and so that the economy becomes viable.

While the Chancellor is in danger of killing the goose that laid the golden eggs by his measures of high taxation, he is also in danger of scaring away the golden egg-heads on whom we must rely if our economy is to become viable. In other words, the right hon. Gentleman's policies are not working and the only answer he seems to have is to give us further doses of inflation and greater increases in taxation. I fear that, if we continue along these lines, effort will be less worth while and we will be less able to accelerate out of our difficulties, as we should be doing.

The Amendment has had the support of all my hon. Friends who have spoken in the debate. Acceptance of it will enable us to get out of our economic difficulties and give a once-for-all boost to those people in our economy who alone can solve our problems. I hope, therefore, that it will receive the support of all my hon. Friends. After all, consider the record of the Conservative Party in the last few years. There were tax cuts in nine out of 14 Budgets, with successive reductions in Income Tax, Purchase Tax and so on. We see a clear division between the policies of the Conservative and Labour Parties. In every Labour Budget since they came to power in 1964 there has been great increases in taxation and these are making it more and more difficult for us to get out of our difficulties. My right hon. Friend the Leader of the Opposition said in a television interview on 3rd November, 1965, when referring to taxes:

"They are not only too high, they are lopsided."

That, in a few words, summed up the philosophy of the Conservative Party.

I was disturbed—and I hope that this will be refuted—to read in The Times that there was a possibility that the Amendment would not be supported by all my hon. Friends. It would be extremely unfortunate if we were to finish our deliberations on the Bill with it appearing that the only ideological difference between the two sides of the Committee concerned the question of who would tax Dr. Barnardo's Homes and who would tax backgammon and crown and anchor. The difference in philosophy and outlook between the two sides is far greater than that, and that is why I fully support the Amendment and hope that all my hon. Friends will do likewise.

I have not read the article in The Times to which the hon. Member for Glasgow, Cathcart (Mr. Edward M. Taylor) referred, but I should be extremely surprised if the whole of the Conservative Party supported the Amendment. I have often heard the hon. Member for Louth (Sir C. Osborne) support the Government of the day in their tough economic policies and I should be surprised if there were not some hon. Members on the Opposition benches who would not agree that, so important is the need to get the economy straight, the Government must take certain measures, some unpalatable.

That is the view of my party, as expressed by my hon. Friend the Member for Cornwall, North (Mr. Pardoe). I would not be intervening now had a certain amount of doubt not been expressed by some Members of the Conservative Party. While speaking, my hon. Friend said that the Tories had cut taxation immediately before the 1955 and 1959 General Elections but that, immediately after being re-elected to power, they had increased taxation. It was at that point that there were noises of dissent from some hon. Members of the Conservative Party. It might, therefore, be helpful if I gave the Committee a few figures, particularly since it is evident that some Conservative hon. Members have short memories. The hon. Member for Cathcart rightly said that the Tories had cut taxation in nine out of 14 Budgets. If my arithmetic is right, that means that taxation must have been increased in five out of these 14 Budgets.

No.

Curiously enough, the Budgets in which the Tories increased taxation seem always to have been those which followed General Elections, whereas the Budgets in which taxation was reduced were introduced prior to General Elections. I am sure that the right hon. Member for Enfield, West (Mr. Iain Macleod) will support me when I remind the Committee that in April, 1955, there were tax cuts amounting to £156 million in the Conservative Budget of that time. After the General Election, in May of that year, there was another Budget, in October, in which tax increases amounted to £113 million. Then, in 1959, there were tax cuts of £360 million in April, then the General Election in October, and then in the following year we had the April Budget with tax increases amounting to £72 million. In a further Budget in July of that year there were further tax increases amounting to £210 million. My hon. Friend the Member for Cornwall, North therefore stated the true position and his remarks could not possibly have justified the noises of disbelief which were heard from Conservative hon. Members.

On a point of order. I wonder whether it is a matter for congratulation or censure that the hon. Mem- ber for Orpington (Mr. Lubbock) has not mentioned the standard rate of Income Tax, which is the subject of the Amendment.

That is not a point of order. I was listening to the hon. Member's speech and hoping that he would come to the subject of the Amendment shortly. If he does not do so, he will be out of order.

I was about to say that workers in these industries working very long hours already are unlikely to have to pay at standard rate. When they come to the end of their 49·8 hours, it is suggested, they would say that they would work another couple of hours if it were not for the penal rate of tax. I think I am entitled to tell the Committee that the average weekly rate of pay in this industry is £19 15s. and they work long hours. In the mining and quarrying industry average weekly earnings are £19 1s. and the hours worked are 50·8 a week In transport and communications average earnings are £19 15s. and the average hours worked are 50·6 per week.

If one looks at the table showing at what point people come on to the standard rate of Income Tax one finds that a man's earnings are exempt from rates exceeding 6s. in the £ if he is married and has one child under 11. The amount is £971. Very few on average earnings would be paying at standard rate. If he has two children he would not come on to standard rate until he was earning £1,119. Therefore, anyone on the average rate of earnings in the construction, in the mining and quarrying and the transport and communications industries would be paying at this rate after he worked the maximum hours approximating to 50 hours a week.

I do not think there is much incentive to work longer hours because of the effect of the standard rate. Even if it were so, that is a poor argument because I think it will be generally agreed that to work for extremely long hours cannot be efficient. Earlier this afternoon everyone was "near-hearing" when the Prime Minister said that we were all agreed that we must try to bring down the amount of overtime worked. For all these reasons I cannot possibly support this Amendment.

As I am sure you, Sir Eric, will appreciate, new Members of this Committee receive a great deal of advice, most of which they ignore because one is advised to ignore it. One cannot help but remember some of it. One of the most vivid pieces of advice I was given was, "Whatever you do don't get yourself mixed up in supporting anything put forward by the hon. Member for Worcestershire, South (Sir G. Nabarro)". Nevertheless, this Amendment which was so eloquently moved by my hon. Friend this afternoon so exactly reflects my long held political philosophy that I find myself on the horns of a very significant and difficult dilemma.

This political philosophy was partly reinforced by speeches at the Conservative Conference at Brighton, one of which in particular burned itself into my memory. It was stated by a very eloquent speaker that in his view there were three schools of thought about taxation. One held that taxation was too low, one held that it was about right and one held that taxation was too high. He went on to say that in the third group he took,his stand. This so affected me that I fought my entire General Election campaign on the basis of reducing the standard rate of Income Tax. I find it remarkably difficult to take the advice given to me such a short time ago about supporting matters raised by my hon. Friend the Member for Worcestershire, South.

In trying to resolve my personal dilemma in this matter I wish to touch on a small point which was hinted at by my hon. Friend the Member for Chelmsford (Mr. St. John-Stevas) but which has not been entirely ventilated. That is the psychological effect on the taxpayer, not of the high rate of Income Tax but of the trend of the rate of Income Tax over the years. The taxpayer knows that when the Socialists are in power Income Tax is bound to rise year after year and when the Conservatives are in power it is bound to fall year after year. This has a very great psychological effect on the amount of work people do, on their enthusiasm for remaining in this country, and their attitude to their lives and work.

If I may give a piece of gratuitous and entirely to be disregarded advice to the Chancellor of the Exchequer, it is that I believe if he were to accept this Amendment the whole image of the Socialist Party in the eyes of many thousands, or millions, of people in this country would change and some who at present can see nothing but hopelessness in future so long as there is a Socialist Government in power would begin to have other views.

We have had a very interesting debate. I hope that the Committee will allow me to make some observations now. To take up the last point made by the hon. Member for Liverpool, Garston (Mr. Fortescue), it is probably true that the image of the Government would change if we were to accept the Amendment, but I am not sure quite in what way it would change or whether the repercussions would be good or bad, either for the standing of the Government or for the standing of the country. It is not just sufficient to be in favour of change, if I may say so to a Conservative. It is necessary to be in favour of directed and purposive change.

