I beg to move, That the clause be read a Second time.

The new clause stands in the name of my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe), who I must say is owed an apology by the Chief Secretary—

rose—

Order. I think it is unfair of the hon. Member for Blaby (Mr. Lawson) to introduce a topic when I have said that it is out of order. I hope that he will conduct himself appropriately to the dignity of the Committee.

This is a matter which is not new to the Committee, but I make no apology whatever for bringing it before the Committee again on this occasion. It is a new clause to index the capital gains tax—[Interruption.] May I have some protection, Sir Myer, from the non-stop chattering—

Order. I think that the hon. Gentleman is getting more interference from right hon. and hon. Members on his own side of the Committee than he is geting from the other side.

This is a matter which has been raised on a number of occasions, in previous Finance Bill Committees and in the House on Report, but I make no apology for again raising the matter, because we have had, since it was last debated on the Report stage of the Finance Bill last year, a very important document from the Inland Revenue on this subject. This carries the matter a little further, and in that sense it is a most helpful document. The fact that it does not carry it to a successful conclusion from the Opposition's point of view, and, I believe, from most of the Committee's point of view, is a matter which we hope can be put right even at this late stage.

Perhaps it might be as well to put the matter into perspective. The question has been raised in previous debates on this matter by, I believe, the right hon. Member for Down, South (Mr. Powell) about whether there should be any capital gains tax at all, or whether there should be any capital taxation at all. It is my view, and the view of my right hon. and hon. Friends, that there should be capital taxation. But it is not at all clear to us that there need be a whole battery of capital taxes in order to achieve the taxation of capital.

At present we have, at the very least, four major taxes on capital in one shape or form. We have a surcharge on investment income, capital transfer tax, stamp duty—one part of which we shall be coming to shortly—and we have capital gains tax. It seems dubious whether we need the last-named tax at all.

If the total amount of capital taxation is adequate—whatever is considered to be adequate, and there might be differences of opinion within the Committee on that—do we need four totally separate taxes on capital to achieve it?

If we are to have a tax on capital gains, it should be just that—a tax on genuine, real capital gains and not on paper gains. Yet it has been revealed in a recent speech by one of the Treasury Ministers that before the minor changes introduced in the Budget, of the total expected yield this year from capital gains tax of £390 million in a full year, no less than £350 million was the result of purely inflationary gains—paper gains—and only 10 per cent. of the yield was derived from genuine gains.

I have no idea whether that is right or wrong, and, no doubt, the Minister will confirm or deny it. All I know is that that is the figure that was thrown across the Chamber by Ministers in an earlier debate. But we are concerned about the principle of whether inflationary gains, which are only paper gains, should be taxed.

Is the hon. Gentleman suggesting that his party wants to give another tax handout of £350 million to the wealthy section of our society?

I thought I made quite clear that we are concerned here with justice. Despite the jeers of hon. Members below the Gangway, this is accepted by all those who have made a serious study of the matter and is, indeed, why the Inland Revenue, under instructions from the Treasury, produced the document of 5th October to which I have already referred.

While we are talking about the cost, another point is that, whatever the cost may be, no cost will fall on the borrowing requirement this year. It is clearly stated in the clause that it will come into effect only for gains made this year. Any tax payable on gains made this year, whether at the present level or any diminished level, will not affect the revenue until next year, 1979–80. So it has no effect whatsoever on the borrowing requirement this year.

The capital gains tax covers two different types of gain—that is, genuine gains in the real value of the asset which has been disposed of, and gains which are not real gains at all—gains which arise on paper because the asset appears to have increased in value when disposed of although in fact, because prices generally have increased, the true value of the asset may not have increased at all.

What we have here is a substantial and capricious wealth tax. This has been admitted by Treasury Ministers in past debates, and those who have come lately into our debates should not attempt to contest it unless they have studied the matter rather more deeply than the hon. Member for Bristol, North-West (Mr. Thomas) has done.

As I say, this is a wealth tax of the most capricious kind, and that is why the Minister of State said what he said last year on Report. I quote from the Inland Revenue document:

"In the course of a Finance Bill debate on 14th July 1977, the Minister of State to the Treasury, Mr. Denzil Davies, said that the Government would look sympathetically at the problem of the effect of inflation on capital gains."

It is to that point that I wish to devote myself in opening the debate. But for the benefit of hon. Members below the Gangway on the Government side who may have a misunderstanding of what is at issue, I shall read a letter from a constituent of my hon. Friend the Member for Bosworth (Mr. Butler). This is from a small shopkeeper:

"I came to my business 7 years ago having experienced three jobs disappear, and bought a sub-post office and newsagency which had just had the delivery service abandoned. I paid £10,000 split as to £7,500 property and £2,500 goodwill…

"Over my term of office my post office salary has increased from £1,000 to £3,150. Last year I realised that if I wanted a saleable business I had to resurrect the news delivery service so now in spite of sometimes feeling rather ill I opted to work a 13-hour day instead of merely 12. Just to show really willing, I also installed an automatic paraffin vending machine.

"You must ask yourself whether we small shopkeepers really try. I must mention that over this period my rate of pay would not be much more than 50p an hour.

"And now after 7 years I decide to sell up! We have now gone 7 years without a holiday and at last we are having to think in terms of appointing an assistant for whom I would have to allow £1·20 hourly plus and three weeks holiday. And this I will not do.

"Over my 7 years, what we have not suffered to enhance the value of my business I cannot think. I always managed to save the post office salary and it seemed some consolation for working 6½ days a week. When the estate agent got me £34,000 for the business it seemed that at least I had balanced out inflation …

"You have probably guessed—my accountant now tells me that I shall be liable to capital gains tax to the tune of £5,000.

"I cannot describe the utter despair my wife and I feel. Everything we have done has been a waste of time and one of my tax inspector friends tells me how lucky we are that we didn't put our money in a building society as if there is something akin as between a stock exchange capital gains flutter and the service we have given the public.

"I scarcely need to say, that I am having my rewards confiscated purely on a non-existent capital gain created by inflation. Is it any wonder that the unions, this Government and even some traders love inflation and will not consider indexation?"

Need I tell hon. Members that after paying the Chancellor his £5,000, the shopkeeper, possibly fatally ill, can receive neither dole nor sick pay? That is an example, of what is happening under the present regime of capital gains tax. I notice that Labour Members below the Gangway are no longer jeering or laughing. Quite right, too.

4.30 p.m.

This sort of problem is not in any way met by the mitigation for small gains introduced in Clause 35 of the Finance Bill. Nor is it met by any of the other provisions of the Bill. There is a genuine problem to which this Committee, should address itself. Indeed, the Inland Revenue note did its best to address itself to this problem. Hovever, the Inland Revenue—

The hon. Gentleman said, after he had finished recounting the example of the shopkeeper, that Labour Members below the Gangway were, perhaps, taking a more solemn view of the matter. As far as I could see, they were not. It would be interesting to see whether they agree with what the hon. Gentleman said. Perhaps they might indicate that by some interjection.

The hon. Gentleman is absolutely right. It will be interesting to see whether Labour Members agree. I hope that in particular the hon. Member for Liverpool, Walton (Mr. Heffer), who I know is concerned about small businesses, will make some contribution to the debate on this very matter and indicate his feelings.

The hon. Gentleman has read out a letter which quotes one side of the argument. We would need to examine it. I have learned in this world that one needs to examine the full details of any case that is put forward. I receive letters from constituents. The hon. Gentleman has a letter which puts one side of an argument.

In the past—I do not do it now—I have rushed in on the white horse, charging for this or that constituent and have discovered that there is another side of the argument as well, which had not been mentioned to me. Before I or anybody else rushes in to say that that is right or wrong, we would need to examine all the facts of the case.

If we are talking in general I agree that there is a case for small businesses, and that there is a need to look into the problems of small business men. But I wonder whether the hon. Gentleman is concerned only with the small business man—

Of course he is not—

or whether he is concerned with all of those in business rather than one aspect of the problem.

I admire the hon. Gentleman's insistence on studying this matter thoroughly before jumping to any conclusion. I and my hon. Friends have done so. Evidently he has not. I hope that he will not vote in any Division on this matter, on the ground that he has not had time to go into the matter with the thoroughness that he thinks necessary before reaching a conclusion.

The Revenue's note was interesting in one respect. It was looking at two different methods of dealing with this admitted problem of inflationary gains which ought not to be subject to tax but which are caught by the tax as it is at present constructed, and which would not be subjected to tax were this new clause, which indexes the gains, to be approved by the Committee.

One method of dealing with the problem was tapering, say over a period of 10 years, and the other was indexation. I know that a number of hon. Members have, until this Revenue document, thought that, possibly, tapering was a simpler solution and, therefore, to be preferred to indexation. The Revenue document makes two things absolutely clear. First, it makes clear that if the problem is inflation, the only logical solution is indexation. There is a case for tapering, but it is not the case which arises from inflation.

Before the hon. Member for Inverness (Mr. Johnston), the representative of the Liberal Party, leaves the Chamber, he should know that in our debates last year his hon. Friend the Member for Cornwall, North (Mr. Pardoe) stated clearly that he was in favour of indexation rather than tapering, because indexation directly concerned itself with the problem of rising prices and inflationary gains whereas tapering was something other than that. I refer to column 864 of the Official Report for 14th July 1977. I hope, therefore, that, with his usual consistency, the hon. Gentleman will be in the Lobby tonight with his hon. Friends.

Secondly, the Revenue document showed that the complications arising from tapering were every bit as great as those arising from indexation and that therefore the possible advantage of tapering—that it was a such simpler method—disappeared.

Logic and practicability go hand in hand to favour indexation as the method. There is only one respect in which tapering produces a simplification: the gains disappear altogether, for tax purposes, at the end of 10 years. But that can perfectly well be written into an indexation clause, as is done in some countries overseas, where gains over 10 years old are automatically exempt and there is indexation for those that are caught.

Three alleged practical disadvantages of indexation were produced by the Revenue in paragraph 20 of the consultative document. The first is that

"a suitable index—or set of indices—would need to be prescribed."

There is no problem in prescribing a suitable index. In this clause we have suggested the retail price index, which is what is usually used where there are linkages to take account of inflation, whether in pensions or other aspects of our social security or tax system.

What is clearly wrong is the suggestion that there would have to be a set of indices. We are concerned with inflation, which means the changes arising in the general price level. Therefore, the only relevant index is one relating to the general price level. The argument of the Minister of State in our debates last year that there would have to be a separate index for every different type of asset was, therefore, bad. He now accepts that that was a bad point. That is made clear also in the Meade Report, which I have to hand. We need a general index of prices to establish how much is real and how much inflationary gain. That rules out the problem which might be introduced if there had to be a set of indices.

The second objection put forward by the Revenue was the "awkwardness", in the case of wasting assets such as leases, of both writing down the cost of the asset and adjusting it to take account of indexation. I think that by now the Inland Revenue will have received sufficient submissions to show that there is no such awkwardness. The existing system would be used for wasting assets such as leases. I do not wish to go into this matter in any more detail, but I have a note on it. If the right hon. Gentleman wishes me to—

indicated dissent.

The right hon. Gentleman accepts that there is no problem there. Good. I shall not go into that.

The Revenue's third objection was about very long-term gains. If the Minister of State considers that this is the only problem, such gains could be exempted in an amendment to the new clause.

The Revenue put forward one other ironical objection—the compliance cost to taxpayers. Taxpayers pay a large sum of money on capital gains which are not true capital gains at all. All the taxpayers that I know would be happy to suffer the increased compliance cost in order to escape paying a tax which they should not pay in the first place.

Many other countries such as France, Sweden—for some gains—Ireland and so on index their gains for just this purpose. The Revenue is opposed to indexation. One knows that. I have a letter from a Revenue official. It is surprising to find Revenue officials having policy views, but evidently that is the situation we are in now. The Revenue official says:

"As you know, I hold no brief for indexation".

Therefore, the Revenue has been inclined to exaggerate the difficulties. There are some difficulties. For example, there are difficulties in the case of investment trusts and unit trusts, which, if there were indexation of gains, should be exempted altogether from capital gains tax. But the difficulties are not nearly as great as the Revenue has made them out to be. A number of submissions, copies of many of which I have, which were made to the Revenue in response to its consultative document have shown the way round these problems.

