This Resolution covers the subject of Income Tax and Surtax—taxes which bear heavily upon the people of this country. Hon. Members will see on the last page of the Financial Statement, that the estimated revenue from these two taxes during the current year amounts to more than one-third of the revenue proposed to be raised, including those items of miscellaneous receipts, and so on, which the Chancellor told us he was not so sure of getting on a future occasion. The House will, I know, forgive the Opposition, at any rate, for wishing to devote a certain amount of time to this very important topic. Two of the major faults of this Budget are the continuing high level of expenditure and the fact that there is no incentive whatever to business enterprise and to professional men. I consider that that is a very serious blot on this Budget. We have been told frequently by the Government that it is their intention to leave 80 per cent. of the business of this country under the private enterprise system, but, although they have made that clear, they appear to have no regard whatever in their financial and budgetary proposals for the appropriate incentives which are necessary to make that system work.
I suppose it would not be too cynical to say that fear of want and hope of reward are two of the most powerful incentives, and if, happily, the fear of want is, to some extent, removed, it is all the more necessary that the hope of reward should be encouraged. Of course, we all welcome the relief on earned income. So far so good. But I want to point out that there is no sort of incentive to the entrepreneur or to the professional man on the higher earning level. This may not be a particularly popular topic, but it is of such great importance that I do not hesitate to raise it this afternoon. No doubt, hon. Members on both sides of the House recognise that current levels of taxation are penal rates. I go so far as to say that until these high rates of Income Tax and Surtax are reduced, there can be no real return to prosperity, and no real release of energy.
I do not know whether all hon. Members opposite are prepared to put themselves into the position of the business man. I want them to try to think what is the position of a business man, and what considerations occur to him when he is trying to make up his mind whether to start a new business, or a new branch of his business. He has, somehow or other, to raise the capital, and then he has to put a great deal of work into the organising of the new business. If he is already subject to a high rate of tax—and hon. Members will not forget that the rates of tax, put together, go up as high as 19s. 6d. in the £—to what has he to look forward? If he puts new capital into the development of his business, or of a new branch or new enterprise, and it goes wrong—which is always possible—he loses 100 per cent. of what he has put in. What happens if it is a tremendous success? His senior partner, the Chancellor of the Exchequer, takes anything up to 19s. 6d. in the £ of the profit. This is a most serious argument. I hope the chancellor will pay attention to it, and will be good enough to give some reply when he comes to answer the Debate.
I think every hon. Member has come to recognise and understand what is generally described as the deterrent of P.A.Y.E. It is not only the system of collecting Income Tax which is the deterrent; it is the fact that the tax is high. Everyone knows that when a man suddenly finds that by working a little overtime, he will bring himself into the range of full Income Tax instead of the lower rate of Income Tax, when he reaches the stage when he will pay 9s. in the £ instead of perhaps 6s., which he was paying up to that level, it immediately has a deterring effect on his effort. That point has been made by hon. Members in every quarter of the House time after time. Nevertheless, it seems difficult to impress upon hon. Members opposite—and in particular upon the Chancellor—the fact that the same sort of deterrent applies in the higher income ranges; and, what is more, deterring as it may be to have to pay 9s. in the £ as a result of increased effort, it is much more deterring to have to pay 19s. 6d. in the £ These are cold facts which I want the House to examine.
The Government have decided that a great part of our industry is to be conducted on these principles, yet they do nothing to arrange taxation so as to make it possible for it to be worked successfully. It really is folly to suppose that the same human motives which operate for a miner or a bricklayer do not operate in exactly the same way for a businessman or a professional man. We should merely be deceiving ourselves if we did not recognise that very obvious fact. It seems almost too obvious to say it, yet it is continually overlooked, and certainly appears to have been overlooked by the Chancellor of the Exchequer. Yesterday, I read this in one of the newspapers:
The flaw in Socialist reasoning is that a man who does well for himself must necessarily do so at the expense of others. Not so. Wealth is not a static pool; it is capable of infinite expansion.