The cost of the Amendment is not, I regret to say to the hon. Member for Worcestershire, South (Sir G. Nabarro), £240 million but £380 million. The reason for that is that automatically this reduction extends through to the reduced rates. The hon. Gentleman based his calculation only on the cost of reducing the standard rate, without taking into account the reduced rates. Even though the hon. Gentleman had thought that £240 million would have been acceptable to the Government, although I do not think he really did think so, I should have had to have said "No". I must therefore say, "No, no" to a cost of £380 million in a full year. I do not see how any member of the Committee in present circumstances can logically vote for a reduction in direct taxation of £380 million, despite the impassioned nature of the speeches which have been made this afternoon.

We are all in favour of lower taxes. We all belong to low-tax parties. We have all been trying to prove it this afternoon. Everybody wants lower taxes. I myself take no particular pleasure in high taxes. All I would say as a Socialist is that, at whatever level taxes have to be fixed, they should be fair and progressive. If one could get away with a standard rate of 4s. in the £, as it was when I first entered the Inland Revenue in 1929, and if it was progressively directed, I would feel that that was the very height of ambition.

I see no virtue in having high taxation for its own sake, but if there has to be taxation, whether it be high or low, let it be progressive. This is a cardinal principle which should unite us all. Therefore, I am in favour of reducing taxation as fast as I can and as far as I can, but I have to take into account the circumstances that I have inherited. By saying that I am not making any party point, because everyone knows that there is a general level of services in the country which has been built up and which is now sustained, and I have to take into account the projected increases in expenditure that I am likely to get.

I myself would much prefer to see the increases in expenditure that automatically take place year by year financed out of the growing product of British industry. This is what the National Plan is about. When we have overcome the balance of payments difficulties, then I trust we shall see a substantial increase in our rate of growth; but it is undoubtedly the balance of payments difficulties in which the country has been placed which are holding back growth at the present time or which at any rate are resulting in our not going ahead as fast as everybody on both sides of the Committee would like to see us go ahead, combined with our propensity for high imports, especially of manufactured goods, when activity in this country is high.

I regret to say that the faster activity goes in this country the greater propensity to import manufactured goods. I know that this is a cardinal feature of modern industrial societies, but I wish that we were able to export manufactured goods of the same kind. The difference in the nature of our trade has become most marked over the past few years. However, I will not trespass on this point, because if I did so I might incur your displeasure, Sir Eric.

rose——

I will come back to the hon. Member's personal circumstances later, because I should like to discuss his personal Income Tax affairs with him, as he raised them. In fact, the highest effective rate in the country is, on an income of £100,000, 17s. 0½d. It may well be argued that 17s. 0½d. is too, high, but there is nobody who is paying any more than that, however that may be regarded. At levels of £15,000 a year the effective rate is not 18s. 3d. but 10s. 6d. It is important that people should understand that.

The hon. Member for Shipley (Mr. Hirst) spoke this afternoon about the deplorable levels of taxation, but he did not refer to the Question he asked me on 24th May about comparative levels of taxation. The answer was so interesting—it interested me when I got the results—that it should be repeated to the Committee this afternoon. Again in the interests of not chastising ourselves unduly, it is a good thing to get the total burden of taxation across.

The hon. Member for Shipley asked me if I would

"give the comparative taxation expressed as a percentage of gross national product at factor cost."—[OFFICIAL REPORT, 24th May, 1966; Vol. 729, c. 66.]

in a number of differing countries under various heads. I gave that information to the hon. Gentleman. It shows this very interesting fact—[Interruption.]—I am on the total now, because the direct taxes are also very interesting. The total taxes and contributions which the hon. Gentleman asked me about in the United Kingdom as a percentage of gross national product are 32·5 per cent. Ours is not the lowest. The United States is 29·7 per cent. We are the second lowest. Above us there are Belgium at 32·9 per cent., Italy at 35·8 per cent, Netherlands at 36·4 per cent., West Germany at 40·3 per cent., and France at 44·6 per cent.

Anybody who is thinking of emigrating from here to France or Germany to escape the consequences of taxation had better think again, because this is split up in a number of different ways. It may be that in some of those countries he would pay less in direct taxation. In Belgium and in West Germany they would pay less in direct taxation. But they would pay much more in indirect taxation. Surely it is the total burden with which we must be concerned— [Interruption.]—I wish hon. Members opposite would wait till the end of my sentences. It is the total burden with which emigrants must be concerned, as much as the burden of direct taxation. Not everybody who is going abroad will earn a substantial salary. Indeed, some of the workers who have recently gone to Germany have not earned substantial salaries, especially those who have gone from the Clyde.

We cannot separate the two things completely. In terms of the total taxation burden, someone going to West Germany would find himself worse off. In terms of direct taxation he would be paying—I am quoting from the Answer I gave to the hon. Gentleman's Question —9·6 per cent, of his income as against 9·4 per cent, of his income in this country.

I do not want to overstate the point, but I think we are being a little masochistic in this country in our belief that it is the most heavily overtaxed country in the world. I do not think international statistics reveal this. It is unfortunate if we get ourselves into such a psychological frenzy that we ourselves believe it, and I do not think it does us any good.

This influenced me a little in my consideration of the Budget, and I hope that some of the speeches made from the benches opposite will be made on Thursday, because they all seemed to be pointing in my direction. Many hon. Members asked me to do what, in fact, I have already done, and that is to widen the tax base—not to increase direct taxation in this country or to increase Purchase tax or to do something of both, but to widen the tax base as an alternative. I hop that on Thursday the party opposite will not vote against the Second Reading of the Selective Employment Payments Bill. If they do they will be expressing themselves in opposition to a principle that has been supported widely in the discussions that have proceeded on the benches opposite this afternoon. I hope they will be able to reconcile even that irreconcilable proposition at 10 o'clock on Thursday night.

What has been said on these benches is not that we are opposed to the principle of the payroll tax, but I am strongly opposed, as I believe is my party, to the particular method that the right hon. Gentleman has adopted in the Selective Employment Tax. Certainly we shall vote very strongly against it.

Nothing has convinced me that it is not a greater nonsense than I first thought.

That is the conventional defence of someone Whose intellectual integrity is being assailed. [HON. MEMBERS: "Oh."] Certainly I am assailing it, because the hon. Gentleman knows that it is the simplest thing in the world to say, "I agree with that in principle but I cannot support you because you are doing it the wrong way". That is the classic defence of opposition. I did it myself for 13 years, and I cannot be expected to be impressed by it now. I am too old in the tooth for that.

The hon. Member for Orpington was quite right in pointing out that, whatever view is taken about taxation, it is a little rich for the Conservative Party to say that they reduced the standard rate from 9s. to 8s. 6d. as they did in 1955—mark the year—and reduced it again from 8s. 6d. to 7s. 9d. as they did in 1959. Is it not extraordinary? I know that it was done with the best of fiscal motives, but it so happens, as has been partially pointed out, that in the months immediately following those elections, hire-purchase deposits were raised, the credit squeeze was tightened and Purchase Tax was increased. [An HON. MEMBER: "What is the right hon. Gentleman doing?"] I did not go to the country pretending that by reducing taxation— [An HON. MEMBER: "The right hon. Gentleman did."] Hon. Members opposite interrupt a little too soon. I did not go to the country pretending that by reducing taxation it would be possible to hold it at that level after the election. That is what I did not do. I said I did not see the need for severe increases in taxation.