There was one curious matter in the Revenue document. The document claimed that when capital gains tax was orginally introduced in 1965 by the present Prime Minister, then Chancellor of the Exchequer, it was introduced at what was called "a relatively low flat rate" because it was specifically taken into account that it might contain an inflationary element.

Reading that document surpised me because it did not accord with my recollection, so I looked back to see what the then Chancellor of the Exchequer, the present Prime Minister, said on that occasion. He said:

"As for assets which are held for periods exceeding 12 months, I think that it would not be reasonable to subject a gain which may have accrued over a long period to the full rates of Income Tax and Surtax applicable to ordinary income for the year in which the gain is realised. I propose, therefore, that these long-term gains shall be taxed at a flat rate. Given a flat rate, I do not consider that there is any need to taper the rate according to the length of time for which the asset has been held, and the flat rate will, therefore, apply irrespective of the period of ownership.—[Official Report, 6th April 1965; Vol. 710, c. 250.]

That was all he said on that point.

Therefore, the Revenue has it completely wrong. The 30 per cent. flat rate was specifically put as an alternative to a taper. It was not in any sense intended to take inflation into account because, of course, it was not envisaged at that time that we should have inflation at anything like the rates we now have.

We were then living in a different age. We were living in an age of what is now called the money illusion, when people who expected interest on money which they had lent thought of it in money terms, not taking inflation into account. People drawing up the profits of their companies were not concerned about inflation. Trade unions negotiating for wage increases in those days of 1965 did not really take inflation into account. Now everybody does. Now we are in a different era.

It is a very sad thing, and a damp squib, that the Treasury has come up with at present, because the relief that is included in the capital gains tax clauses, which we shall be dealing with in Standing Committee, is a relief which nowhere near meets—quite apart from the fact that it is different in form, size and scale—the amount of tax which is wrongfully extracted from taxpayers for gains which they have not in any genuine way been fortunate enough to acquire.

The Chancellor of the Exchequer, announcing the failure to introduce any form of indexation in his Budget Statement—this is the last quotation I shall read from a member of the Government—said this:

"I do not think that it would be right to give relief for inflation to investors in shares and land"—

If I may here interpolate, as we have seen, it is not simply a matter of shares and land. It is also a matter of the small shopkeeper and the sale of his shop. The Chancellor continued:

"while investors in building societies and other fixed-interest loans receive none—and while an investor can benefit from the decrease in the real value of his own borrowings."

That is an extraordinary statement. As to the first half of it, it is perfectly true at present that if somebody invests in a building society or some other fixed-interest security, a part of that which is taxed as income—and with the investment income surcharge, too—is merely replacement of the capital value which is otherwise deteriorating through inflation. That causes taxation to be too high.

4.45 p.m.

But the amount that that man suffers is not nearly as great as the suffering from capital gains tax—the inflationary gains being taxed at a real rate. That is a far greater injustice, and to say that the Government cannot remedy that glaring injustice because they have not seen a way of remedying the lesser—even though there are ways suggested in the Meade Report for doing that, but I leave them aside—really is a poor argument.

I am following the hon. Gentleman's argument very closely, and up to a point I sympathise with some aspects of it. But would he not agree that if we are to have a system of indexation of the kind that he wants, he would also then have to apply indexation to wages and salaries? In fact, he would have to index all incomes of one kind or another. Is the hon. Gentleman in favour of indexing wages? Does he think that salaries also should be indexed? What is his view on that?

The hon. Gentleman is on to an interesting point, but it is a completely different matter. He would be the first, I should have thought, to insist that wages and salaries are matters for negotiation freely between employers and employees and between employers and trade unions. If a trade union wishes to negotiate with an employer an index clause in a pay agreement, it is free to do so. There is no reason why it should not. But it is not a matter for negotiation or collective bargaining, even though perhaps the hon. Gentleman might like it to be, to decide how much tax should be paid. That is a matter laid down by law. It is a matter of the legal relationship between the State and the citizen and the obligations under law that the citizen has.

rose—

I wonder whether my hon. Friend would comment upon the relative attractiveness, in terms of employment in the private sector and the public sector, if all contrasts of service within the public sector were indexed. Would it not mean that labour would be sucked into the public sector, unless the private sector was prepared also to index all contracts of service?

It might well do but, as I say, I do not accept the parallel of the indexation of wages.

Will the hon. Gentleman give way?

In a moment, I shall. Where there is a parallel is in other aspects of the taxation system; and it will be within the hon. Gentleman's recollection that last year, despite the Government's opposition, we insisted on indexing the personal allowances for income tax on precisely similar grounds.

In reply to my hon. Friend the Member for Liverpool, Walton (Mr. Heffer)—and I think it was a fair point—the hon. Member said that within private industry of course it was a matter of negotiation between the employer and the employee. However, if the Government accepted his view that indexation was a good idea, would he be in favour of indexing all contracts of employment between the Government and their employees, given that there was indexation?

No. There really is no comparison with, say, the firemen, to take a recently topical case, who negotiate wages with the local authorities, and if they do not like the wages they can leave the fire service, as some of them may have done. That is quite different from a taxpayer who is legally obliged to pay a particular tax and cannot opt out of it. I think, therefore, that the Minister is on to a very bad point, and not for the first time.

May I go back a number of years, as one who has had a lot of experience at negotiating in the private sectors with trade unions? It is implicit in the realm of contract that one tries to index. All that stops indexation is Government pay policy. In the real world, every trade union which is worth its salt expects the minimum of indexation, although the phrase is not used, and any sensible employer who can possibly afford it will accord it.

There is implicit in what my hon. Friend said a very important point—that is, that matters which are reviewed every year, such as wages, can be, in a rough and ready way, adjusted for inflation. One of the reasons why the injustice is greatest in relation to capital gains tax is that this is not something which is adjusted every year, unlike even the income tax allowances. It is a tax concern with a period of years, when the pounds at the beginning of the period bear no relation in value to the pounds at the end of the period.

Let me remind the Committee of the final reason, as it was a few moments ago now, that the Chancellor gave for not moving on this matter, even though we were given to understand that there would indeed be legislation this year and the Inland Revenue document stated that the hope was that there would be legislation this year that a satisfactory form could be found.

The Chancellor said that he was not prepared to do this

"while an investor can benefit from the decrease in the real value of his own borrowings."—[Official Report, 11 th April 1978; Vol. 947, c. 1202.]

Who is the investor who benefits most from the decrease in the real value of his own borrowings? It is the Government. It is the Government who are the biggest borrower of all. If anybody has benefited from the decrease in the real value of his borrowings, it is the Government. For the Government to say "Because we have had this great benefit, that is a reason why we cannot give any benefit to taxpayers whom we have been mulcting unfairly all these years" is a most monstrous and extraordinary argument. I am surprised that even the Chancellor, who, after all, had time to compose his Budget Statement as well as a long time to say it, should have used an argument of that kind. The fact that he did is, I think, some indication of the weak ground on which he found himself.

I thank the hon. Gentleman for giving way and will disregard the nasty comments he made earlier. Will he be good enough to tell the Committee how much he thinks the proposal will cost? We know that he had some trouble with the figures last time the Committee met, and perhaps he has had difficulty in getting it right, but could he give us some indication? Is it the £350 million of which we spoke earlier? If he would give just some indication, I at least should be grateful.

The cost this year will be nothing at all, for the reason I have already given. The cost in a full year, next year, will in any case fall to be met by the incoming Conservative Government, so I think that the hon. Gentleman can leave that to us. I would judge that the order of magnitude—and it is possible to make only a guess at it, and that is the case with the Treasury, too, which is perhaps why it has produced a series of wrong answers in its Written Answers—is about £300 million of inflationary gain.

This, as I have said, is a matter of pure justice. That is why we have said in our policy document "The Right Approach to the Economy" that

"we shall adapt Capital Gains Tax so that only true profits (as opposed to inflationary gains) are subject to the tax."

We have an opportunity to embark on that course now. We have an opportunity to remove from the statute book in its present form a tax which is a wealth tax masquerading as a capital gains tax, a wealth tax of a higher incidence even than the Swedish wealth tax in a period of the sort of inflation that we have had in recent years, and a wealth tax which falls in a most capricious and undesirable way, which is contrary to any justice and contrary to the economic needs of the country.

I invite hon. Members on both sides of the Committee to give the new clause their support.

Perhaps I may come in at this stage and say a few words about the new clause, because the hon. Member for Blaby (Mr. Lawson) did not address his mind to it at all. He pretended that there were no real problems involved in indexation. Then he made a knock-about Second Reading speech which we have heard from him before.

A very good speech.

It may have been a very good speech from the hon. and learned Gentleman's point of view, but the hon. Member did not really address his mind to the clause itself. He was asked, and he gave figures, about the cost of the new clause. He is quite right in saying that there is no cost this year because of the way the assessments are made. Our best estimate is that in a full year this new clause would cost about £350 million. I am not making an issue of the figures. I am just telling the Committee that our best estimate of the cost is £350 million.

The total yield from capital gains tax, if we include corporation tax on capital gains, is slightly greater than the hon. Gentleman seemed to think. It is about £480 million. But, as far as we can judge, the cost of this new clause in a full year is about £350 million.

Will the right hon. Gentleman give way?

In a minute. The hon. Member for Blaby dismissed that. He said "Next year it will be a Conservative Government, and we will see about the cost." But he still has not told the Committee—indeed, we were not told on other amendments—from where this money is to come. We have had almost £700 million in a full year on other amendments, and here we have another £350 million, with very little indication from the Opposition where they will find the money.

What assumptions has the Minister made in arriving at the figure for the rate of inflation next year?

The assumptions are that the rate of inflation more or less will remain what it is now. I said that it was extremely difficult—the hon. Member for Blaby also mentioned this—to arrive at an accurate figure when estimating for a year ahead. But our best estimate is that the cost is around £350 million. I cannot pretend that it is an exact figure, but it is probably pretty close to what the actual cost will be if this new clause is accepted.

Is it not a rather extraordinary admission by the Government that, if we take the £390 million figure of my hon. Friend the Member for Blaby (Mr. Lawson), 90 per cent. of capital gains tax is yield from inflation gains and only 10 per cent. is true capital gains? Is that not an extraordinary admission?

I do not accept that. In fact, leaving aside assumptions and the argumentative point, about 75 per cent. of the yield is what we assume would be lost as a result of this new clause. We are debating a new clause and its effect on the Government's income, and I am telling the Committee—whatever conclusions hon. Gentlemen wish to draw—that this amounts to about £350 million. I think that the Opposition owe it to the Committee to tell us where they would find the money that would be lost as a result. The tax may be unfair. It may be a tax on inflationary gain. That is a matter for argument. The Opposition still have a duty, if they pretend—I think that they have given up all pretence of being a responsible Opposition—to be responsible, to say from where the money is coming. We have heard nothing.

Next year.

Next year. That is a typical Conservative approach. There is no problem this year, so let us pile up the problems for next year. That is extremely irresponsible. We have not been told from where the £350 million is coming.

The hon. Member for Blaby argued for indexation. We have heard the argument before. He appears to be in favour of almost general indexation, provided that it is not of wages and salaries in the public sector—or, perhaps, contracts. He holds his face against that.

We have debated this case several times, and I do not suppose that we shall ever agree whether indexation of the tax system is right. My own view, which I have expressed previously, is that I do not think it fair to index for the benefit of one group, be it a group selling capital or any other group. If one goes down the road of indexation, one must index right across the board, and then, as far as I can see, one is back in the same situation as at present, and nobody really benefits at the end of the day.

5.0 p.m.

Indexation addresses itself to the symptom of inflation. It is not a cure. It is a kind of pain-killer, and, like all painkillers, it gives one the false illusion that the disease has been cured. In fact, the disease has not been cured.

That is why my own view is that indexation is dangerous. It draws attention away from the real problem of inflation, which is the problem to which the new clause should address itself The real injustice is inflation. That is why this Government have been addressing themselves, very successfully, to the problem of inflation.

I do not accept for a moment that a Government who have allowed prices to double during their four and a half years of office have been successful in dealing with the problem of inflation. But may I make it absolutely clear that the clause is in no way concerned with curing inflation. The arguments I was adducing in favour of the clause were grounded entirely on justice. It is no good saying that it is not a cure for inflation, a cure for baldness or a cure for anything else. It has not been put forward on those grounds.