That is the point we have to keep well in mind. Of course, there are a number of other objections to these high rates of tax, some of which Were touched upon most admirably in the Budget Second Reading speech of my right hon. Friend the Member for the Scottish Universities (Sir J. Anderson). He told us some of the dangers and difficulties with which the Board of Inland Revenue were faced.
I wish to draw the attention of the House to the premium which these high rates of taxation put upon dishonesty and extravagance in administration. If we recall the history of the Excess Profits Tax—now happily removed—all those who were familiar with its working will remember that it led to immense extravagance in the administration of businesses. When 100 per cent. of what is being spent comes out of the pocket of the Chancellor of the Exchequer, that produces upon the man spending the money an effect which it is not very difficult to understand. Then again, this high rate of taxation encourages speculation of the worst kind. All speculation is not bad. Far from it. A great deal of speculation is necessary to the sound working of our economic system. But some speculation is bad and the very sort of speculation which is of the worst kind is that which is encouraged by taxation at these penal levels. This high taxation brings out all the worst in private enterprise and discourages all the best. The penal effect of this high taxation has been recognised by the Chancellor in the way in which he dealt with the salary of the Prime Minister. I entirely endorse what my right hon. Friend said in his Second Reading speech, as to the desirability of enabling the Prime Minister to do his duty, and to carry on his work with dignity and efficiency. But I would draw the attention of the House to the fact that there are others besides the Prime Minister who should do their duty with dignity and efficiency. What is the position of the high court judge, the businessman, the professional man?
If we look at the rates of tax which are disclosed in the Financial Statement, the position of a successful professional man will be appreciated. It is quite impossible for him, during those few years in his life when he is able to earn at a high level of income, to save enough money to provide for his widow even a modest income, comparable to his way of life. The other day I quoted something which I read in a newspaper which brought this home, namely, the fact that £4,500 must now be saved to produce an income that will buy a packet of cigarettes every day. It begins to make one wonder where this taxation is leading us when £4,500 has to be saved in order to produce enough income, at 2½ per cent., less the current rate of tax, to buy one packet of cigarettes a day. That just shows the lengths to which our taxation has gone.
Professional men are exactly similar to all other men in the way they react to these deterrents. It is becoming increasingly obvious that there is a vast amount of under-employment in this country in every sphere. That is to be found among professional men just as much as in any other section of the community. Why? Because there comes a period beyond which it hardly seems worth while for them to exert themselves. It may be said that that is very deplorable and lamentable; but it is very human, and very understandable. Is it surprising that a barrister does not want to sit up all night with a wet towel round his head, studying a brief for which he would normally receive a handsome fee, when he now gets hardly anything out of it? That is what is happening also with many other professional men. Look at the hardship which is imposed by such a system.
If this country is to survive, and if trade is to flourish, we must have fuller employment. It is not merely sufficient that everybody should be on some pay roll. What is important is, that the whole resources of the country should be exploited to the full, that we should all be pulling our weight and doing our utmost to produce as much as we can for the country. Fuller production would mean more exports, and the possibility of solving the Chancellor's great problem of the balance of payments. I beg the Chancellor to remember, that private enterprise cannot succeed if the rewards and the prizes are removed. Many, or at any rate some hon. Members opposite, object to the system of private enterprise. I understand the objections they have. I do not agree with them, but I understand them. But for, goodness' sake let us be realistic enough to appreciate that we will not get through our difficulties unless we allow the system of private enterprise, within the field in which the Government allow it to operate, to succeed according to the ordinary methods on which it is worked. Do not let the House blind itself—and do not let the House encourage the Chancellor to blind himself by doctrinaire theory—to the facts which are before us. I say that nothing but a substantial reduction—and a substantial reduction before long—in the rate of Income Tax and Surtax can save this country and enable a decent standard of life to be preserved in this country for all. These things I know, are not popular. These things are perhaps not welcome to every audience in this country. But I believe that unless the Government have the courage to realise them, and to put them plainly before the people, there is very little chance of recovery.