What the two Conservative Governments did in 1955 and in 1959 was, for electoral or fiscal purposes, to reduce the standard rate of Income Tax immediately before the elections and then shortly after the elections they took it out again in the form of increased indirect taxes. They cannot expect me to be impressed by what the hon. Member for Worcestershire, South calls fiscal propriety. I would have another word for that kind of action.

I come to the next point that was made by the hon. Member for Worcestershire, South about his own circumstances.

He stated the proposition in three different ways. It may have been more, but I counted three different ways during his speech. Once he got it right, on the last occasion. On the first occasion he did not get it right. He does not pay Surtax at 10s. on his income over £15,000 a year. This is what he said he did, but I can assure him that he does not. If he does, it is time he got a new accountant.

Surtax of 10s. is reached at certain stages between £15,000 and £20,000 depending on the personal circumstances and the nature of a man's income. The hon. Member for Worcestershire, South has a wife and four children. Here may I say that I was sorry to read of the accident, and very much trust that his good lady will soon be better. Unless those four children have very large personal incomes, I can assure the hon. Gentleman that he ought not to be paying Surtax at 10s. in the £ until his income reaches £19,130. This was the only point of difference between the hon. Gentleman and myself on this matter. This is why I shook my head violently, knowing his domestic circumstances, when he told me that he was paying 10s. in the £ on £15,000.

I am grateful to the right hon. Gentleman, but he is being exceedingly disingenuous in his reply. I did not speak at any time during my speech about effective rates of taxes. What I said perfectly bluntly was—and this is utterly correct—that the top level of direct taxation in this country on £15,000 per annum of earned income leaves the recipient with an income of only 1s. 9d. in the £. That is strictly correct. At no time did I talk about effective rates.

I am not talking about effective rates either. I think the hon. Gentleman knows this. I am not discussing effective rates in this connection. The hon. Gentleman has stated his proposition a fourth time, in a slightly different way from the other three. Each time he has got a little nearer the truth of the matter. I stick to his first proposition. I am not making a lot of it, except that I understand that he wanted an apology from me. I am not asking for an apology. I do not suppose I would get it if I asked for it. I can promise the hon. Gentleman that in no case, and not even in the case of a single man if his income is earned, does he pay Surtax at 10s. on £15,000. Perhaps I can discuss this with the hon. Gentleman when we get out of the Chamber. It is nothing to do with effective rates. At £15,000 his effective rate is—let me make quite sure since I am discussing it with the hon. Gentleman—rather less than 10s. 6d. in the £. It is nothing like the figures he gave.

I thought the hon. Member for Bournemouth, West (Sir J. Eden) came nearest to the point when he said that if we are to have lower rates of taxation we have got to have lower expenditure. I agree. I am not alone or unique or even the first to say it. It was the right hon. Member for Barnet (Mr. Maudling) who made clear to the House some years ago, in about 1963, what the position was. He made it clear in his White Paper on expenditure and in a number of speeches. He could see that the House, the Conservative Government at the time, the country, my own party and I dare say the Liberal Party also were all united on a substantial programme of increased public expenditure.

The Chancellor has just said that he would like to move to a conclusion on this matter. I hope that he will remember that we have had no fewer than five speeches and a considerable number of interjections from his own side of the Committee. Although it is right that I should follow the Chancellor and give my attitude towards the Amendment, some of my hon. Friends may well wish to continue the debate after I sit down.

We are discussing an Amendment, to reduce the standard rate of Income Tax by 9d., moved by my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro). I find myself in complete agreement with him, with my hon. Friends the Members for Yeovil (Mr. Peyton) and Shipley (Mr. Hirst), and indeed with all members of my party, on their approach to this problem.

The contributions from the Liberal Benches were the kind which one expects from them. The hon. Member for Cornwall, North (Mr. Pardoe) became very excited about a letter which he received from Conservative Central Office, which argued that it was scarcely fair to blame the inflation of 1951 upon the Conservatives. Following that argument to its conclusion, if the Conservatives are responsible for the inflation of 1951, the Socialists are responsible for the balance of payments deficit in 1964. That ends that particular argument, and we can leave it conveniently there. They cannot have it both ways, as my hon. Friend the Member for Ormskirk (Sir D. Glover) said. This is a most interest- ing line of defence, which we shall adopt in the future.

The Chancellor said that we all belong to low-tax parties. If he believes that, then, like the- Duke of Wellington, he would believe anything. There is only one low-tax party in the House of Commons, and that is the Conservative Party.

I am on record many times as saying —as for example, in my speech at Brighton to the Conservative Party Conference—that I believe in a capital-owning democracy. I accept what my hon. Friend the Member for Chelmsford (Mr. St. John-Stevas) said, and that must mean reductions in direct taxation.

At Brighton, I quoted and endorsed a statement by my right hon. Friend the Member for Kinross and West Perthshire (Sir Alec Douglas-Home) that we had reduced direct taxation before and could do it again. But first I told the meeting that I made no apology to the Conservative Party that a number of its cherished commitments were not included in our programme on grounds of expense. Then I said:

"The careful management of our economy and the repayment of debt must come first."

If the General Election on 31st March had gone the other way and I had been entrusted by my right hon. Friend the Leader of the Opposition with the Treasury, I should have gone there with the clear determination to reduce personal direct taxation at the earliest possible moment, and also to reduce the percentage of our gross national product that is taken by public expenditure.

I have never been convinced by the argument that it is not possible both to reduce taxation and to have an increase in true terms, in the social services, because this is what we did and what other countries succeeded in doing. We did it in this country in those "thirteen years" about which we have heard so much.

It is quite true, as the Chancellor said, that in 1955 there was a reduction of 6d. in taxation. It is equally true that there was in that Budget the sort of miscalculation which he has made no fewer than three times in his Budgets since 1964. But the reduction which we made in 1953 was neither after a General Election nor with one in sight, and the benefits of the other reductions in the years after 1955 stayed in all succeeding years after 1955 and after 1959. I do not agree with him or other hon. Members who have said that to reduce all levels of taxation, and especially the higher levels, would not be an incentive.

I want to call somebody in witness here. I have not asked his permission to refer to him, so I will not give his name. All I will say is that he is one of the wealthiest and ablest men in the world. He told me in the autumn of last year that the reductions in the very highest level of taxation deliberately made by President Kennedy and President Johnson had an electrifying effect upon the American economy. Even at the highest levels of taxation it is my view that such an argument is valid for this country

rose——

I hope that the hon. Member will forgive me for a moment. What we are considering now is whether the Conservative Party, in June 1966, should go on record as calling for a reduction of £380 million in the key index of taxation. I have made it clear that I would dearly like to see this, but I must also make it clear to my hon. Friends that if I found myself in the Chancellor's position—wherever the responsibility may lie for the inheritance that led to the last election—I could not possibly make a reduction of this magnitude in taxation this year.

rose——

I am in the middle of a rather important argument, from my point of view. I shall be glad to give way to the hon. Member at any other time. I am sure he will understand.

We must remember that there were 14 Budgets in the years of Tory Administration, and that in only three did we find it possible to reduce the level of direct taxation. I know that on five occasions we were able to increase the allowances and other benefits but the rate fell on only three occasions in 14. I had to ask myself, in all honesty, whether I regarded the situation in this year, and at this time of year, as coming into the category of the three occasions or the 11 occasions. Unhappily I have come to the conclusion that I cannot advise the Conservative Party to vote for the Amendment. I know what is in the mind of my hon. Friend the Member for Worcestershire, South, and I have made it abundantly clear that I am wholeheartedly in sympathy with him, and that I hold the view that the Conservative Party believes both in the reduction of personal direct taxation and in taking a lower percentage of the gross national product for public expenditure.