I accept entirely what the hon. Gentleman has put forward as a cure. If he is basing his argument on justice, he must, with justice, give the benefit of indexation—if it is a benefit when it covers everybody—to all other groups as well. He cannot in justice claim the benefit of indexation for this group, however worried they might be, without arguing that the benefit should be applied to other groups as well. That is the point I was seeking to make.

Indexation in this regard seems another Tory easy way out of the problem of inflation. At least this particular group would not suffer. That kind of regime leads to the illusion that inflation is not such a bad problem after all because one has protected certain people from it.

Rubbish.

In reply to the hon. Gentleman may I quote from the Carter Commission, which was set up by the Canadian Government some time ago to look into the whole tax system. The hon. Gentleman may not agree with that commission's conclusion, but it is a wide-ranging, deep analysis of taxation problems. The Carter Commission said about indexation and capital gains tax:

"It has been argued that it would be inequitable to tax a gain that resulted from a general increase in the price levels."

That was the hon. Gentleman's argument.

"The point is made that such a gain is illusory because it does not represent any real increase in purchasing power. This argument, when used to support the exemption of stock market gains, appears over-emphasised if the substantial increases in the stock market averages are compared with the rather smaller increase in the cost of living index."

I make no point on that. The commission went on:

"In addition, we cannot overlook the fact that there are many members of society with fixed incomes who suffer losses in economic power because of inflation and are unable to protect themselves against it. This is in contrast to the equity holder who during a period of inflation will generally experience some growth in the dollar value of his assets."

That does not happen.

That is not true.

The commission continued:

"Because it is not possible to make provision for complete recognition of declines in purchasing power brought about by inflation, we have concluded that it should not be the function of the tax system to attempt to relieve only some segments of the population from the effects of inflation. The tax system, therefore, in our opinion should continue to be based on current dollars and not on constant dollars."

rose—

I have given way on a number of occasions. The hon. and learned Gentleman should contain himself. I am summing up the quotation.

The Carter Commission makes it quite clear—this is a point that my right hon. Friend the Chancellor made from the Dispatch Box—that it would not be right, on grounds of justice, to give this benefit to one segment of the population and to protect it from the effects of inflation if we were not prepared to extend the benefit to other segments of the population.

If that is the considered view of the Treasury Front Bench, why did it encourage the Revenue to put out a consultation paper and waste a great number of people's time making representations? The only basis for the consultation paper must have been that the Government recognised that there was some case, at any rate, for indexing, or at least countering, the effects of inflation.

The Government did recognise it and still recognise the problem here in relation to inflation and gains of all kinds. But, at the end of the day, having considered the matter, it does not seem to us just and right that we should introduce a measure to protect one group, however worthy or unworthy—it is not a question of merit—from the effects of inflation when other groups would not be so protected by the tax system.

Perhaps I should remind the Committee—I do so only as a matter of fact and not to draw any special conclusions from it—that the rate of capital gains tax is lower than the rate of taxes on income. The Carter Commission came to the conclusion—I make no comment on this—that the tax on a capital gain should not be at a different rate from the tax on income gains, because both represent a spending power or purchasing power.

The Meade Committee, which looked at the whole tax system, also seems to be inclined to the view that a capital gain merely reflects purchasing power at the end of the day—whether that is true, I know not—but again thinks that the tax should not be different.

Will the right hon. Gentleman give way?

The hon. Gentleman has made his speech. He keeps bouncing up and down at every point one makes. He should sit back and reflect on the points that I am making. I want to develop my argument.

The index chosen in the clause to assess a gain, or to remove the inflationary part of the gain, is the retail price index. That is an index of spending power. So in the new clause we have a kind of implied admission that capital gains can be looked at only as money that can be spent, because of the index which is used. If that is so, does the hon. Gentleman still argue that the rate of tax on capital gains should be any different from the rate of tax on incomes? He should bear in mind that he is relating capital gains to spending power in terms of the index.

A little while ago the right hon. Gentleman appeared to be praying in aid the Meade Report. Is he aware that that report, which is a very valuable study in many ways, is specifically in favour of indexation of the tax system in general and the capital gains tax in particular?

The tax system in general, and capital gains come into it. The Meade Report was not specific on a large number of matters. I am surprised that the hon. Gentleman can be so dogmatic about that report.

The question I was seeking to ask—perhaps we shall have a reply from the Opposition in the winding-up speeches—was whether the Opposition accept that even with the new clause the rate of tax on capital gains should be any different, as it is now, from the rate of tax on so-called income or income gains.

Does not my right hon. Friend agree that for the wealthy taxpayer the rate of tax on capital gains is far less than he would pay on an additional slice of income? At the end of the day, this would be a slice of disposable income, just as though it had been earned.

That was the point that I was seeking to make. My hon. Friend has put it clearly. Many reports, including both the Meade and Carter Reports, come to the conclusion that the rate of tax on capital gains does not necessarily have to be any different. Why should it be, if one is looking simply at spending power? There may be other reasons why the tax on a capital gain should be at a different rate.

But if one is looking at spending power, why should the rate of tax be any different in respect of capital gains than it is for income gains? The hon. Gentleman should think about it for a while. He is very prone to jump up, and sometimes he does not get it right when he jumps up on the spur of the moment. I suggest that he considers the matter and that when he has the opportunity he returns to it later.

I now return to the clause. The hon. Gentleman skated over it. The clause was not so important, it seemed. It was the principle in the clause that he was concerned about. The clause fails to meet many important points—and not merely drafting points. I realise that the Opposition cannot be expected to get the drafting right. But this clause was originally conceived by the Society of Conservative Lawyers, so I do not excuse any drafting errors. If those lawyers cannot get it right, they cannot complain if I criticise them on that score.

The new clause skates over many problems in an attempt to make it look nice and simple. But if we really wanted to introduce the kind of datum indexation that the new clause seeks, we should need at least 10 pages of the Finance Bill instead of one and a quarter sides, as on the Amendment Paper.

The new clause says nothing about part disposals. Presumably the clause was drafted by all the resources of the Conservative Central Office as well as the Conservative lawyers, but it makes no attempt to deal with the problem of part disposals. No attempt is made to deal with the problem of the pooling of shares. No attempt is made to deal with the problem of enhancement of expenditure. Those are three extremely important issues.

They are easily dealt with.

The hon. Member for Blaby says that they are easily dealt with. It seems that everything is easy for the hon. Memer for Blaby, but he does not always get things right. If these three matters are so easy, why are they not dealt with in the clause?

The fact remains that these are complicated matters. I do not say that it is not possible to draft a clause dealing with them, but the best advice I have is that it would take about 10 pages of the Finance Bill. I am not saying that it cannot be done. I am saying that it shows the complexity of what is being put forward by the Opposition and their failure in the clause to recognise—perhaps they did not want to recognise—the complexity involved.

Then, assuming that we can take care of those three matters, there is the additional problem of existing share pools. I am surprised that the hon. and learned Member for Dover and Deal (Mr. Rees) did not mention that. It, too, is an extremely difficult matter, but the clause makes no attempt to deal with it. My advice is that the Inland Revenue fails to see how it could be dealt with in this particular clause.

The hon. Member for Blaby regaled us with quotations from some of the representations made on the Revenue's discussion paper. He will know that one paper put forward by two members of the Bar tried to deal with the problem in relation to datum indexation—the problem of existing pools of shares. They came up with a concept called the minimum referable cost concept with two graphs to support it. But the Inland Revenue has been unable to understand what is meant by the minimum referable cost concept. Indeed, when the Inland Revenue wrote to the distinguished gentlemen who produced the paper, those gentlemen did not even supply an answer.

I am merely saying that we are dealing with an extremely complicated area. The new clause does not begin to deal with it. It is no good the hon. Member for Blaby coming her and seeking a vote of the Committee. I accept that a debate can take place on the principle of the matter. But here we have the Conservative Opposition saying "It will be a problem next year when we come into Government." They are to vote on a new clause which, frankly, is hopelessly defective. I am surprised that they are prepared to go into the Lobby in support of it.

Apart from the clause being legislatively defective, there is also the question of administration. Tory Members said that the compliance costs to the taxpayer do not matter. Very well. The taxpayer does not mind as long as he does not pay the tax. But there are the administration costs for the Inland Revenue. In view of the reduced yield of the tax, the actual costs of administration of this tax—the present cost being about 3 per cent. of the yield—would then be about 15 per cent.

Tory Members will say "That just shows that these are all inflationary gains." But they must accept the consequences of that. The consequences are that they are collecting a tax under the new clause where the costs of administration are 15 per cent. of the actual yield of the tax. I suppose that they will continually leave that problem until the year after next. It is an extremely difficult problem for them to overcome.

Those are some of the reasons why the Government are opposed to the new clause, apart from our view that indexation for one group is not fair. As I said, indexation is an attempt to offer a palliative to inflation. For that reason, it tends to obscure the real problem. Apart from that, there are the complexities of introducing this kind of indexation in our tax system. That is why the Government decided against it.

Clause 35, which we put forward and which we shall debate upstairs in Standding Committee, is not a substitute for dealing with indexation. It is not put forward as a substitute. I remind the Committee, however, that proposals put forward by the Government at a cost of £65 million this year—not a small sum of money—

Not this year.

The hon. Gentleman has got it wrong again. It is a cost of £65 million this year in terms of Clause 35, because it relates to assessments that have been made.

rose—

I will not give way. The hon. Gentleman is wrong again on his figures. I do not want to make a point of it, but the hon. Gentleman should sit down and think about these matters and consult those who understand them before he jumps up.

I shall finish my argument. The cost is £65 million in this year, with a saving of about 200 staff and a reduction of 50 per cent. in the assessment. Therefore, 50 per cent. of the assessments will be reduced this year.

Wrong again.

I think that it would help the Committee if the Minister replied to what the hon. Member for Blaby (Mr. Lawson), said. The hon. Member is reading from the Red Book, saying that the cost is £15 million. The Minister has said £65 million. Who is right?

The cost in a full year is £65 million. If I said "this year", I withdraw what I said. The cost is £65 million in a full year. The cost in the Red Book is the cost this year. The cost is £65 million in a full year. There is a saving of 200 staff and as a result of the new regime there will be only half the number of assessments.

Against that, this is a system that is not complicated. I agree that it does not meet the problem of indexation, but that is a much wider problem. The new clause is extremely defective in many areas and I hope that the Committee will not accept it.

I do not agree with much of what the Minister of State said. I am glad that my right hon. and hon. Friends have decided to move a new clause in favour in indexation rather than tapering since I believe that tapering raises not only much more complicated administrative issues but more complicated issues of principle which might divide us all.

In spite of what the Minister of State said I believe that the new clause is very simple. It does not raise matters of principle and it is non-controversial. In these inflationary days—this is the real point—indexation is increasingly becoming a well established principle. This is why I intervened in the Minister's speech in relation to pay settlements and free collective bargaining.

When I first became a Member of Parliament we had very gentle inflation. There were sound Treasury reasons for saying "Let us not write indexation into our affairs". But with current rates of inflation—I make no party point about it—indexation has to become part of our general scheme if justice is to be maintained between one citizen and another and the equitable relations between citizen and State are also to be maintained.

The principle has already been established. I need only mention the indexation of personal allowances for taxation which the House insisted upon last year in the Finance Bill. It is true that it was against the advice of the Treasury Bench, but we did it. It appealed to the House as a whole as a matter of basic natural justice.

Secondly, there is the whole area of public service pensions. I know that that is not taxation, but it is direct public financing. When I listened to the Minister of State I was inclined to interrupt him on this point but I did not wish to detain the Committee too long. Once we have the indexation of public service pensions it becomes an accepted part of our practices.

We have the implicit indexation of our social security benefits. The annual review is written into legislation. Therefore, the only issue involved in the new clause is whether we should index chargeable gains under a capital gains tax.

Let me remind the Committee of what the rate of inflation has been since the present capital gains tax was introduced in April 1965. Between April 1965 and March 1978—roughly 13 years—there has been an increase in the retail price index of 228 per cent. The Chancellor spoke of a more optimistic figure for the future anticipated rate of inflation. He has been telling the country that we can expect a 7 per cent. rate of inflation within the foreseeable future. Let us not argue whether he will achieve that. Let us, for the purposes of this debate, take him at his own word.