I rise to support the plea put forward by my right hon. Friend, and I make no apology for doing so, because last year I made the same plea. I should like the Chancellor of the Exchequer and hon. Members to recall the time when I was sitting on those benches on the other side, and when this rate of high taxation was proposed in this House. There was a feeling almost of despair that we had raised the rate of Income Tax to such a high figure as 10s. in the pound. But we went away from this House feeling that as we were at war, there was no burden that the country, and all the individuals comprising the nation, were not prepared to bear for the victory that we felt sure would result. But, now we are in a time of peace, there is no justification whatever for this penal system of taxation at the rate of 9s. in the pound and at the rate of Surtax which people are expected to bear today.
We are getting into an appalling situation as regards people who are endeavouring to keep up a certain standard of life. After all, we cannot all live in Acacia Avenue on some housing estate. [HON. MEMBERS: "Why not?''] There are people in a professional way of life. There are for instance His Majesty's judges. They have their station in life to keep up, just as much as the Prime Minister who is given a special allowance. The professional people are doing a very important job in this country. When they have carried out their full year's employment it is very hard on them to find that, in some cases, they have as little as 6d. in the pound left to them, apart from certain small allowances the Chancellor has graciously given them. It is a very big deterrent on them. No hon. Member opposite would give his best if he got nothing in the end for it. I think there is no need to apologise for human nature; it is much the same on that side of the House and on this. I have yet to see the man who can convince me that he is working for nothing. He must have an incentive.
High taxation is having a dangerous effect on two classes of individuals. The middle class in this country have borne a tremendous burden of taxation. We have people today who, because of their taxation, are having to sell capital in order to make their way and meet the high cost of living today. They are people who were thrifty. After all, thrift is a good thing to admire in this country, when we need it. People set aside, after their labours, out of their hard-won earnings, a certain amount of capital. Now they find themselves with the tremendous burden of Income Tax at the rate of 9s. in the pound. They have a certain station in life to keep up. They cannot give up their houses. They have probably become involved in large commitments, and cannot readily get out of them; and the amount of taxation levied on them is forcing them to use capital in order to live. That is an individual point of view. Taxation is having a crushing effect on a very important section of the people of this country; we need those people, and I do not think it should be the policy of any Chancellor to try to cut them completely out of existence by a penal form of taxation such as this is.
We have also the position as it affects companies. There is the case, as my right hon. Friend says, of the man who is starting a new business. He says "When I have finished at the end of the year, what have I got left? I have practically nothing of my earnings left after the Chancellor, the most senior partner, the major partner, the persistent partner, has taken his whack out of my business." More than that, existing businesses are paying in taxation, money which should go back into the businesses. [HON. MEMBERS: "Ah!"] Well, the Chancellor of the Exchequer is giving repayments of E.P.T. in order that the money should go back into businesses to rehabilitate them. We agree with that policy, but, apparently, hon. Members behind the right hon. Gentleman do not. Money is taken out of business in taxation, draining the resources of a company, preventing it from building up reserves which are necessary in order to prosper, and do the best it can. I say without any hesitation that if taxation had been reduced by one shilling or two shillings the incentives to work would have been greatly increased, and we should have had greater and accelerated production in this country.
The Chancellor may say, "Where am I to find this reduction?" I say, quite frankly, that a reduction in Income Tax could have been found by a reduction of millions in the expenditure of the country. [HON. MEMBERS: "On the social services."] I could give endless instances—[HON. MEMBERS: "Go on"]—of where this money could have been found. It is no answer to say we should cut the social services, because that is a very topical shout from the other side, and hon. Members opposite know perfectly well that it is not part of our policy to cut the social services. [HON. MEMBERS: "Oh."] That, I am afraid, is an old bird, and it will not fly today. But the Chancellor of the Exchequer must face this position. Hon. Members will have to come to it sooner or later, otherwise it will affect the employment of the people they purport to represent in this House. The Chancellor must face the question whether he is going to break the back of the people of this country by such a harsh and penal system of taxation. In war time we had to endure it for the sake of victory; we had to put all our efforts into victory. But I give him this warning, that we cannot go on taxing supposedly rich people and giving reliefs only to those at the lower end of the scale, hoping that, perhaps, at the next General Election that policy may gain some more votes. The Chancellor must, sooner or later, realise that he is going to break the backs of the people of this country with a penal system of taxation such as we have today. If he wants cooperation, if he wants full production, he must take his courage in his hands and make a substantial reduction in the rate of Income Tax, and, also, in the Surtax charges, so that people may have the human interest of their labour's reward that he has himself, and that hon. Members have, and so that we can all give of our best.