I also recognise not only the sincerity with which my hon. Friend put his case but the fact that in new Clause No. 1 and new Clause No. 2 he has put forward alternatives which are not before the Committee and which have not been worked out in detail. We must decide what to do in respect of the Amendment which is now before the Committee.

I am all for switching to more taxes upon consumption, and for creating an increase in choice for the people. These are themes which I have tried to develop over many years. I know very well that if I had the substance instead of the shadow, however, I could not recommend, this year, any downward change of this magnitude in personal direct taxation. That being so it would not be honourable for me to do anything else than suggest that my hon. Friends should not vote for the Amendment.

I am very glad that my right hon. Friend finished his remarks on the note that he did. Although my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) and my hon. Friend the Member for Yeovil (Mr. Peyton) have done a valuable service in putting down the Amendment so that we could have an excellent debate, I am sure that in the present state of the economy— and we have no responsibility for that; it is almost two years since we were in power, during which time the Government have increased taxation by £1,000 million and have created a severe balance of payments problem—my right hon. Friend was correct, and presenting a picture of responsible opposition, in saying that he could not recommend the committee to agree to the Amendment.

I should find it somewhat difficult to go into the Lobby in support of the Amendment, bearing in mind the conditions facing the country now. That fact must be made clear at this stage. Perhaps the Chancellor is now not sorry that he allowed me to make a short speech.

Despite what the Chancellor has said, the debate has made it clear that the bulk of his party thinks that there is some virtue in taxation. The hon. Member for Orpington (Mr. Lubbock)—who is no longer in his place—representing the Liberal Party, literally tried to argue that people liked high taxation and that it was good for them. If we carried his argument to its logical conclusion we should raise direct taxation to 100 per cent., when everybody would work a jolly sight harder. That was a most surprising argument to come from the Liberal Party, which up to this moment I thought stood for allowing the abilities of the individual to flower and develop to the advantage of himself and the nation.

rose——

I am not going to give way to the hon. Member for Cornwall, North (Mr. Pardoe). He was very rude to my colleagues when they were speaking. The hon. Member for Orpington talked about the Conservative Party's reducing taxation or increasing benefits just before each election. The Conservative Party reduced taxation in nine Budgets, only three of which came immediately before an Election, so there must have been six in which we reduced taxation which had no connection with an election.

I am sorry that I was not here to hear the speech of my hon. Friend the Member for Bournemouth, West (Sir J. Eden). What we must make clear is that the Conservative Party has a totally different philosophy from that of the party opposite and is determined as soon as it gets back into power to reduce taxation. We agree that certain implications have to be borne in mind, as mentioned by the Chancellor. We agree that our society needs to be reorganised to achieve this end. I accept implicitly that our society is altering fast. It is not the sort of

rose in his place and claimed to move, That the Question be now put.

The Question is "That the Clause stand part of the Bill"——

On the Question, "That the Clause stand part of the Bill"——

I am of opinion that the principle of the Clause and all the matters arising in connection with it have been adequately discussed on the Amendment.

On a point of order, Sir Eric. We have discussed adequately, and certainly on a very wide basis, all the implications of certain specific rates of Income Tax, but we have not discussed the principles. While I do not wish to extend the debate on Income Tax, you will do doubt recall that I rose at the conclusion of the earlier debate, but at that moment the Deputy Chief Whip opposite rose and claimed to move, "That the Question be now put" notwithstanding that certain hon. Members on his own side as well as on this side of the Committee were still endeavouring to speak. In those circumstances, would it not be equitable and reasonable that those hon. Members who were frustrated by the precipitate action of the Deputy Chief Whip —action which frustrated even the hon. Member for Nelson and Colne (Mr. Sydney Silverman), who had an important contribution to make to our debates, and whom we are delighted to see return to the affairs of this Committee——

Order. I cannot allow the hon. Member to proceed.

rose——

rose——

Does the hon. Member for Nelson and Colne (Mr. Sydney Silverman) rise to a point of order?

I rise to the point of order raised by the hon. Member for Worcestershire, South (Sir G. Nabarro). I wanted to make it clear that the important contribution which the hon. Member says I was frustrated from making was about the Amendment which he deliberately chose not to leave to be decided by the Committee.

On a point of order, Sir Eric. Might I put a point to you very briefly? I think you will agree that it is customary, and perhaps particularly so when there has been only one Amendment discussed on a Clause, that before the Chair rules—which, of course, it is entitled to do—that there has been full discussion on the Clause, this is said to the Committee, and I think that you omitted to do this before the words were actually put. I wonder whether, because he was not able to speak, you will allow my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) alone to speak briefly— [HON: MEMBERS: "No."]—on the Question, "That the Clause stand part of the Bill", because I think that the way the Question was put to the Committee was unusual.

The position is this. The Committee decided without a Division on the Amendment moved by the hon. Member for Worcestershire, South. I have ruled in my discretion that the principle of the Clause and all the matters arising in connection with the Clause have been adequately discussed on that Amendment. I deliberately allowed a very wide debate on the Amendment, and I am afraid that my Ruling cannot be challenged.

I beg to move Amendment No. 166, in page 19, line 38, to leave out "£2,000" and to insert "£3,000".

The Amendment is designed to provide an opportunity for discussing the question of Surtax on unearned income. The last time the subject was seriously discussed at any length was in June, 1961. We then had a long discussion on a series of seven or eight Amendments, but they were very limited in nature and were more or less specifically designed to cover the older ages in the population, people between 60 and 65.

I feel compelled to say, because I must be absolutely honest in the matter, that I thought that the then Conservative Government were, to say the least, extremely mean in refusing to accept those very limited Amendments. It is not too much to say that I was, frankly, rather ashamed of them. I say that to be fair to the Committee, as I usually am in these matters. I was very much on the wrong side of the debate on that occasion.

I say at once that for all too long there has been too large a difference, whatever argument there may be about what the difference should be, between the tax treatment of earned income and so-called unearned income. My right hon. and learned Friend the Member for Wirral (Mr. Selywyn Lloyd) inevitably made that very regrettable difference —unwarranted to my mind— infinitely worse and more marked by the substantial changes in 1961, which were very welcome and helped our economy very much at the earned Surtax levels. At this juncture I would most strongly protest at the continued use of the term "unearned". If I use that term at the moment it is only because it has become so used that I feel that I must do so for the sake of clarity. There has been erroneous thinking over the years which no Government, including, I am afraid, Conservative Governments, have done anything much to alter. Very strong appeals were made in the course of the debates in 1961 to which I referred. Speaker after speaker then pressed for a change from the term "unearned" to "saving in investment income" or some other term as a sounder, better and more accurate one.

It was not only in 1961 that we had such debates. I have taken part in such debates year after year. I remember this matter being pressed year after year by Mr. Geoffrey Stevens, when he was the hon. Member for Portsmouth, Lang-stone, in the course of his specially well-informed speeches, which some of us who took part in those debates miss in our discussions today.

These savings of one generation or another have in very many cases been built up over the years by persons denying themselves for the future of themselves or their families, and I suggest that it is monstrous that such people should be penalised by this very marked difference which is enshrined in our tax laws. On Second Reading I touched briefly on this subject and mentioned that the distinction does not arise in the United States tax laws. They see no distinction or need to make one. On that same occasion, I said that we would not have real progress in healthy investment so long as we penalised that sort of incentive. If people feel that they will not be penalised if they save, that is a first-class incentive to savings.

In the 1961 debates we put the case for circumstances whereby investments arising from savings could be encouraged to fructify to the benefit of all. Where would big business be today had it not been for the past opportunities of private individuals, in partnership or alone, to save money and plough it back into their firms, which have been amalgamated and have grown into such great organisations?