A little simple arithmetic will show that a 7 per cent. inflation, extended over the second 13 years of the capital gains tax, produces an increase of 241 per cent. We have, therefore, the first 13 years of capital gains tax producing a 228 per cent. increase in inflation, and the second 13 years—if the Chancellor is right—241 per cent. I say this to illustrate the rate of inflation that we are currently experiencing and are likely to go on experiencing.

There was a time in our history when we had years of inflation and years of deflation, and over a period they roughly evened out. Between 1850 and 1914, price levels evened out to about the same. Between 1914 and 1945—say, 30 years—and through two wars, prices roughly doubled. From 1945 to 1967, prices doubled again, in another 30 years. From 1967 to 1973, they increased by a further 50 per cent. But since 1973, they have doubled, in about four years. Let us not go into the reasons. Let us just record the fact.

The object of the capital gains tax is to put a tax on chargeable gains—that is, where an asset is worth more in real terms when it is disposed of than when it was acquired. Let us not go into the question whether we think it a good or bad tax, but simply accept that we have this tax. The only issue is a very narrow but a very important one; how do we assess chargeable gains?

Government supporters below the Gangway say that they would like to see the rate of capital gains tax the same as the rate of income tax. That is not the issue today. They may be right; they may be wrong. We can argue that matter, but let us have a proposition. The issue before us is whether, under a capital gains tax, the chargeable gains should be indexed. I believe that as a matter of simple equity they should be indexed.

When they are not indexed, the capital gains tax becomes a wealth tax. When there is 224 per cent. inflation in 13 years, it does not require a degree in higher mathematics to work out that if an asset has maintained its market value and one disposes of it after 13 years, one is being taxed on inflation.

I concede to Labour Members below the Gangway that there may be a case for a wealth tax. If they favour it, let them introduce an honest wealth tax. But let it be open and clean. Let us not have a wealth tax under the disguise of a capital gains tax, when there is no capital gain and the disposer of an asset is taxed on an inflationary gain, whereas in real terms he has made none.

The only objection to accepting the new clause can be the objection in the Inland Revenue paper. The paper, which we all have at hand, is as to 95 per cent. of its wordage dealing with tapering, so we can ignore that. The amount written in the paper on indexation is about one page. There are broadly three points.

First, one has to find a suitable index. I suggest that we take the RPI, which is increasingly becoming the general index of inflation. One can get into the more recondite points of statistics, but I think that we can ignore that. I think that anyone with an asset would settle for the RPI. One need not draw any broad deductions, as the Minister of State did, about an asset being, as a result, income and spendable in the year that it is realised. The RPI, incidentally, is used by the Treasury on its own inflation-proof savings certificates for elderly people, so the principle has already been accorded.

Secondly, let us take wasting assets—leases and so on. That problem exists already under a wealth tax, if we had one, and under a capital gains tax. Therefore, there is no new issue in that respect. Indexation adds nothing except a very minor addition to the problem. The problem already exists.

Thirdly, there is the proposition that the rules for assets acquired before 6th April 1965 might make it more difficult for taxpayers—and so on. We have that problem anyway, and have to cope with it so, again, there is no new issue.

The only issue is the choice of index, and I suggest that the Treasury has already set the example in the way that it handles indexation on savings certificates for elderly people by using the RPI.

In spite of a certain attempt by thy hon. Friend the Member for Blaby (Mr. Lawson), who is so eloquent and such a good debater, and the Minister of State with his Welsh eloquence, to make a great matter of principle out of this new clause, I believe that there is none at all. It is a terribly simple, modest, administrative matter. Nobody need get the least bit steamed up, and I think that we could pass this on the nod and go on to further business.

The hon. Member for Eastleigh (Mr. Price) made an interesting point. He said that the clause was meant to dispose of a form of wealth tax. Surely, there is no idea of a wealth tax but simply a question of a tax on capital gains, and even that is not payable until the gains are actually realised. I think that it would be a very good idea if we had a wealth tax, but I do not see how that idea could apply to this new clause.

The hon. Member for Blaby (Mr. Lawson) made an ingenious and, at times, moving speech. There was a moment—the hon. Member was talking about small businesses—when I thought tears would come to his eyes—

He was talking about one small business.

Indeed, yes. But if such tears had come to the hon. Member's eyes, they would have been a splendid example of crocodile tears. The clause might benefit small businesses to some extent, but the overwhelming majority of beneficiaries would be really wealthy people and institutions with enormous sums of money at their disposal.

Everyone suffers from inflation, except a privileged class. Thanks to the Government of the right hon. Member for Sid-cup (Mr. Heath), civil servants and officers of the Armed Forces have completely inflation-proof pensions. They are, of course, very worthy people, but in spite of their meritorious services I think that there is considerable resentment among a large number of people, at the particularly privileged position such persons have, I should have thought it most undesirable, in relation to inflation, to create a new privileged class of people who obtain capital gains.

The new clause may well benefit small business men. I do not know the situation as regards small business men, but it may well be that some of them suffer some hardship. I think that it would be desirable for my right hon. Friend the Minister of State to look into this, in consultation with the Chancellor, to see what can be done to help small business men in cases where they suffer hardship in this matter.

The new clause benefits mostly entirely different members of the community. In fact, if the hon. Member for Blaby wanted to benefit small business men, he could have reduced the scope of his clause so that it benefited small business men primarily. But the clause is absolutely wide and will embrace everyone who makes capital gains.

Let us consider what people they are. Pension funds, of course, will be beneficiaries, and that is desirable. But the clause will benefit mostly holders of ordinary shares.

If I did not mishear the hon. Gentleman, he said that pension funds would benefit from this clause. Pension funds are exempt from taxation.

That is very helpful. But pension funds draw some of their income from sources where capital gains tax has to be paid. However, I agree that in the majority of cases pension funds do not to a large extent.

I am trying to be perfectly fair to the hon. Member for Blaby and bring in every possible favourable circumstance for the new clause. But that exhausts my supply of favourable circumstances.

5.30 p.m.

We come now to the other beneficiaries—the holders of ordinary shares. There are insurance companies, merchant banks, joint stock banks, and all the other City institutions. I cannot see why they particularly deserve to have this concession made to them. The clause would also benefit large property owners and large landowners. Why should they have a special concession from, above all, a Labour Government? Those who benefit will be the property speculators, people who buy for no other purpose than to make large capital gains.

The hon. Member for Blaby read us a letter, which perhaps touched some of us, about a small shopkeeper suffering real hardship at the end of his days. That may well be a genuine case. But I suggest to the hon. Gentleman that his new clause will chiefly benefit such people as Mr. Harry Hyams, the owner of Centre Point—[HON. MEMBERS: "Not the owner."]He was the owner until recently. Such people would profit enormously, not the small shopkeepers. Property speculators would be able to make enormous killings as a result of the new clause. I shall be glad if any hon. Gentleman can tell me why he believes that I am wrong in this respect

The hon. Gentleman does not take any account of the effect of the development land tax, which was introduced long after the 1965 legislation on capital gains.

I am fully aware of the development land tax, but even when that takes full effect there are still enormous profits made from property speculation. There is no doubt of that.

There are also very large profits to be made by Stock Exchange speculators. Why should they be privileged people and have this concession? One of the biggest causes of inequality in this country is capital gains. Rich men, over the years, consistently become richer and richer as a result of capital gains. The new clause is the last thing to which this Committee should give serious consideration.

Hon. Gentlemen, including the hon. Member for Eastleigh suggested that people who buy property or shares suffer some injustice because of the effects of inflation, but even that injustice is of a very limited nature. Surely all Stock Exchange prices, and perhaps to a lesser extent property prices, are based on the assumption that the purchaser will at some time in the future sell that property—in the hope of obtaining a capital gain. Surely all prices are discounted to allow for that.

That might be true if someone had bought shares when capital gains tax had not been introduced. But if capital gains tax were introduced, and the hon. Gentleman and I bought some shares, it would be discounted in our purchase price and the discount on the sale price neutralises that. The hon. Gentleman is on the wrong wicket here.

That is just the point I am making. The discount on the purchase price to a large extent offsets the ill effect of inflation on the sale price even allowing for the continuing discount. I suggest that that is eventually the case, taken over the years.

A further point is that I believe that a large amount of money for these transactions is found by borrowing—for example, from the banks. Those sums are borrowed at a fixed interest. Someone borrows money to buy shares or property and the money borrowed loses its purchasing power steadily. Although the money that a person receives from an eventual sale loses some of purchasing power due to inflation, nevertheless the two factors tend to cancel each other out to some extent. I believe that to be true.

The hon. Member for Blaby may laugh at this, but he has produced an extraordinarily ill-drafted clause and he might try to pay some serious attention to a simple situation like this. If the hon. Gentleman borrows £1,000 and buys some equity shares and at some time in the future sells those shares for £5,000, that £5,000 will, admittedly, be affected by inflation. But inflation would equally affect the £1,000 that he has borrowed. Therefore, to a large extent what he has suffered from the effects of inflation will be offset by the fall in the purchasing power of the money he has borrowed. This is simple arithmetic. But one must bear in mind that this new clause will have no useful effect on the economy. It will in no way help people living on small fixed incomes, the worst sufferers from inflation.

indicated assent.

I am very glad to see that the hon. Member for Isle of Ely (Mr. Freud) agrees with me on this, but he is surrounded by a vast number of Tory Members who are not interested in people with small fixed incomes. I suggest that the new clause will have no useful effect on the economy. It will produce no particular incentive to anyone who wants to work harder or who wants to use his ingenuity to help the country. It will not make the trade unions happier, or more disposed to be conciliatory about wage increases. There is no case for this new clause, except a marginal case for shopkeepers. The clause is primarily looking after the interests of the wealthy people whom the Opposition primarily represent.

In his opening speech the hon. Member for Blaby (Mr. Lawson) talked about this being a tax on capital. It is a tax not on capital but on capital gain. I hope that the right hon. Member will accept that definition. He did not say how this £350 million was to be funded. I do not know whether the Conservative position is that there should be further public expenditure cuts but, be that as it may, he did not explain how the £350 million was to be found.

I should have thought that the purpose of a Budget was to seek some sort of social and financial justice and also to create a tax system which would stimulate the actual creation of wealth—wealth which is created through motivation to work, and motivation to work is created by a fair system of rewards. That is why the SNP last week voted for the widening of the tax band at the middle level to assist middle management and others whom we consider to be the real creators of wealth and employment. But it is also the reason why we did not support the Conservatives, who sought to reduce the rates of tax at the very top level. I suggest that the new clause comes into the latter category.

The Government have done something in the context of capital gains to mitigate the effects of CGT at the lower levels, but my party and I do not believe that the new clause will help the creation of wealth or stimulate the work motivation of individuals. Indeed, it could be argued that the new clause might operate against the motivation of individuals to work to create wealth. If there is to be tax relief, it should be primarily on earned income and not on unearned income.

My party is against the new clause because it does not assist the creation of the country's wealth. It is inequitable, and if a country's wealth cannot be created there will be insufficient wherewithal to be used for the creation of social engineering—items such as kidney machines and hospitals. The Scottish National Party will therefore vote against the new clause tonight.

This again, in my judgment, is a clear example of the Tories serving the class interest that they are here to represent. I wish that they would be honest and tell us exactly what they are about. There is no doubt that the new clause is designed basically to assist the wealthy in our society.

I feel sad that certain hon. Members—for example, the hon. Member for Perth and East Perthshire (Mr. Crawford)—should have got caught last week to the extent that they gave massive handouts to those earning over £10,000 a year and gave £5,000 to those earning £50,000 a year. These are the great innovators and entrepreneurs about whom we heard.

It would seem that the Tories are determined in this Budget to give approximately £1,000 million to their friends. My right hon. Friend will tell me if I am wrong. If the Tory Party had had its way completely last Wednesday and the previous Monday, I understand that the bill would have been £780 million. Is that right?

indicated assent.

Thank you. The Tories now want to give away another £350 million, so I am underestimating. We are talking about £1,100 million—over £1,000 million—that the Tories want to give to their friends. We are not given any indication where the £350 million under this proposal is to come from. All we are told is that, if elected, the next Tory Government will deal with it. We know that they are intent on making all kinds of cuts in public expenditure. We know that in the many areas where the Government have given help to certain firms and industries, the Tories would have let them go, unless they were in their own constituencies. When their own constituencies are affected it is a different kettle of fish altogether. They send the begging bowl round at practically every Question Time to the Department of Industry and other Departments.