Many of us on this side of the House are seriously interested to know where the cuts which the hon. Member for Hallam (Mr. Jennings) has suggested can be made. Can he take two or three minutes to tell us?
It can be saved out of the total Budget expenditure. The Chancellor of the Exchequer apparently agrees with what I have said because he stated:
I wish to emphasise that I do not regard our total national expenditure as having reached rock bottom. There is much scope for reduction in defence expenditure yet, much scope for reduction in overseas expenditure on various kinds and for a reduction in some selected parts of our domestic expenditure.''—[OFFICIAL REPORT, 17th April, 1947; Vol. 436; c. 461.]
"A reduction in our domestic expenditure"—that is the answer.
I can well understand the Chancellor's caution in reducing direct taxation at this time in view of his fears of inflation; indeed, I wonder whether the fear of the damage done by inflation is not much greater than the Chancellor seems to admit, or surely he would be taking more strenuous steps than he has yet done to combat it. Does he realise that the present inflationary situation is so distorting production that it is causing an enormous amount of concealed unemployment, which may have catastrophic results on production in this country? Inflation is not necessarily caused by increasing purchasing power; it is caused by an excess of purchasing power over the supplies available. I should have thought that the Chancellor would do everything he could to provide conditions under which inflation could be avoided, not by the unpleasant method of cutting down expenditure, but by increasing production. The job is to make these two legs match, and to have an equilibrium between the supply of goods and the demand for them. Is the Chancellor always going to choose the course of making these two legs match by shortening the long leg, rather than lengthening the short leg? I know by bitter experience that the chopping off of a leg is the easier thing to do, but it is a very painful business. The Chancellor's job should be to lengthen the short leg.
I am not sure that the present crippling taxation on earned income is not proving a very great deterrent to production. I will give a simple example, although it is rather an extreme case. Take the case of a man with £10,000 a year. He may double his income by a piece of luck, but 99 times out of 100 he can only double his income by an expenditure of energy which endangers his health or capital. If a man in this category increases his income by 100 per cent., the amount of income he retains is 7½ per cent., and if he doubles it again, the amount left is only 2½ per cent. Is it likely that people will risk their capital, their health or their lives to make such a trifling percentage increase? I would remind the Chancellor of the Exchequer of something I saw in a paper some time ago, which was written by a Member of his party. It was a letter which appeared just after Lord Nuffield had made one of his magnificent donations. A Socialist wrote to the paper asking where this money had come from, which Lord Nuffield had given away. He asked whether it had not come out of the pockets of the workers. A more thoughtful correspondent, in the following week, pointed out that money is not a fixed amount; that it is not the case that if you take more from one person, there is less for another, but that there is no limit to the amount to which wealth may be increased. The wealth of Lord Nuffield was made by his ingenuity, by his work and enterprise, which were beneficial not merely to him, but to the country as a whole.
I ask the Chancellor whether he cannot give an assurance that, in future, he will discriminate between unearned income and earned income to a greater extent. So long as we live under an economy where 80 per cent. is still left under private enterprise, an increased incentive should be given. Do not let us pretend that we are all saints. In all walks of life, we do things either because we are tempted by a carrot, or because we are urged on by a stick. Cannot the Chancellor of the Exchequer make it possible for incentives to be offered to increase the wealth of the country? I have the unpleasant feeling that what the Chancellor may have at the back of his mind, is that he is quite content to keep the poor poor, in order that there shall be no rich. I see that he shakes his head. I hope he will emphasise that he does not mind rich people, so long as the poor are getting richer too. When I was in America a short time ago I talked to trade union leaders, and I was very impressed by their outlook. They said that they wanted companies to do well, and that they did not mind great profits being made, so long as they got their full share. If only we could get that sort of expansionist outlook here, we should be getting out of our difficulties, of which I see no sign at the present time.