I remind the Committee that Surtax—it was called Supertax in those days—began in 1910 at the level of £3,000. It was and intended to be an imposition upon the rich. No one could deny that it had this effect in that it dealt with incomes of above £3,000. But circumstances have changed and in that context £2,000 today does not mean riches. There is a very different aspect altogether. I do not know the relative values offhand as between now and 1910, but certainly such a figure today is less than one-fifth of the value it held in those days. This fact makes the Amendment relatively modest. Indeed, it is so modest that I feel almost ashamed, but I want to keep a sense of proportion, as I did on the last Amendment.

Another aspect is, inevitably, the Labour reaction. Hon. Members opposite are grotesquely bad economists. I do not know why, for they have many trained economists in their ranks. But the more economists they recruit the worse they are. This particularly applies when they import them from abroad. Yet the Labour Party remains more or less aware of the importance of savings and of personal investment. It cannot be overstressed that savings and investment are the cornerstone of the economy and of the real standard of living of the people.

It is the small businesses which have prospered through this system and which have grown and developed under healthy and sound conditions, improving the standard of living of those working in them as well as the owners. But hon. Members opposite are inevitably in a dilemma. Yet it is of their own choice. They believe that a high level of savings contributes not only to the dignity of man but is also an answer to inflation. Despite this, they also believe in high taxation. They consider high taxation to be a weapon for levelling down. That is all their taxation does. It does not give people an incentive to level themselves up. It can only do that when it is reduced. High taxation is the creed of hon. Members opposite and that creed is written into every page of the Bill.

I hope that it is not too much of a disappointment to the hon. Member for Shipley (Mr. Hirst) if the response of at any rate one hon. Member on this side of the Committee is not in accordance with the caricature which is constantly being painted by hon. Members opposite of the views of the Labour Party as being a high-taxing party and so on. I wish that hon. Members opposite would not constantly caricature the views of the Labour Party in this way. Some of my newer colleagues might take their Socialist instruction from hon. Members opposite and come to believe that it was truly party orthodoxy which was being preached by hon. Members opposite and vote accordingly, and that would be very distressing for me. I know that it was said in the last debate that I was not in the main stream of thought of my party on this question. I am not sure that that view is well justified. Certainly in the matter of disliking unnecessary taxation I think that the hearty majority of members of my party are as passionately keen to keep tax down as anyone else.

I think that the hon. Gentleman underestimated my party in supposing that it was hostile to unearned income in the sense that he described it. I think that my hon. Friends recognise, as we must all recognise, that unearned income is very often simply earned income congealed, at any rate earned income which has congealed with time, and we respect it in the proper hands in all circumstances according to the way it gets there. But the fact that we recognise that it was once earned income does not mean that we are not entitled reasonably to make a differentiation between earned and unearned income. It is a differentiation which has been made by Conservative Governments who, we are assured by hon. Members opposite, have a passion for low taxation and equity and all the good things in fiscal life. Surely the hon. Gentleman will appreciate that we can make a distinction for tax purposes between the two kinds of income without despising the one, even though we think that there are occasions when it must bear a higher burden than perhaps earned income has to bear when all circumstances are taken into account.

For this purpose I cannot help relying on something said by the right hon. Member for Enfield, West (Mr. Iain Macleod) on the last Amendment when I wanted to make a brief intervention. I am somewhat mollified, not having been able to make that intervention, by the great integrity—one might almost say the accustomed integrity—which led the right hon. Gentleman to the conclusion which I would have reached and which was that one could not vote in favour of the last Amendment.

In arguing that the high taxation of income had a seriously damaging effect on incentives—and this applies to Surtax as much as to Income Tax—the right hon. Gentleman said that leading American industrialists had told him— and I am sure that this is absolutely right —that when the Americans reduced taxation the incentive of doing so had an electrifying effect on the American economy. Of course it had an electrifying effect on the American economy, but that was not because of the incentive of paying less Income Tax, but because of the electrifying effect of the injection of so much new purchasing power into an under-employed economy. To attempt a similar electrifying effect in the present situation of the nation would be entirely unsatisfactory. The right hon. Gentleman would then have been in receipt of a confidence which would have told him of the electrocuting effect of a reduction of taxation.

Is the hon. Gentleman saying that the Government should slow down the economy by increasing taxation so that there should be no pressure on the economy at all?

When there is a lack of demand and serious unemployment, as there was in America at the time to which the right hon. Gentleman was referring, a serious under-employment of resources, manpower and machinery, that is one thing, but anybody who believes that that is the case in our economy at the moment should have voted in favour of the last Amendment and in favour of significant reductions in taxation all round in order to stimulate the economy. But there can be very few hon. Members on either side of the Committee who have that view of the economy when the facts are so clearly in the opposite direction.

Hon. Members opposite often confuse incentive and fair play. What matters is that a man's reaction to the taxation which is imposed upon him is not that he will not work because he has to pay 10s. or 12s. in the £. What can affect his desire to work is his sense of being unjustly used, unfairly treated, singled out for spitefulness, or unfairly chosen for a particular rate of tax. A sense of oppression has a serious disincentive effect.

In different circumstances, there might be a very reasonable case for having another look at the Surtax arrangements. It was very fairly recognised by the hon. Member for Shipley that no such possibilities exists at present, but I should like to go on record as saying that the Government ought to have generally in mind that, by the erosion of currency and the higher rates of tax imposed on the lower levels of Surtax incomes, the original allowances are devalued and the rate of tax automatically raised without any statutory increase.

We say that we are imposing the same rate of tax, but we are imposing not the same but a slightly higher rate, by reason of the erosion of the value of currency and the higher rate at which the lower un-Surtaxed slice of the income has been taxed. The Government should have that continually in mind. Everyone must recognise that the Government must look at all the circumstances, but we should bear in mind that we are now operating Surtax on incomes which in pre-war buying power start at about £500 or £600 a year and I do not recall even the most enthusiastic Surtaxers of my younger days in the Labour Party urging that we should be keen to tax Surtax income at those levels.

It is easy for those of us who are marching towards fogeydom and who are the middle-aged Members of the House of Commons who think in terms of prewar buying power and pre-war standards of income, but we must not lose sight of the fact that incomes are different and that standards are different and that the level at which we now enforce Surtax and thet level at which it begins to bite are probably out of date and should be reviewed as soon as the country's economic circumstances permit.

I am sure that the Committee is grateful to my hon. Friend the Member for Shipley (Mr. Hirst) for moving the Amendment, particularly since it gave rise to the most interesting contribution of the hon. Member for Manchester, Cheetham (Mr. Harold Lever). I very much hope that the Financial Secretary will be able to show considerable sympathy for the points of view which have been expressed, even though they were advanced with extreme and almost unusual modesty and calmness. None the less, they raised issues of considerable importance.

A number of representations have been made to me about the differentiation in treatment between earned and unearned income for these purposes. If we could go some way towards indicating hope that shortly there would be a change of attitude and a change of approach, that would go a long way towards relieving some of the present distress.

Many people feel that they are being unfairly singled out for special treatment which they do not deserve. Surely we all desire to encourage people to earn more so that they may put it away in greater savings. That is the background to much of our discussion of personal taxation matters. How can we encourage savings on the one hand and yet ultimately penalise those who successfully invest their savings? Surely what we want most to achieve is greater savings in order to lead to greater investment. Without investment we cannot possibly get the industrial expansion which we must have to try to rescue the economy.

Personally, I am a very keen supporter of any move to try to expand share ownership among people at all levels and in all income groups. I hope that we shall give every conceivable encouragement to the Wider Share Ownership and kindred movements. This is extremely important. I have spoken elsewhere advocating far greater dissemination of information by companies through their annual reports to shareholders and prospective shareholders of all kinds. This is part of the general subject which we are considering tonight of not discouraging those who save to invest, because that is an essential part of the capitalist system which all of us defend.