In addition, as I understand the statistics of the Budget, 57 per cent. of the total tax handouts on the Government's proposals are to go to those earning over £4,500 a year, which is the average wage. Well over half of the Government's proposals for tax handouts, therefore, were going to those who were earning more than the average wage.

Given the Tory proposals, including this new clause, it would be 70 per cent. If we add the £1,100 million that they want to give to their friends to what has been given anyway, about 70 per cent. of the total tax handouts will go to those earning more than £4,500 per year. In any event, it will be considerably greater than the Government's 57 per cent. because of the measures adopted on Monday and Wednesday of last week.

This is a pure example of naked class interest. I wish that the Tories would make this clear instead of trying to wring our hearts about some little shopkeeper who saves up all his pennies to buy a shop, goes into the shop and then has to sell it. If the Tories want to help such people, why not put down a specific amendment to try to deal with that kind of situation? It will not be easy, because such a proposal would encourage people to rush in and out of business and to make losses. They would be better off if they made losses in certain cases. It would not do much for this great innovative and incentive challenge which we are told the Tories' taxation system would defend. Let us get it clear that this is a piece of naked class interest.

5.45 p.m.

I am sure that the right hon. and learned Member for Surrey, East (Sir G. Howe) will not be surprised to learn that on capital gains tax I have not had one letter from any docker, aircraft or other worker who creates the wealth in my constituency. I do not know whether the hon. Member for Perth and East Perth-shire has had any letter from the real creators of wealth in his constituency. I certainly have not. If I were to mention capital gains, I am sure that most working people would not know what I was talking about.

The hon. Member for Blaby (Mr. Lawson) and others suggested that this was some kind of wealth tax. I do not know whether the Royal Commission reports are to be believed, but the November edition, like the others, gives some indication of the total wealth in this country. On page 69 of the report of November 1977 there is a table which gives the total personal wealth in this country. It gives the

"Numbers of identified wealth owners and amounts of net wealth, by range of net wealth."

The total estimate of personal wealth in this country is £190,000 million. Capital gains tax bring in £400 million. That is a rate of tax of 0.002 per cent. What a wealth tax: We can work it out for ourselves. We are told that the total wealth is about £200,000 million, and this tax brings in £400 million. If my arithmetic is wrong, I shall apologise to the Committee. What a wonderful wealth tax we have in this country.

The Labour Party has for decades tried to get across the concept that capital gains are just as much income as any other form of income. The hon. Member for Eastleigh (Mr. Price), in a very reasoned speech—as against the speech made by the hon. Member for Blaby; I listened to him very closely—was trying to say that that particular chunk of income should be treated differently from any other. He was suggesting that perhaps there was something in the indexation of wages. Indeed, he suggested that in some areas workers get wage increases which are equivalent to the increases in the retail price index. But the point is that they pay tax on them. Workers have taken a massive cut in their standards of living. I do not know whether the hon. Gentleman takes the same approach as I do, but if we accept that capital gains are just as much income as income from rent or anything else, because they can be spent, they should be treated as such, and the rate of tax should be the rate for that level of income. I do not see any argument against that.

rose—

If I may finish this point, I shall certainly give way to the hon. Gentleman. If we say that the allowances are not enough, that comes down to increasing someone's personal allowances before he pays tax. But if it is part of his income, it should be treated as income, and income tax at the appropriate rate should be charged on it.

The hon. Gentleman is entitled to argue from his point of view that we should have the same rates for capital gains tax as for income tax. But that does not dispose of my argument, which is outwith his argument, that a capital gain should be corrected for inflation. Therefore, it should be a real gain. We can argue whether the rate should be 100 per cent. total confiscation or 10 per cent. That is not the issue. The simple issue is: what is the chargeable gain for the purpose of capital gains tax? I am sure that the hon. Gentleman is with me on that point.

The hon. Member can tell me whether I have understood his point. Let me draw a comparison with wages and salaries. The logical conclusion of what he is saying is that those who get a 14 per cent. increase in earnings in the current year will pay no tax on 10 per cent. of it, and will be taxed only on the remaining 4 per cent.—

That is not the same thing.

I say that a capital gain must be treated just like any other income.

The hon. Member has got it wrong. Capital gains tax is levied on the basis that over a number of years a capital asset increases in real value and that the increase should be taxed. The proposition is not that the paper value increases and should therefore be taxed. On incomes, the House decided last year to index personal allowances. That was in accordance with the point that the hon. Gentleman is now seeking to make.

That is not the same thing. All of us receive an indexed personal allowance whether or not we receive a capital gain. We are therefore all equal on that score. The hon. Member for Eastleigh wants those who receive a capital gain to enjoy an additional indexation. I know of no legislation which provides for the taxation of real increases. Capital gains tax is applied on the sale of an asset where the sale price is greater than the purchase price. The figure will not be adjusted according to some index of retail prices or the like, but that is what the hon. Member for Eastleigh is arguing should happen.

May I suggest that the hon. Member for Bristol, North-West (Mr. Thomas) studies the Order Paper, where he will see just what the clause is intended to do?

I am taking up the point that the hon. Member for Eastleigh was making, as the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) would know if he had been listening, which I doubt. The hon. Member for Eastleigh was referring to taxes on real gains. Until now tax has been levied on all gains. It is a nonsense to suggest that a person with a total income of £10,000 a year, of which £1,000 is a capital gain, should pay one rate of tax on £9,000 and a completely different rate of tax, or none at all, on the balance.

On that basis I would insist that a worker who had a 14 per cent. increase should have that increase indexed, in addition to the indexation of his personal allowance. He should not pay tax on 10 per cent. of it, but should pay the same level of tax as capital gains tax, which is 30 per cent., on the remaining 4 per cent.

Capital gains tax was introduced in 1965 by the then Labour Government. There was growing evidence that people were finding ways of converting income into capital gains which until then had not been taxed. Those who paid high rates of tax did not want dividends; they wanted free shares or scrip issues, and so on. In that way they could employ a tax avoidance technique by obtaining untaxed capital gains. In the event, even those gains are now taxed at a lower rate than income—at 30 per cent. No one has ever explained to me why that difference should exist.

The right hon. Member for Down, South (Mr. Powell) takes a particular interest in these matters. Does he agree with the suggestion in an article in The Guardian that the differential between capital gains tax and the tax on other income distorts investment decisions? While that arrangement might be best for the individual, it is certainly not best for the community. In addition, the article refers to possible damage to the economy and so on.

Not for one minute would I support the amendment, which is a plain example of the Tories serving the class interest that they were sent here to represent. That is fair enough. However, I am not happy with the Government's proposals either. I do not see why we should hand out £600 to someone who makes a capital gain of £6,000. The Government's proposal will do just that, but in addition will apply retrospectively to last year, giving a total figure of £1,200 which is in addition to the £750 that such people will get from the Budget anyway.

The Government's proposals are an erosion of the concept that capital gains should be treated as income. Even at this late stage I ask them not to proceed with the clause, even though the total sum involved may be small. There can be no justification for giving such a handout. If the Government did as I suggested they would at least claw back a little of the revenue lost when the Tories and their allies forced through the income tax amendments last week.

There is a greater measure of agreement between the hon. Member for Bristol, North-West (Mr. Thomas) and my hon. Friend the Member for Blaby (Mr. Lawson) than appeared to be the case when the hon. Member began his speech. He concluded by advocating some form of more comprehensive indexation. He was saying quite reasonably that we have indexation in respect of capital gains and that we must therefore have some element of it in respect of taxation of income. I am sure that my hon. Friend would agree with that.

However, the attack that has been made upon my hon. Friend is unjustified. His proposals for the indexation of capital gains are not presented as a class measure, although that would be perfectly justified in this Committee. There would be a perfectly reasonable case for saying that the element of taxation on those with large incomes and wealth is too high. But the proposal is not advanced on that ground. My hon. Friend favours general indexation. He sees it as a method of mitigating for all classes and persons the harsh effect of inflation.

My hon. Friend at first restricted his argument in favour of the clause to narrow grounds. He said that there was a problem in respect of capital gains, and there is. He argued persuasively that capital gains tax in its present form is nothing more than a disguised form of wealth tax. That is correct. He went on to argue that there were already enough taxes on capital. But he did not give an entirely comprehensive summary of all the taxes levied on capital. He pointed to the investment income surcharge, to the capital transfer tax and to stamp duty. He failed to point out the introduction of the development gains tax and the development land tax.

6.0 p.m.

My hon. Friend drew a proper distinction between a so-called real gain, as he put it, and a paper gain. He said that it was this taxation upon the paper gain that concerned him and led him to believe that indexation was the proper way to deal with this anomaly. I do not describe it as an injustice because I do not know in these circumstances what is just or unjust. I describe it as an anomaly.

However, the fact is that when capital gains tax was introduced back in 1965 there was some truth in the point made by the hon. Member for Bristol, North-West that the great tax game was to try to convert income into capital. Once one has done that, however, it is of benefit to oneself only if one uses it.

It is true that in the past the principal benefit derived from being able to convert a large income into capital and then pass it on to someone else before the seven-year period was up was that one got the benefit of the legal tax avoidance that was available under the old estate duty legislation. But here the situation has changed. We no longer have a voluntary inheritance tax. We have the capital transfer tax. If we are to have any system of capital taxation on transfer, the general idea of capital transfer tax is fairer, in my view, than the old system of totally avoidable death duty.

I argue immediately about the provisions, the exemptions and, most of all, the rate. But personally I much prefer the concept of an even-handed tax upon all forms of transfer.

The case that existed in 1965 has been eroded. It has been further eroded by the harsh development land tax, because, in respect of all large gains, that starts at 80 per cent. and it is said by the Government to be likely to rise to 100 per cent. in the future. The Tory Party has said that it is in favour of the continuance of DLT—not, of course, I emphasise, at the present level, but at some level. We can argue about whether it should be 40 per cent. or 50 per cent.

Therefore, I argue that, whatever the case may have been in 1965 for capital gains tax, that case has been eroded. It has been further eroded also by the existence of the Income and Corporation Taxes Act 1970 which, by Section 488, makes artificial transactions in land taxable as though they were income. It has been further eroded by the fact that a single transaction may now be taxed as income if a person is held to be trading in respect of that single transaction.

I would argue, therefore, that the proper approach for the Tory Party ought to be to give a firm commitment either to phase out or, better still, to abolish capital gains tax. The sooner that is done, the better. If it be that we have not got the courage to say that in bald terms in the new circumstances, so long after 1965, it is not right to pretend—I do not say that my hon. Friend pretends—that it is not right to say that indexation is the only way of dealing with the phasing out of capital gains tax.

It can be done by tapering, though I accept that when dealing with tapering it is technically very difficult. It can be done also by the system of reliefs which has been introduced in Clause 35 and following clauses in this Finance Bill. I suspect that it may not be possible baldly to say in a pre-election period that we are in favour of abolishing capital gains tax. But these anomalies, the anomalies argued about by the shopkeeper, can be dealt with by the sort of reliefs, on a vastly extended scale, that are so tentatively introduced in this Bill.

However, in the second part of his speech, my hon. Friend the Member for Blaby stated what I know to be his firm intellectual belief. He is in favour, as the hon. Member for Bristol, North-West turns out to be, of general indexation. I should just like to state very shortly my belief that general indexation is neither possible nor desirable. I shall deal first with why it is impossible.

It is impossible because although theoretically, of course, it is possible to index both all payments by the State and all payments the other way—receipts—it is not possible in a free society to order every private citizen to index all the contracts that he has with another private citizen. It is not possible, most of all, because one would have to deal with it in respect of retrospective payments. How would one index payments that have been made in the past? One would have to index them retrospectively. One would have to say, for the sake of argument, "I borrowed £100 from my granny 20 years ago." However, when one came to pay back one's granny, the State would have to say "We order you retrospectively to repay to your granny an additional sum that takes into account the change in he RPI"—or whatever other index might be introduced.

It would be impossible because, no matter how sophisticated we in the House of Commons might be in introducing new clauses such as that before the Committee—and no doubt my hon. Friend the Member for Blaby would say that if I were slightly more numerate I would be able to understand the new clause—I very much doubt whether Granny Smith—

What the hon. Member for Blaby would say is that what his hon. Friend is now entering into is a fantasy that bears no relation to the proposition that I was putting forward.