I had not intended to speak today, but having heard hon. Members opposite pleading the miseries of the rich, and as it has so often appeared in the Press that I am one of the most wealthy Members of this House—which, incidentally, is not true—I should like to put forward my view on one or two points. If a person has £4,000 or £5,000 a year—and that is the kind of person we are talking about—I do not think he necessarily needs any more. A long time ago a friend of mine was allowed by his father something more than £4,000 a year free of tax. He met his father at a party, and told him he could not possibly live on his £4,000 a year free of tax. His father said they would not discuss it at that moment, but told him to see the solicitor in the morning. When the son went to the solicitor, his father asked, "What is all this about not being able to live on £4,000 a year?" The son said that he spent so much on this, and so much on that. "But what about those poor so and so's who live on £2,000 a year?" his father asked. That really is the point.
Hon. Members do not seem to realise that the people about whom they are talking probably number no more than 100,000. I know that before the war there were only 98,000 people receiving over £2,000 a year, although I do not know what is the position now. I am perfectly certain that a big business man does not refuse to take over a directorship because of the fear of increased taxation. What really delights them, and the people who are doing a great deal of work, particularly managing directors, is the satisfaction they get from power, and from the fact that they are doing a good job of management. I am certain that the hon. Member for Hallam (Mr. Jennings) who, I believe, is a big employer in the steel industry, gets a great deal of satisfaction from doing his job well. I do not think that it is a question of salary only. The hon. Member does his job of managing his industry with joy and success. It is worth reminding the House that that kind of satisfaction exists.
I know that there are many devoted civil servants who work unnumbered hours of the day and night. I know that from my experience of various jobs, in relation to the work of the House. Members on both sides, particularly Ministers, know the complete devotion that we get from the draftsmen, civil servants, Officers of the House, and others who are working 14 to 16 hours a day. One knows very well that the Officers of the House do not work until one and two in the morning because they get another £1,000 a year for doing it. They are prepared to do a great deal of work for nothing, for the general good of humanity and society, and their fellow creatures. The best people are the most devoted people. They do not think, all the time, whether they will get another £500 or £1,000 a year for working harder. I am sure that Members generally will agree that what I am saying is perfectly true.
On the question of Lord Nuffield, raised by the hon. Member for Scarborough and Whitby (Mr. Spearman)—and I am not saying anything against Lord Nuffield—I remember some correspondence on the question of a gift by him of £1 million to set up a college in Oxford. The real complaint in that correspondence was this: Here was Lord Nuffield, giving away £1 million worth of capital; which, even at 5 per cent., would have brought him in £20,000 per annum, on which he would have paid 19s. 6d. in the £ tax. He was, therefore, giving away 20,000 times 19s. 6d., which belonged to the Chancellor, or would have done if he had not made that gift. That money would have gone to the Chancellor, and would thereby have helped to relieve taxation. Is not that right? It must be right. That was the real objection which certain people had to the gift, and I remember it very well, although I did not take part in the correspondence. Another complaint was to the effect that men of wealth were able to set up institutions, owing to their private munificence, possibly to advocate views which were contrary to the general good of the country. I am not saying that that was done, but there was complaint that by the use of money which otherwise would belong to the Chancellor and to the taxpayers in general, that might be done. As I say, the correspondence about the Lord Nuffield gift was concerned with what effect the giving away of 20,000 times 19s. 6d., for ever, and not only for one. year, would have on the general good.
I know that there is something to be said for the view which has been advanced by the right hon. Gentleman the Member for the City of London (Mr. Assheton). If somebody asks me, let us say, to make a will, for which I might reasonably charge three guineas, it is not worth doing that work, and taking the responsibility, for the amount of "beer money" which one might have after taxation had been paid. I accept the right hon. Gentleman's argument, because I believe it is true. A barrister who sits with a cold towel round his head all night, getting ready to divorce a well-known person, is not doing the same kind of socially valuable work as other people, who are contributing to productive industries, or devoted civil servants who are carrying out heavy duties and who want no more money per annum for it. I say this because I feel that I can say it, although I am certain that the "Evening Standard" will have something to say about this tomorrow. Nevertheless, I do mean what I am saying. Do not let Members opposite think that they represent the great mass of taxpayers in the country, who are prepared to do a good day's work and are not deterred by a tax of 19s. 6d. in the £ The vast majority of them never get anywhere near that. The people who do pay that tax, get enjoyment from doing a good job, and from the sense of power which their job gives them.