In moving the Amendment on which we have had this short and amicable debate, the hon. Member for Shipley (Mr. Hirst) adduced mainly general economic arguments, some of which were dealt with at length in the preceding debate. I do not want to follow the hon. Member in seeking to reply to what my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever) called the caricature of the attitude of the Government and our party towards taxation, nor do I propose to try to respond by replying to what I regard as the equal caricature which has been presented of the attitude of the party opposite to taxation. The fact is that any Government is wrestling and grappling with the problem of how to raise the funds which are required for the level of public expenditure that we all vote and to do so with the lowest possible levels of taxation. These depend on the growth rate and the amount of savings that we achieve.

The hon. Member for Shipley supported, by his hon. Friend the Member for Bournemouth, West (Sir J. Eden), urged that we should as soon as may be abolish the distinction which at present exists with Surtax as between investment income—I am quite content to call it that—and earned income. The hon. Member for Bournemouth, West in particular urged this as a necessary incentive towards saving. Speaking purely personally, I am not convinced by this argument.

I entirely agree about the need for us to be more successful in inducing people to save, but I should have thought that the levels at which there is that greatest need is not among the Surtax-payers so much as among the ordinary Income Tax-payers and the ordinary wage-earners, many of them earning substantial wages. It is at those levels, where in the aggregate so much of the country's income is earned, that we would like to see the level of saving much higher. For my part, therefore, I feel that there is a good and sound principle underlying the distinction which was introduced by the right hon. and learned Member for Wirral (Mr. Selwyn Lloyd) in the Surtax treatment of investment income compared with earned income.

If I may turn briefly to the Amendment and point out its implications, the proposal is to raise the starting point for Surtax from £2,000 to £3,000. I take it that the hon. Member for Shipley intends that the starting points for each slice would equally be raised by £1,000.

I instanced the tax in the United States of America, but the hon. and learned Gentleman has got me wrong or has misunderstood me. I was not being unreasonable in saying that the whole distinction should go like that, because that would be a major matter. I argued, and I was supported by the hon.

Member for Manchester, Cheetham (Mr. Harold Lever), that there is an injustice for the position having been left completely behind and that the difference between the two is too marked and unfair. I had it in mind that the Government might do something to close the gap a little. There is a distinct injustice that is has remained the same for the last 20 or 30 years.

The distinction has not been the same for 20 or 30 years. Surely, the present levels of the distinction between the two were fixed by the right hon. and learned Member for Wirral in one of his Budgets.

I remind the Committee that in recent years there have been two reforms which have improved the Surtax starting point over a wide field. Since 1957, the amount by which the total of the personal allowances due to an individual exceeds the single person's allowance has been deductible in computing his total income for Surtax. In addition, the special Surtax reliefs in respect of earned income have been allowable since 1961—that is, the earned income relief deduction and the special Surtax earnings allowance. The effect of all these is to raise the Surtax starting point for a single man for earned income to £5,001, and for married men and others entitled to more than the basic single person's allowance the starting points are somewhat higher.

If the hon. Member's proposal were accepted, the starting point for Surtax would be raised to £3,000 with those allowances left unchanged. The result would be that not only earned income, but investment income, would to a substantial extent be free of Surtax. A single person could have earnings up to £6,126, with a higher figure for a man with dependants, or earnings of £5,000 and an investment income of £1,000 and still not be liable to Surtax. The cost of these changes would be substantial. In the first year in which they would operate, which would be 1966–67, the cost would be £43 million and in a full year it would be £62 million.

The hon. and learned Gentleman knows only too well the difficulties and limitations of putting down Amendments on the Committee stage of the Finance Bill. I recognise that my Amendment would go right across the board. The hon. and learned Gentleman could tell from the whole tone of my speech, however, that I was inviting the Government to say how they could help the investment income as I call it, in a strict compartment of its own, without affecting the earned income, which is fairly satisfactorily guarded. For drafting reasons, I could not do all this in my Amendment.

I appreciate the point made by the hon. Member and the way in which he moved his Amendment. I am not trying to take any false debating points, but it is only right that I should explain the implications of the Amendment.

I conclude by saying, as, I think, the hon. Member tacitly acknowledged when moving his Amendment, that this is clearly a year in which my right hon. Friend the Chancellor of the Exchequer has found it necessary to raise a substanial additional sum in taxation. Obviously, therefore, it is not a year in which it would be realistic to propose a raising of the starting point in Surtax rates.

The hon. Member has made his point. I have given my immediate personal reactions to the main point which he has argued. What the hon. Member has said will, of course, be borne carefully in mind if we reconsider this tax in a future year.

I would like to say a word in support of the Amendment moved by my hon. Friend the Member for Shipley (Mr. Hirst) and to thank the Financial Secretary for giving a fairly detailed reply. My support is in the spirit in which my hon. Friend moved his Amendment and the spirit in which the hon. Member for Manchester, Cheetham (Mr. Harold Lever) made his contribution.

Equity does not stop at an investment income of £2,000 per annum. Sooner or later we must pay attention to raising this limit. I understand that this year is not the year to do it, but we hope that one year, possibly before the next General Election, the Chancellor will find that he has enough spare to do what my hon. Friend the Member for Shipley is asking.

I am grateful to the hon. and learned Gentleman for what he has said, though he has not said all that I had hoped. I would like him to have added a little indication of what the cost would have been in the clear spirit of ray speech; that is, were the Government able to think up the necessary drafting to ensure that this alleviation would only be borne by the unearned or investment income people. I hope that he will give some thought to that aspect.

I would never have dreamed of puting down the Amendment had I been of the opinion that I could press for a reduction of £44 million. The great bulk of that is going to those who already benefit by the 1961 arrangements. I wanted to benefit those people who were left out of the 1961 arrangements. I hope that I have made that point, and perhaps he will give some thought to that aspect. If a study can be made and if I can be informed of the sorts of sums that have been worked out, I shall be grateful.

However, in view of what he has said, I beg leave to withdraw the Amendment.

I am in a rather ambiguous position, having promised to cover my hon. and learned Friend, as his Parliamentary Private Secretary. However, I find that I am the only voice to speak on the Clause.

I hope that my hon. and learned Friend will tell us why he thinks it necessary to exclude the investment deposits, as defined in Section 1 (2) of the Post Office Savings Bank Act, 1966. I have not looked at the point with the care which those of my absent hon. Friends who tabled the Amendment have. My recollection is that the Clause excludes the savings account deposits in a savings bank, and not the ordinary accounts. If that is so, I should like to know why that distinction has to be made.

I shall now sit down and await eagerly a word or two from my hon. and learned Friend.

Before the Financial Secretary replies, perhaps I may be allowed to say a word about the Clause.

It is now ten years since the first £15 of interest on Post Office savings was exempted from Income Tax, and I believe that that exemption extends both to a husband's and a wife's account in the Post Office. Jointly, it is quite an advantageous exemption from tax. As I understand it, the exemption cannot extend to the new accounts which are due to start on 20th June because it would be difficult to do it in respect of that one kind of saving only and hot extend it to savings which are similar in nature and to such things as the trustee savings bank.

The same point applies about the ordinary Post Office savings exemption under this Clause as applied under the last Clause. It is ten years since the rate was fixed. Sooner or later, it will have to be raised. There will have to be a thorough review of all the effects of taxation measures on the level of savings in general and on specific savings.

It would have been nice if the Post Office exemption could have extended to the new accounts. That would have been a start in the right direction and would have convinced us that the Chancellor is really out for savings. At the moment, it looks as if he preaches more savings and less tax, but practises more tax and less savings.