It is not a fantasy. What I am trying to do is to say that one can have total indexation and that that may introduce some appearance of honesty in contracts, but one cannot have partial indexation. It is impossible to argue for indexation only in State transactions without introducing indexation in transactions between private individuals.

The point I was trying to make was that if one cannot have—I agree with the hon. Member— indexation for all other forms of income, it is quite wrong to have indexation for a particular form of income—namely, capital gains.

The hon. Member emphasises the next point that I wish to make. That concerns whether it is desirable for there to be total indexation or even partial indexation. As my hon. Friend the Member for Eastleigh (Mr. Price) says, we already have a high degree of partial indexation. We have indexation in respect of State pensions. Let us be clear about it. There are very many right hon. and hon. Members on the Opposition side who are highly sceptical about whether we should have indexation of State pensions.

Or of Members' salaries.

There have been many in the Conservative Party who have expressed grave concern about the indexation of State pensions. In Committee and in the House we often talk about the grave difficulty of persons on low wages finding almost no advantage in working because of the incidence of tax and the high level of State benefits. Those State benefits are now indexed.

There are those on this side of the Committee—I am one of them—who wish to consider whether those benefits should be indexed. However, there will be no intellectually sustainable case for considering either State pensions or State benefits if we are also introducing indexation in respect of capital gains. Therefore, it was undesirable as well as impossible to go further along the road of indexation.

My hon. Friend the Member for Eastleigh says, rightly, that we already have a great measure of indexation. He argues, rightly, that effectively in wage negotiations there is a high level of indexation. He points to the indexation to which I have referred in public sector pensions, but that merely shows a reason why this country has not felt a greater sense of outrage at the very high rate of inflation that we have suffered in recent years. For instance, if there were not relief from the capital gains obtained on principal private residences, would there not be a great deal more outcry against inflation? If there was not also tax relief on mortgage interest payments, which is tax relief against an inflation-proofed asset, would there not be more of an outcry against inflation?

I cannot prove that if we mask the symptoms of inflation we shall thereby erode the popular will to defeat inflation. These are psychological factors that we either feel or do not feel in our bones. I was brought up in what is now called a one-parent family. We lived on a fixed income. As a boy, I understood clearly the effect of those low rates of inflation. If I have a strong emotional feeling in politics, it is to see inflation squeezed out of the system. Yet at present I know that in the change of my fortunes I am now a small farmer who is very heavily over-geared. As every month goes by, I see the money value of my assets increasing and the real value of my debt reducing. I know also that as a Member of Parliament I am at least partly dependent on what is effectively an indexed wage from the State. I know that if I am not careful, my emotional attitude towards inflation changes. I say that I can live with it. We can all live with it.

Unless there is some pain in inflation, the popular will to defeat it will be gone. In a great inflation there will always be those who are clever, able and strong enough to get on the right side of inflation, but the fight against inflation is the fight against real injustice. It is the fight against the arbitrary unjust redistribution of assets.

I agree entirely with the hon. Gentleman's indictment of inflation. Most of us in the Committee would agree that inflation has to be beaten. However, his arguments against indexation were slightly odd, coming from someone who, I have always thought, takes the monetarist viewpoint. The monetarist viewpoint is increasingly common on both sides of the Committee which, unfortunately, like much of the rest of the Western world, is in the grip of an evil guru.

The evil guru himself, Mr. Friedman, states explicitly—

The hon. Gentleman must not believe everything he reads.

Mr. Friedman says that general indexation is the sine qua non of his whole proposition for defeating inflation. He does not say that he can defeat inflation without general indexation. He says that the only thing that makes his policy for defeating inflation politically and economically possible is general indexation.

Therefore, those who argue the Friedman policy for dealing with inflation, of acting on the money supply, but deny that we have to go along with his proposals for making it politically possible, are living in cloud-cuckoo land. The only way in which one could make it politically possible to follow Friedman would be to have general indexation. However, I agree that general indexation would be impossible. Therefore, I believe that Friedman is impossible—but I arrived at that conclusion by a different course.

One of the honest remarks that the hon. Member for Wolverhampton, South-West (Mr. Budgen) made was that perhaps we cannot abolish capital gains tax in an election year.

No, I did not say that.

If the hon. Gentleman reads his speech, he will see that he implied that. If that is so, the amendment comes near to abolishing capital gains tax. The hon. Member for Blaby (Mr. Lawson) thought at the start of events that it was coming nearer to abolishing capital gains tax than it really is.

It is 90 per cent.

It is not 90 per cent. because we have ignored in the Red Book the revenue from corporation tax, which is dependent upon capital gains tax. Therefore, as the Minister made clear, the actual yield that we are dealing with is about £480 million, if we include the corporation tax effects, and we have a new clause which would cost about £350 million. Nevertheless, it is abolishing a pretty large slice of capital gains tax. It is abolishing three-quarters of it.

Some Conservative Members might well consider, as we all have to, whether this is the moment to abolish capital gains tax, though I would go nearer to the hon. Member for Wolverhampton, South-West on that point than on his other arguments.

I disagree fundamentally with the hon. Member for Bristol, North-West (Mr. Thomas) about indexation. He has got it wrong. The argument about indexation of the tax system as opposed to general indexation is about parliamentary power and control of the Executive. That argument should appeal to the Tribune Group, as it must appeal to a Liberal Member or to any parliamentarian. The first reason for indexing the tax system—I believe that the principle of doing so is right, proper and necessary—is that taxation should be what Parliament decided and intended. Capital gains tax was intended to tax the increase in the capital value of an asset.

Inflation was very much lower when Parliament entered into that undertaking. That was one of the reasons, as the hon. Member for Blaby would point out, why the Conservative Government did not index capital gains tax when they were in power between 1970–74.

I have always understood that Parliament introduced capital gains tax because it was convinced that realised capital gains were the same as income.

That, funnily enough, is not the reason why Parliament introduced capital gains tax. The reason why Parliament introduced it is not the essence of the argument. The essence of the argument is that Parliament intended it to be a tax on gains at the then rate. Inflation has changed the balance of that. If Parliament wants to tax capital gains, it should tax the real gains. If they want to achieve £480 million of revenue from gains, the Government should do so by coming to the House and saying "This is the rate at which we have to tax capital gains in order to yield £480 million in a year." Parliament in its wisdom can then decide whether that rate is right or wrong.

Surely, the whole argument is about parliamentary control. It is wrong that, Parliament having made a decision on the appropriate rate in those circumstances, inflation should be allowed to change that real rate and that Parliament should not be allowed to do it for itself. That is why I believe that, in principle, indexation is right and proper.

Why cannot Parliament change the rate? The hon. Gentleman is talking as though the rate were laid down in 1965 and is immutable.

Parliament could change the rate, but that does not alter the problem. The whole basis of the argument is that we should be taxing the real gains, just as we should be setting the real level of personal allowances right through the tax system, and it is up to the Government to come to Parliament and change the rate. Parliament cannot increase the rate of capital gains tax. Only Governments can put forward an amendment to do that. If Parliament believes that the increase in capital values should yield a specified amount of revenue, we should charge the appropriate amount on real gains. On the principle of indexation, it should be introduced as soon as possible, right across taxation.

The Minister got it wrong when he said that if indexation were across the board, we should be back in the situation we were in before and no one would gain. That is a gross distortion of the argument. The whole point is that inflation does not affect all people equally. It distorts the economy. That is one reason why the hon. Member for Wolverhampton, South-West and I would argue that inflation must be beaten.

It is far better that Parliament should distort if anyone is to distort. I suppose that one would then call it discrimination in favour of one section of the economy rather than another, but to allow inflation to do it haphazardly, without Parliament deciding whom it wants to gain and whom it wants to lose from the economic process, is an abdication of Parliament's power. It is not true to say that indexation across the board would put us back to the situation that we were in before. It would alter the situation fundamentally from what we have under current rates of inflation.

The hon. Member for Bristol, North-West rightly introduced into the argument the fundamental question of why we distinguish between income and capital gains. Parliament introduced capital gains tax for short-term gains only, and those are certainly much nearer to being income than are long-term gains, in reply to public demand. There was considerable public concern at every level of society about, in particular, short-term speculative gains on the stock market. The public does not distinguish between that sort of gain and income.

Under the present law, that single gain may be taxed as income.

That is true, but when the tax was introduced the public did not make that distinction. Since then, because of the tax applying in a different way for long-term gains, we have arrived at a situation in which we try to distinguish between capital gains and income by taxing at a different rate.

By far the most sensible formula, if we are to go on with capital gains tax, would be to index it but to count the real gains as income for income tax purposes and include them in the income tax schedules. That would be a sensible reform.

The hon. Member for Loughborough (Mr. Cronin) got it wrong when he said that capital gains tax was the cause of inequality. It is not. The cause is the failure of inheritance taxes and gifts taxes to redistribute wealth adequately. That is where the greatest fiscal failure has taken place in tax policy since the war. I do not believe that it is capital gains tax which has caused this inequality but rather the ability to pass on wealth.

The problem is entirely an acoustic one. I said that capital gains was the major cause of inequality.

All right, but that does not alter the argument, except that the word "tax" does not need to be there and does not make sense if it is.

Capital gains are not the cause of inequality. It is, largely, inherited wealth which is the cause of inequality and therefore, we need to reform our capital taxation and decide first whether we are to tax the income from wealth or the wealth itself. We have decided that it is better to tax the wealth itself than the income from it. Clearly, wealth that is productive is, generally, good for society and wealth that is not productive and does not produce an income is lazy wealth and is not in the interests of society generally.

Having decided that we should tax the wealth itself—and that argument is unanswerable—we have to decide how it should be done. We can have either an annual wealth tax or tax the wealth at the point of transfer. If we choose the latter course, it makes much more sense to tax the person who receives a gift or bequest than to tax the estate that gives it up. That would be a redistributive accessions tax. It is a thousand pities that the Chancellor of the Exchequer, having been persuaded in Opposition that an accessions tax was infinitely preferable to a capital transfer tax, was persuaded by the Inland Revenue to change his mind. That is a great pity because we would have had an accessions tax, which would be the best way of taxing gifts or wealth at the point of transfer.

The Government have not accepted indexation or tapering in the Finance Bill but they have made a significant change in the administration of capital gains tax and the incidence of the tax. I wholly welcome that change. It is not indexation and no one could claim that it is. It seeks only to mitigate the effect of capital gains tax, but let us be under no misunderstanding about the effect of what the Government have done. In an article in the Financial Times on 12th April, Professor Cedric Sandford and Adrienne Gleeson said:

"The upshot of the proposed changes is a substantial reduction in capital gains tax liability for individuals whose annual net gains rise to quite a sizeable figure, the concession being greater for high income receivers than for basic rate payers, since the latter benefit from the replaced 'alternative charge'."

There is one problem that I hope the Government will take note of and will return to. Capital gains of £1,000 a year are free of tax. It is comparatively simple for the negative investor on the stock market to arrange his finances so that he makes that sort of gain every year—if he makes a gain at all.

Why should we discriminate in favour of the person who is able to make a gain of £1,000 a year but not in favour of the person who is able to make a gain of £5,000 on an asset held over five years? Surely that person may be a more positive investor than the man who is going in and out of the stock market in order to make £1,000 a year tax-free.

I fear that we shall see all sorts of strange devices cooked up in order to ensure that no one makes a gain of £5,000 over five years but that it is somehow converted to £1,000 a year. I see no reason for the Government not to introduce a simple amendment that would enable the £1,000 a year to be held over and credited for as long as a person holds the asset so that, if he buys an asset this year for £5,000 and sells it in five years' time for £10,000, that should count as £1,000 a year and be tax-free.

The hon. Member for Blaby knows that I accept his arguments for indexation in principle, but in the end the decision comes down to a question of priorities and what we do with £350 million. The hon. Member will say that it is next year and that that is easy. It is always easy to give away money next year. But we shall need to reduce income tax next year as well, whether the hon. Gentleman's party is in Government or not, and £350 million represents 1p off the standard rate. It is a great pity that the Conservative Party, when it refused to support the Liberal Party's suggestion for a 2p reduction in the standard rate, did not say that it could manage only 1p this year but that it would take off 1p next year as well. It did not say that and it did not commit itself in any way to doing that. The Conservative Party is now giving away £350 million of the money which it could use next year to reduce income tax, at the lower level, at the higher rate, in the middle or wherever it might be.

6.30 p.m.

I believe that the priority in tax reform is pre-eminently the reduction—and the substantial reduction—of income tax. I do not think it right, therefore, to mortgage funds that will be available for that purpose next year by committing ourselves to a partial reform of the capital gains tax, which is only one small part of capital taxation this year. I believe that we should go for a wholesale reorganisation and reform of capital taxation. It would not reduce the total revenue available. The reforms that I have advocated would actually increase the total revenue available.

I do not think that this is the right year in which to spend this kind of money—nor, indeed, next year—in fiddling around with the capital gains tax when the money could be used to much better economic purpose by reducing the income tax for every income earner in this country.

We seem to have established in the Committee that in the case of capital gains tax somewhere between 75 per cent. and 90 per cent. of the gain is inflationary. It seems to me that, if we are to go on with the present system, we might as well face up to some of the economic consequences of that fact, or else we ought to alter the position on the lines of the new clause..

The first consequence of going on as we are is to recognise that anyone wishing to maintain the real value of his capital must speculate. He must put his money into something which is highly risky and probably not very desirable socially. That is one of the very few ways in which to keep up with inflation.

Secondly, what are we saying to the person who might be inclined to put his money into sensible long-term investments—plant and machinery, factories and businesses—which most of us would consider to be desirable in creating more jobs? We are almost certainly inviting him to incur, over the period of his investment, some sort of capital loss in real terms.

Thirdly, we are saying that it is much better to seek out that sort of investment which gives a tax-free capita] gain—for example, life policies, Government stocks and so on. If we are to discriminate—as we do at the moment—in favour of institutional investors in that sort of area, particularly in regard to life policies, the effect of this, frankly, is to distort the investment market, because those investments generally tend to find their way back into the major companies in this country and not, for very good practical reasons, into the small businesses. By carrying on in this way, therefore, we are deliberately encouraging the investors to discriminate, whether they realise it or not, against small businesses.

Fourthly, we are saying to someone who has investments, which it might be right for all sorts of considerations of economics to switch into something else, that he should think very carefully about doing so because a real chunk of his capital will be taken away. This means that attempts to get investment into the right source—the source which will grow and be good for the country—will be distorted by a view of the capital gains positing away part of the real capital of the investor by taxing the inflationary element.

Fifthly, whether or not we argue, as the hon. Member for Bristol, North-West (Mr. Thomas) did, that it is only a tiny, weeny wealth tax, it is in fact a form of capital levy of one sort or another if year by year, by capital realisation, we take away some part of the real capital fund.

There are, therefore, several very serious economic reasons why it is not good for the business, the industrial and the commercial life of the country that we should distort our investment decisions in this way by a capital gains tax which creates taxation on inflation.

I would go quite a long way with the Minister of State in his references to the Carter Commission. I am by no means less radical than some people on what I consider should be taxed, but what I believe is that, for very sound economic reasons—reason other than simply the personal convenience of the taxpayer—although that is a very important consideration—we have to recognise that if we continue in the way we are going we shall have to face some of these very serious problems. That is one of the reasons why I shall support the new clause, which, I believe, goes a substantial way towards dealing with them.

It has been a curious as well as an interesting debate in Committee on the new clause, because about halfway through—partly thanks to the hon. Member for Bristol, North-West (Mr. Thomas)—the Committee discovered that what we are really debating is not amendment of an existing tax but the replacement of one tax by a quite different tax. Thereupon the debate switched from the previous rather arid attempt to define a capital gains tax to the more practical discussion as to whether we ought to move from one sort of tax to aother.

Would the right hon. Gentleman agree that the tax has already become a different tax from that which was intended?

The hon. Member is on the same line of thought as I was intending to pursue. I was about to say that the crystal which the Minister of State injected into the debate was his disclosure that, on the Treasury's estimate, three-quarters of the tax to be expected this year—I think he was talking about this year—is a tax upon inflationary gains: that is to say, 75 per cent. is a tax levied upon that part of the sums coming into taxation which represents the consequences of past inflation.

I would myself be inclined to think that, even if that estimate is true in one particular year, it is an underestimate, looking at it more broadly, because there are three—and three only—form of capital gain. One is the major forms that we are primarily discussing—that which simply represents the fall in the value of money.

The second form is a relative gain—namely, the fact that one asset has become relatively more valuable. But that sort of gain is always equal and opposite to a corresponding loss, for it is a truism that all relative increase in value is offset by an equal relative decline in value somewhere else.

The third and only remaining form of capital gain is one which reflects the general accretion of wealth; but there has been precious little general accretion of wealth in this country in the last five years.

If capital gains tax, excluding inflation, is run over a period of time, the fact that relative gains and relative losses balance will show up in a disappointingly and surprisingly small yield for the tax. Therefore, from its inception, whatever the illusions that were entertained about it, the capital gains tax was a tax which looked for its prime source of revenue to the taxation of illusory or inflationary gains.

Indeed, it is doubtful whether we should have engaged in a capital gains tax at all but for the phenomenon of inflation. Certainly, we should not have done so but for the combined phenomena of inflation and high marginal rates of taxation which put such a premium upon methods of converting income into capital that the question naturally arose "Cannot we catch that capital when in due course it is liquidated?"

There are two ways in which we can face the situation which our experience over the last 15 years has disclosed. One is the method adopted in the new clause. We can attempt to drain out of the capital gains tax the inflationary element. I have an objection of detail as well as an objection of principle to the attempt to do that. The objection of detail is that we all very well know the significance of the retail price index when we compare one year with another, or when we are dealing with a relatively brief run of years. If, however, one has to use the retail price index as a measure of inflation over 20 years, one really is applying an inappropriate instrument to one's purpose.

The retail price index, even for the purpose for which it was invented—to deal with matters which affect the standard of living of the ordinary family—has periodically to be adjusted, with a consequent break which deprives it of its validity over a long period of time. In fact, every index suffers from an inbuilt contradiction, which is that if its base is consistent it is wrong, because a consistent base becomes increasingly out of date, but if its base changes it is also wrong—for what is the point of an index with a different base? We can laugh off this difficulty when we are dealing with two, three, four or five years at a time. We cannot laugh it off when, as in this new clause, we are prepared to apply it over decades. There simply is no objective method, in terms of decades, of measuring inflation. We know broadly that inflation has taken place, but by the very nature of the phenomenon itself we are incapable of measuring it. That is my technical objection.

My more serious objection is allied to that of the hon. Member for Wolverhampton, South-West (Mr. Budgen), namely, that we are seeking to reform or, indeed, alter a tax by means of institutionalising inflation, for all indexation implies an acceptance of the phenomenon of inflation and the building of that phenomenon into the structure of our law, be it the tax law or whatever. I share the hon. Gentleman's objection to our undertaking in a branch of the law what is, in effect, an institutionalisation of inflation.

In an earlier speech, an hon. Member expressed what is a very general assumption but is, I believe, a fallacious assumption that is, that although we were mistaken 10, 15 or 20 years ago, when we thought that inflation rates of more than 2 or 3 per cent. were impossible, we are not mistaken now when we suppose that, having experienced inflation rates of 7 per cent., 10 per cent., 15 per cent. and 20 per cent., we shall go on experiencing those rates in the future. I believe that the one extrapolation is as fallacious as the other. I do not believe that we can go on living with 7 per cent. per annum inflation any more than we could go on living with 15 per cent. per annum inflation. Whether we like it or not, and whether the rest of the world which has more or less been engaging in the same jolly game likes it or not, we shall find that, however painful, we have got to get inflation out of our system or, rather, out of our methods of Government.

Many of us share the right hon. Gentleman's hopes in that direction, but we see precious little evidence of that happening with the Government increasing the supply of money as rapidly as they are at present. However, that is not the point that I wish to make. The point is on indexation. Surely the principle of indexation has already been allowed by the Government in allowing for stock appreciation. Indeed, had not stock appreciation been allowed two or three years ago, many companies in British industry would by now have been bankrupt. Therefore, the principle is already allowed. Does not the right hon. Gentleman think that, having allowed that principle, it should be further extended to the indexation of capital gains?

I would certainly not accept that because, in one sector or another, we have found ourselves forced to admit and allow for, and attempt to measure, the consequences of inflation, we ought therefore to generalise any such allowance and that there is an automatic ground therein for extending that procedure from one sphere of taxation or legislation to another.

The main point to which I was coming is that if it be so that, with bumps along the way, we shall discover that the depreciation of money which even 7 per cent. compound inflation represents is intolerable, capital gains tax will cease to be important in our fiscal pattern. Of course, how soon a given fall in the rate of inflation would reduce the yield of capital gains tax must depend upon something which no doubt the Treasury knows but which is not given to other mortals, namely, the past inflation profile of the capital gains which are coming into tax in a particular assessment year. But, whatever that profile may be, as time goes on, with the fall in inflation, and maybe the disappearance of inflation as an important phenomenon, the capital gains tax will become a very minor revenue yielder indeed. It will certainly disappoint the hopes—here I am with the hon. Member for Cornwall, North (Mr. Pardoe)—of those, like the hon. Member for Bristol, North-West, who believed that capital gains tax would be an instrument of redistribution of wealth.

Of course it is an instrument of redistribution of wealth between one poor bounder and another, because the man who has made a capital gain gets less benefit from that gain—part of it being taxed away—than he otherwise would. But it does not bring about a distribution of wealth as between classes—as between the owners of property and the proletariat, for example—because with real gains balancing one another automatically no such effect can be produced by a capital tax upon real gains. It is, therefore—

rose—

I should like to finish my sentence and then I shall willingly give way to the hon. Gentleman. Indeed, I was complimenting and thanking him in his absence for the contribution which he made to the debate.

It is arguable that there would be no fun at all in a capital gains tax unless there were inflation with no indexation for inflation, because it is the taxation of illusory capital gains which gives a certain distributional effect to the capital gains tax.

I must apologise to the right hon. Member for not being present to hear the beginning of his speech. I do not think that I have ever suggested that capital gains tax makes any contribution to the redistribution of wealth. What I tried to say was that a capital gain was income, just like any other income—just like a wage or salary increase. We do not say to the man who receives a wage or salary increase "You have only 12 per cent. You need 10 per cent. of that to meet the increase in the index of retail prices. Therefore, we shall tax you only on the remaining 2 per cent." I see capital gains as a form of income, and I do not see why it should be excepted.

At any rate, I am glad to learn that the hon. Member will not suffer the disappointment, which I feared, of finding that a capital tax on real gains is not redistributive, and I hope that he will forgive me—although it is a delightful temptation—if I do not in answer to his intervention attempt to deal with his effort to equate capital and income. It leads to some remarkable results, but it would take us far from the subject of this debate.

At the outset, in introducing the new clause, the hon. Member for Blaby (Mr. Lawson) referred to the objection to any capital gains tax that I had voiced in earlier debates and which I suppose—for time goes on and Crossman diaries are published—I may now say I voiced in the Conservative Shadow Cabinet in 1965 when capital gains tax was introduced.

But if we follow through the result of today's debate, we shall find that what we are debating is the attempt to abolish capital gains tax by a side wind and by the instrument of indexation. I would much sooner, as I think would the hon. Member for Wolverhampton, South-West, do it openly by recognising the futility of a true capital gains tax as a means of raising revenue and its inadequacy as a means of redistributing income if that is desired. We had better get rid of it altogether.

I venture upon the prophecy that, not many years ahead, some Chancellor of the Exchequer will come to the conclusion that the cost of levying what will then be left of the capital gains tax, even in its present form, will not be worth the candle.

The objective of the new clause has been deserted by many of its friends last year. The Liberal Party was in favour of this principle and appears not to be in favour of it this evening. The Government were also in favour of it, and they seem to have retreated from it. So also, perhaps, has the right hon. Member for Down, South (Mr. Powell), and I want to take the directly opposite point of view to his last remark.

Quite properly, the right hon. Member sees this attempt to index capital gains tax as a way of ridiculing the tax itself, leading to its eventual abolition. I was not sure whether he intended to vote against the clause, but I shall vote for it for that reason. I think that it would be excellent to have the tax abolished.