I understand the reason for the Clause, but I hope that, sooner or later, the £15 limit will be raised and extended to other forms of savings.

May I say, first, that it was made clear during the debates on the Post Office Savings Bank Bill that the distinction which my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever) complains of would be drawn and that the tax exemption would not apply to the new type of investment deposit.

The new type of investment deposit is, as it were, the equivalent of the special investment department of the trustee savings bank. The exemption of the first £15 of interest on deposits with the ordinary Post Office Savings Bank account is one which applies also to ordinary deposits in the trustee savings bank. But it does not apply to the special investment department.

There is a reason for the £15 exemption. It is often quoted by people who seek exemption from some particular form of savings or another. But it is in a unique position. To start with, the ordinary account at the Post Office Savings Bank is a form of investment which provides, in effect, an elementary form of banking facilities without charge. The deposits can be withdrawn on demand at any time, and, in consequence, the rate of interest, naturally, is a very low one of 2½ per cent. As there is only that low rate of 2½ per cent., since 1956 there has been this relief from Income Tax, but not from Surtax, on the first £15 of interest on ordinary accounts in the Post Office Savings Bank and the trustee savings bank.

That is intended to encourage small savers to lend to those institutions, which lend the money deposited with them direct to the Government and pay only a low rate of interest. It would be quite illogical to extend that to these accounts which are offering a very much more attractive rate of interest. The rate of interest on investment accounts in the Post Office Savings Bank will be 5½ per cent.

If the proposal were accepted to make an equivalent exemption for these accounts, for a person who was paying Income Tax at the standard rate the effect would be to pay a gross rate of interest of 9⅓ per cent, on the first £250 of Post Office Savings Bank investment deposits. That is taking into account the minimum holding which he would be required to have in his ordinary account before he was entitled to have an investment deposit account. The 9⅓ per cent, would compare with and be considerably higher than the effective return of 7¾ per cent, on the latest issue of National Savings Certificates which, I am glad to say, is proving a very successful and attractive savings medium. I do not think that anyone would expect that we should try immediately to better that to the tune of a 9⅓ per cent, return on the special investment deposits. As I say, there is a more particular argument for the ordinary accounts.

The hon. Lady the Member for Finchley (Mrs. Thatcher) raised a separate point, taking the occasion of the debate to invite the Government to look at the £15 figure as it applies to the ordinary accounts and see whether, with the passage of time—and, no doubt she would say, the decline in the value of money—that figure could not be raised. We have received representations to that effect. It is not something which my right hon. Friend is in a position to do at the moment, but we shall take those representations into account.

I rise to record briefly my total dissatisfaction with the logic of the Treasury. I do not shrink in horror at the notion that someone who has £250 in a special account with the Post Office should have 5 per cent, tax free on his money, even after the computation made by my hon. and learned Friend that that would amount, at 5 per cent, net, to an approximate 9 per cent, gross.

I would point out to him that, to the more skilled and sophisticated investor, there is no difficulty in getting 5 per cent, free of Income Tax by way of income, very often on short-dated Government bonds. This raises a very important point, and I hope that my hon. and learned Friend will not brush this off, because it is of some importance.

The Government are wrong in thinking that the man who invests at 2½ per cent, gets a bad rate of interest and is entitled to some consideration. When the rate of 2½ per cent, was fixed it was a fair rate. Over the years it became a totally inadequate rate, which amounted to little more than taking advantage of ignorant people who did not know much about banking and bank accounts, and were only capable of using the Post Office Savings Account. It is much to the discredit of all Governments, Conservative and Labour, that they did not trouble to put this matter right, but were content to get large sums of money from the least sophisticated section, and very often that means the poorest section, of the community at a totally unwarrantable low rate of interest.

Now, when the Government, somewhat belatedly, are putting this right by offering, not a spectacular reward for the small saver, but a modest reward, still below the general rate of interest, at 5 per cent., still barely adequate, it seems that they are showing a false meticulousness of logic to exclude them from this paltry concession on Income Tax, and I am not satisfied that the Government are wise in doing so.

I hope that none of my hon. Friends, nor hon. Gentlemen opposite will be misguided enough to read this as an attack on the Government. What I am attacking is the characteristic Revenue view that all these concessions have to be wrung from them by force majeure, and when they are wrung from them, and we finally get this pitifully small contribution to equity on the small saver's account with the Post Office, we get a ridiculous exercise in logical acrobatics to deprive the small taxpayer of this modest tax-free rebate.

I hope that my hon. and learned Friend will look at this again. Because there is no Amendment in my name, my hon. and learned Friend cannot quote what the total cost of the concession would be. I know that it would be trifling, but psychologically it would be reassuring to many of us if the Treasury were to overrule the pedantry which has led to this restriction.

I find myself in almost complete agreement with the hon. Member for Manchester, Cheetham (Mr. Harold Lever). I do not always agree with the hon. Gentleman, but on this occasion I feel that the Treasury is not fully aware, or does not seem to be aware, of the change which has taken place in the investment climate in recent years, and which I think will show itself increasingly in the future.

As the hon. Gentleman said, the Post Office has received investment not only from the less sophisticated of the investing public, but has received it because such investors in the past have had very little temptation or very little experience of looking elsewhere. If that day has not gone already, I think that it will soon depart, and unless the Treasury and the Post Office are more realistic in their assessment of what will be needed to sustain investment in the Post Office Savings Account, they will find that the traditional investing public will be a declining asset.

I find this a complicated Clause, and I hope that the Financial Secretary will read one of those expositions after which all becomes clear.

This Clause, entitled "Personal reliefs for non-residents", is tied up with certain other Clauses in the Income Tax Act, and if the hon. and learned Gentleman would listen to me for a moment he might tutor me and tell me whether I have the meaning of the Clause right.

As I understand it, certain nonresidents are entitled to personal reliefs on that part of their income which arises in the United Kingdom. The reliefs to which they are entitled are in the same proportion that the United Kingdom income bears to their total income, but there are certain difficulties in calculating the United Kingdom income and total income particularly where there is a double taxation agreement in force, and where that double taxation agreement provides for a low withholding tax on dividends.

If I have it right, the recipient of the dividends cannot have both allowances and a low rate of withholding tax on the same portion of income. That is to say, the United Kingdom income will be calculated without reference to the dividends which go out, and therefore his personal allowances will follow the proportion which the United Kingdom income bears to the total income, but the dividends will be disregarded for calculating the personal reliefs.

I hope that that is more or less right. If it is, I think that we can perhaps let the Clause go through fairly quickly.

The hon. Lady is right, and so I am spared having to read a much lengthier and far less lucid exposition of the Clause.

As I understand it—and I am putting it in my own words, and not in the learned words with which I have been supplied—the effect of the Clause is to separate the income which is subject to the limited rate under the double taxation agreement from the rest of the income. For the rest of the income the overall rate of tax on the United Kingdom income is to be what it would have been in the absence of relief provided by the double taxation agreement, and for the rest of it, that which is subject to the double taxation agreement—and this is the only point that I really want to make—the taxpayer will have an election either to have the rate of taxation on those dividends which is provided for by the double taxation agreement, or the overall rate, whichever is the smaller, so there is an election on that point.

There are three points that I should like to raise on the Clause. The object of the Clause appears to be to bring the 1965 pension increases into line with those paid in 1959 and 1962, both of which were liable to Income Tax. It has been put to me that it was only after representations had been made to the Treasury that two specific classes of pensioners were included in the 1962 pension increases. The two classes to which I refer are the widows of men dealt with by the Indian Civil Service family pension funds and the superior services pension funds. I appreciate that it may be difficult for the Financial Secretary to give me an answer to this point immediately, but we on this side would like to press for an assurance that those two classes will not be left out.

The hon. Gentleman's questions are highly technical and without notice I cannot answer them. We have no further information to give with regard to the Indian pensions payable in rupees. I have nothing to add, in other words, to the letter which I sent him on these points. On the other two points, I will write to the hon. Member, and if he feels that there is anything in the reply to which it would be valuable to give greater publicity, we can no doubt find a way of raising the matter.

The Financial Secretary will remember that we had an extensive debate on partnership covenants last year and had a number of tries at getting the Clause right. We did not succeed and some of my hon. Friends warned the Chief Secretary that his Clause then was drawn too narrowly and would prevent the payments under certain partnership covenants from having relief for Surtax purposes. This Clause has been brought in in substitution for the provisions which applied last year. As a drafting point, I would say that we are grateful that this Clause substitutes for last year's and does not merely amend the one last year by reference. It makes it a good deal easier to consider it and will no doubt make it easier for those who later have to consult the Act.

As this is our second try at this problem, it is important that we should get it right. I recognise that a majority of the Clause gives wider relief than was given last year. What we have to consider is whether that relief is sufficiently wide even now. A number of cases have been raised with me and I think that it will be easier to illustrate the point if I describe them to the right hon. Gentleman.

One solicitor has put to me the case of two separate covenants, the first concerning a partner who retired well over 12 years ago and my correspondent dealt with the inadequate provision under that partnership agreement for a pension.

That agreement gave the retired partner only a right to certain partnership profits for two years after the end of the partnership. Two years passed and the majority of his income had gone. He had no further right by virtue of the partnership agreement. But I am sure that the Chief Secretary will agree that one cannot stand only upon legal obligations in these matters. People in this position are entitled to expect that the partners will honour their moral obligations, and naturally the partners drew up a covenant to benefit that other retired partner. Because the Clause last year was not retrospective, that covenant has continued to enjoy Surtax relief.

It is now due for renewal, and I suspect that, as the Clause stands, payment made under a covenant drawn up now would not be a payment

"under a liability incurred for full consideration."

I suspect that that would fail because of the absence of consideration.

Why?

There would be no consideration given by the partner, who retired ten years ago, to the present partnership for the covenant.

I am asking that where a covenant has been in existence and has been allowed and comes up for renewal, there should be provision in the Clause to provide that payments made under that covenant shall be allowed for Surtax purposes. In most cases where people retire in modern times adequate provision is made in the partnership agreement for some sort of income for the retired partner. This was not so many years ago, and people in this position will find themselves without an income or with a very much reduced income if this Clause goes through and such covenants are not allowed for Surtax purposes. Alternatively, the partners would still grant an income to the retired partner but it would cost them a great deal more, and possibly with their own obligations they could not give the same amount.

The second point concerns the widow of another retired partner, and this covenant, too, is coming up for renewal. There was never a legal obligation in this case on the partners to provide for the widow. In fact, they did it out of a sense of moral obligation. She has been enjoying the benefit for a number of years. The covenant is due for renewal. I refer hon. Members to subsection (1) and to the phrase that covenants will be allowed only if 1

"payments made under a liability incurred for full consideration".

A number of legal commentators have got at this Clause and have pointed out that the phrase

"liability incurred for full consideration"

is nowhere defined. For example, if a partnership covenants with a retired partner that that partnership will make payments to the widow of the retired partner, is that a liability? The widow of the retired partner could not enforce it against the partnership. What is "full consideration"? Even if the covenant were made directly with the widow, it seems to me that there would be no consideration—not merely not full consideration but no consideration at all.

We are very much concerned that this type of provision should continue to be allowed for Surtax purposes. If this point has not so far been raised with the Chief Secretary, I hope that he will think about it and, if the Clause is defective, will undertake to bring forward Amendments on Report.

I understand that a number of dependants commute their right to the income in return for a capital sum by assigning their right under a covenant to a financial institution. As the Clause is drawn, if the dependant does this it may deprive the payer of Surtax relief even though he could not prevent the recipient from commuting his interest under the covenant. It would seem wrong that the payer should himself be deprived of a relief because of something over which he had no control.

I hope that the Chief Secretary will consider these matters because it is important that this year we should get the provision right. We should try to make it as wide as possible to help those who do not stand on legal obligations but who are honouring their moral obligations as well.

I have listened carefully to what the hon. Lady the Member for Finchley (Mrs. Thatcher) said and there is no need for me to explain the Clause because she and, I am sure, the rest of the Committee, fully understand it in its complete and utter simplicity. It is, as the hon. Lady rightly said, a relieving Clause to a provision which was brought in last year and which was, perhaps, too narrowly defined. The Clause was introduced last year to meet representations made at that time.

The representations made on that occasion came from a number of professional bodies and were to the effect that annual payments made by individuals, paid under bona fide business arrangements not as a matter of pure bounty, should not count; in other words, should still attract relief for Surtax purposes. The essential condition was that they should arise from business arrangements and not as a matter of pure bounty.

The two examples given by the hon. Member for Finchley would clearly fall in the latter category. It would not be for me, as a non-lawyer, to go too closely into the law on this matter, particularly in view of the hon. Lady's great knowledge of these affairs. However, the distinction is, to a layman, clear. As she pointed out, they were examples of what she called "moral obligations". We all know what a moral obligation is. It is something which one is not compelled to do but which one does out of one's good nature, sense of responsibility, good citizenship and the rest of it. However, it does not count as a transfer of income and is not allowable for Surtax purposes. It was not intended that it should be. Thus, the answer to the hon. Lady's first two questions is that she is right in assuming that they would not attract relief for Surtax purposes.

In answer to her third point it would be easy to say "No, I do not think that they should count either". I can say that they would not. Although the hon. Lady was not asking that question, she did ask me to consider the matter and to see if we might extend the Clause to take that into account. I would not like to offer sympathetic consideration, although I am prepared to offer consideration. I do not want it to be understood from my words that the Government are under an obligation of any kind whatever to introduce an Amendment on Report. I will look at the matter because it has not so far been put to us. However, it seems at first sight to be something which does not call for legislation or adjustment in the Clause, but it would be discourteous of me to give an offhand answer. Thus, I will look at it further, but I do not want it to be thought that I am undertaking on behalf of the Government to bring in an Amendment.

The Chief Secretary is sparse in his sympathy tonight, so sparse that I was not sure to which section of my representations he was allocating it.

To the third and last point which the hon. Lady raised, namely whether Surtax relief should continue to be given if the pensioner commutes his pension as opposed to disallowing it for an action not by the covenantor but by the covenantee.

I am sorry that the right hon. Gentleman did not have sympathy for the other covenants as well, because it is important that we should try to include them in the Clause. The right hon. Gentleman said that representations had been made to the effect that covenants should be allowed where they were made for bona fide business reasons. That is different from a liability being incurred for "full consideration". I should have thought that "bona fide business reasons" allowed far more covenants to get by than would appear from the phrase the right hon. Gentleman chose. One could probably successfully argue that where there were solicitors in partnership in a comparatively small town it would redound very badly against the business if it were known that the existing partners did not look after former partners and the widows of former partners. Certainly a company which did not look after its former employees would not expect to have the good will of the surrounding locality and it would of course be allowed, albeit under a different Schedule and a different computation.

If the Chief Secretary is very unsympathetic we shall obviously have to return to the matter on Report. I am especially concerned, and ask him again, about covenants coming up this year for renewal. I can get a little sympathy on that narrow point? We have a special obligation there because people are now damnified by the Treasury whereas last year they were perfectly all right. I hope that the right hon. Gentleman will have second thoughts. I can assure him that my second thoughts on this subject will be exactly the same as my first. It would save him time on Report if he had second thoughts now.