Taking matters the other way round, it is extraordinary not that the clause will cost £350 million, or whatever it is, but that, if it were passed, the entire yield of capital gains tax would be only £130 million. If one asked what would be the yield with a fully indexed capital gains tax on persons as opposed to companies, with which there are different considerations, it would be probably more in the region of £50 million or £60 million. It would be so small that it would not be worth the cost of collecting it. What is more, the economic damage which it causes is great, and I venture to suggest to the hon. Member for Bristol, North-West (Mr. Thomas) that the social good that it does is non-existent.

There are two or three Government supporters who come here as what might be described as Robespierrian representatives of the people and tell us of the divisive effects of Tory tax policies. I include in that group the hon. Member for Ormskirk (Mr. Kilroy-Silk), who graced our debates last week on this same theme and who believes that the only way to look at any tax proposition is whether it will benefit people who are not taxpayers. That in itself is an impossible proposition. The hon. Member for Ormskirk told us about his constituents who would give their right arms to be taxpayers. All of the hundreds of thousands of one-armed taxpayers wandering round Ormskirk will not thank him, because it will not do a pennyworth of good to them to be told that the capital gains tax is to left as it is or that it is to be abolished. It will not help the so-called poor to abolish this tax. To leave the tax as it is will not do them any harm. It will not make any difference at all to the sort of considerations that the hon. Member for Ormskirk has in mind.

What really affects all our constituents is whether this tax has done harm to the creation of jobs. I believe that it has. I believe that the effect of capital gains tax has been to delay investment decisions which should be taken, to stop switching which should be done, to frighten people off from making investments, especially in this country, and perhaps even to drive them to go abroad to an extent which has damaged the one-armed taxpayers of Ormskirk and others too.

The hon. Member for Bristol, North-West made another extraordinary remark. He equated capital gains with income, and I am afraid that the Minister of State made the same error. I took down his words. He said:

"Capital gains are just spending power."

I did not say that. I merely asked whether it could not be argued in certain circumstances that capital gains were different from income, because they conferred spending power. Indeed, the index used by the hon. Member for Blaby (Mr. Lawson) in his new clause is an index related to spending power.

The Minister of State must not disown his own arguments. He has a hard enough job disowning his own intention to adopt this policy last year. He is now attempting to disown what he said earlier today. He most certainly looks at it, as do his hon. Friends, as though any capital gain which is realised is spending power. But let us suppose that the capital which is realised is reinvested. Then it is not spending power.

Let us suppose that the income that someone receives is reinvested. Then that is not spending power. But that tells us precisely nothing.

If I may develop the argument, it is that the evil about this tax is that it taxes, in some cases quite heavily, gains which are made when people simply wish to switch an investment.

The evil about which the constituents of the hon. Member for Bristol, North-West complain is the spending of the gain. I do not agree with them. I am not an egalitarian, and I do not believe that envy and bitterness are the motive for tax policy or are in order, pointful or reasonable. But, if they are, it is the spending of the realisable gain which is offensive to the hon. Gentleman's constituents. In that case, the right way forward with capital taxation is to make clear that only that capital which is withdrawn and consumed, as opposed to being reinvested, should be subject to the sort of taxation which the hon. Member likes to see. I am not advocating that myself. I am merely saying that it is a logical position for the hon. Member to take.

Anything that we can do in this Committee to wreck the whole of capital gains tax should be done. I support the new clause, warts and all. Obviously, any attempt to index anything will have warts. I do not have any passion about indexation, but I have a passionate hatred of capital gains tax because of the harm that it does to all our constituents.

I, too, support the new clause. I recognise that of itself it will not cure the seemingly interminable problem of inflation, but it will concentrate the mind of the Government on so doing. There is nothing like indexation of Government receipts to make the Government more aware of the benefit that inflation provides in raising revenue. Perhaps they will deal more certainly with the problem if they are prevented from raising revenue by stealth, which is the present situation.

Many hon. Members have spoken with care and restraint about the clause. They, too, recognise that it will not, in itself, cure inflation. But it seems to me that capital gains tax itself has changed radically since it was introduced in 1965. It is not that we are now proposing a radically different tax; all that we seek to do is to return to the situation that prevailed in 1965. The rate of inflation then was substantially less then than it is today, and it does seem inequitable, not that capital gains tax should be indexed and therefore compare favourably with earned income but that inflation and the failure to index capital gains tax should bring inequities between different forms of capital tax.

It seems wrong that a man with a substantial amount of capital, just because he has been left it, may pay absolutely no tax on the income while he holds it whereas someone who sells the capital—it having produced a gain over a period of time, but not necessarily having produced an increase in real value—has his asset reduced in value. This seems to be inequitable treatment between two holders of a capital asset, which results solely from the accident of that wealth being transferred.

If we do not carry this new clause and capital gains tax is not indexed, we should at least change the name of the tax. It is not capital gains tax: it is more a selective wealth tax. It is not entirely a wealth tax, because it does not apply to all wealth. On the other hand, it is not a gains tax, because in the majority of cases it does not tax a real gain. It taxes selectively the wealth of those who choose, or are forced, to transfer or dispose of a capital asset. Therefore, to that extent it is inequitable between different categories of capital holders.

It is this fundamental injustice of the tax that we seek to rectify with the new clause. It is nonsense that every year so many individuals and companies are involved in disposing of capital assets purely to realise a loss to set against their capital gain. This is a largely unproductive process, and the passage of the new clause would mean that if the gains that were realised were only paper gains, and not of a real nature, individuals and companies would not have to dispose of other assets for the purely technical reasons of incurring an off-setting loss. Surely, the hon. Member for Bristol, North-West (Mr. Thomas) would not be in favour of the substantial amounts of commission and the benefits which go to many individuals in the City from realising losses on behalf of asset-holders. Yet that is the situation that exists without indexation.

If the new clause were to be carried, the only sort of losses that would be realised would be those genuinely going to offset real capital gains that have been made.

For those reasons the continuation of this tax in its present form is inequitable. While we hope that we shall return to the days of lower inflation, there can be no certainty about this and there cannot be any accurate forecasts of Government receipts from capital gains tax. These receipts depend entirely on the growth of the economy, and where the economy expands at a substantial rate, the disposals that are made and the value of assets generally are bound to increase. In such circumstances, the real value of capital gains tax to the Government will increase. Therefore, receipts depend on many external factors as well as internal ones. Real economic growth and the growth of real personal disposable assets are bound to be encouraged by the passage of the new clause or, better still, by the removal of capital gains tax altogether.

I would go further than many of my hon. Friends in my approach to the taxation of capital. It seems to me entirely wrong that the whole of our system is orientated towards a swingeing tax on what people earn during their lifetime, but virtually nothing on what people happen to inherit if, by some quirk of circumstance, they can go the whole of their lifetime without disposing of it.

I would be prepared to consider trading much lower levels of income tax for a system of capital tax, but as the system stands at present there are gross anomalies and inequities. I believe that the new clause will help at least to alleviate some of them.

We have had a valuable debate, or, in many ways, two debates. One was on the new clause and the other was initiated by my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen), followed by his predecessor, the Wolverhampton wanderer—the right hon. Member for Down, South (Mr. Powell). They were really concerned with showing that their opposition to this clause was a virility symbol indicating the strength of their hatred of inflation. All I can say is that if I thought for one moment that the passage of this clause would in any way impede the fight against inflation I would not propose it, vote for it or have my name attached to it in any way.

The Minister of State asked me a number of technical questions about the clause itself. He asked me how we would deal with part disposals, share pools and enhancement. Of course, we have looked into these, and the form of the clause is one which would enable us to deal with them relatively simply. Although for a Government who have put as much complicated legislation on the statute book as this one, to say that there are certain complications in this clause is a bit rich.

On share pools it is a matter of simple arithmetic to uplift the expenditure on all acquisitions by reference to the indices for all relevant years in order to compute the gain or loss.

If there is a part disposal, the cost of the acquisition of the shares sold would be calculated as the appropriate proportion of the uplifted cost. The remaining holding would then be carried forward at the uplifted value of assessment. I hope that the Minister of State has fully taken that in.

As for enhanced expenditure, there are slight complications here, but basically the difficulty which is envisaged—which is in paragraph 45 of the Inland Revenue's memorandum—is in fact a difficulty that occurs anyway, irrespective of the indexation in the new clause.

I have dealt with the Minister's technical objections. I thought that it was agreed on all sides that the Committee should follow the Inland Revenue paper. Having heard the devastating intervention of my hon. Friend the Member for Horsham and Crawley (Mr. Hordern) on the point of stock appreciation, I feel that it is something to which the Minister ought to address himself. My hon. Friend the Member for Maldon (Mr. Wakeham) made an important point about the economic distortion in the capital market caused by this tax.

In view of all that has been said, I hope, with renewed conviction, that the Committee will support the new clause.

The hon. Member for Blaby (Mr. Lawson) has tried to deal with some of the technical inadequacies of the new clause. It is a pity that he did not write into the clause what he has just read out—although I suspect that if he had done so the clause would be more unintelligible than it is now. The hon. Member asked me to comment on stock appreciation. The right hon. Member for Down, South (Mr. Powell) gave the answer. I accept that stock appreciation is a form of indexation, but the lesson to be learned from the stock appreciation exercise is that in periods of high inflation pressure will be brought in favour of indexation in one way or another so as to benefit a group suffering from the effects of inflation.

There are dangers in this line of argument. I believe that we should resist such pressure, because of the dangers that certain groups will secure a change in the law for their own benefit while others who do not have the muscle will be unable to get the law changed. That is why I believe indexation is unfair.

The hon. Member for Blaby told us of the grocer from Grantham—

Hinckley.

Sorry. With the knowledge of indexation revealed in the letter, I thought that perhaps the grocer came from Grantham. This is a difficult case. I remind the hon. Gentleman that 75 per cent. of the yield arising from capital gains tax and corporation tax flows from the disposal of stocks and shares and not from the sale of small grocers' shops. Most business assets have the benefit of rollover relief and most people who retire have the benefit of retirement relief. The writer of the letter did not, unfortunately, have that benefit.

The hon. Member for Blaby did not say from where he would get the £350 million. All that he did was to mention next year. He did not say where the money would come from next year. The hon. Member for Cirencester and Tewkesbury (Mr. Ridley) had it right when he said that ultimately the new clause was not about indexation; it was about abolishing the tax. If this new clause were to be accepted, the yield from the tax would be so small that the cost of collection would represent about 15 per cent. of that yield. Such a tax could not be sustained by any Government. I understand the implications of what I have said, but I also understand the fundamental objections of Tory Members to indexation. The new clause is about indexation and the vote upon it will, likewise, be about indexation.

Leaving aside the passion of the hon. Member for Blaby for indexation, I can see that a consequence of the new clause would be the abolition of this tax. If that is what Opposition Members want they should table a new clause and make it clear, in election year—as the hon. Member for Wolverhampton, South-West (Mr. Budgen) said—that the Tory Party stands for no tax on capital gains. We are going back to the days before 1960. From 1960 onwards there were attempts in the Finance Acts to prevent people dressing up income as capital gains. This started in the Finance Act 1960. Since then there have been attempts to stop people converting

Will the right hon. Gentleman agree that the introduction of capital transfer tax has markedly changed the case to be made against these contrived capital gains since such a gain is only of value if it gives income or can be passed on?

I heard the hon. Gentleman's speech. The point he made then, and which he makes again now, is that since capital transfer tax is presumably not as legally avoidable as estate duty was, perhaps there is less of an incentive to turn income into capital. The fundamental point is that there is now less of an incentive because there is a tax on capital gains. Before 1960 there was no such tax. If the Opposition want to return to those halcyon days, when a lot of people made a lot of money quickly and a lot of legal advisers made a lot of money—

Careful.

I was not called to the Bar in 1960. The hon. and learned Member for Dover and Deal (Mr. Rees) was called to the Bar before 1960. If the Conservatives want to return to those halcyon days, let them table the appropriate new clause and argue the case before the Committee.

The new clause is about indexation. In my opinion indexation for one group is unfair. I do not believe that it is an answer to inflation. There is a great danger that the more we spread indexation the greater will grow the feeling that somehow we can thereby cure the problems of inflation. I want to deal with the problems of inflation rather than propose palliatives.