The arguments which we have heard from the other side deal with only a very small part of the case which was put forward by my right hon. Friend the Member for the City of London (Mr. Assheton). What I am particularly concerned about is the person who has to pay a tax of 9s. in the £ when he earns another £100 a year. He may have the lower-rated scale of personal allowances, but if he increases his income at all, he has to pay 9s. on every additional pound that he earns. If he has an income of £500 or £600 per annum, and earns another £100 per annum, he has to pay 9s. on that other £100. I know that Members opposite may not like to hear this, but we on this side listened to them with great courtesy, and I think they should do us courtesy of listening to what we have to say, when advancing the view that this penal taxation is harming the productive effort which is so necessary to get rid of shortages, and get the country back on to its feet.
I would like to tell the Chancellor that it is much harder now for a person to make his way in the world than it was before the war. There are many more difficulties and restrictions, some of which are necessary and many of which, we believe, are unnecessary. If the Chancellor was a young man, going into the world to make his way, he would find it a much harder world in which to earn his daily bread and butter than it was when he was a young man. That condition of affairs affects many people who served this country in the Forces during the war. Many who want to reopen business have lost their goodwill, and some have lost their skill and knowledge. If these people do not make good, they lose their savings, and it is most unfair that if they do make good they should have to lose 9s. in the £ on anything which they make. I have great respect for civil servants, but there is one advantage which they have over those people who have to make their way, and that is that they do not stand to lose, as a business man does if his business goes "bust." They have not that feeling of insecurity which anyone has who has ever tried to stand on his own feet. I know that the hon. Member for Nuneaton (Mr. Bowles), in his fairness and honesty, will be the first to admit that. We on this side of the House feel that for people who have to make their way under very difficult circumstances, it is the greatest imposition to tax them at the rate of 9s. in the £.
I would like to tackle the hon. Gentleman on that. I agree with him to a certain extent that men are prepared to give a considerable amount of their time without reward; but they are not prepared to give their main time in which they have to consider their wives, children and dependants. That is not from selfish motives. More and more, in all sections of the community, people are considering—and I would not mind saying that nearly all hon. Members of this House are considering—what propel expenses they can write off against their income before it is assessed for taxation. Before the war, there were many people who did not worry themselves about that—they were giving all their energy to increasing their income, and not so much energy to seeing how they could reduce the assessable amount. Hon. Members know that when they come to look at their own Income Tax returns, they put in, as they are justified in doing, the amount of the expenses which attach to the duties of a Member of Parliament. In business, the same kind of thing is going on. More and more energy is being wasted in seeing whether another £5 or £6 can be written off against taxable income. If that time was given to trying to produce more income, it would be healthier for the country. I seriously suggest that, as soon as the Chancellor of the Exchequer is able to give even a token reduction in taxation, it will be an encouragement and inducement to people not to think that they are wrong in increasing their incomes. They should be enabled to expect that as soon as we get out of the difficulties with which we are faced, the Chancellor will give them that encouragement, which so long as the Government admit that private enterprise has a big part to play in the financial future of this country, should be given to them.
While not wishing to bring this discussion to a premature close, I think it may be useful if, at this stage, I suggest a few points. We are discussing the standard rate of Income Tax and the Surtax scale. It would not be in Order for me to go at length into the other related Resolutions, but what I am saying is relevant to much that has been said on this point of why, for reasons which I explained in my Budget speech, I gave the first choice this year in tax relief to earned income relief, on the one hand, and child allowance relief, on the other. It is my considered view—and it would not be proper to go into comparative arguments at this stage—that I have done more in the way of increasing incentives and assisting those who are earning their livelihood at various levels of income by doing it in that way this year, than I would have done by making even a small reduction in the standard rate. I considered this very carefully and weighed up the alternative possibilities, and it seemed to me that it was better, in the circumstances of the Budget this year, to wait a year longer, at any rate, before again touching the standard rate.
It will perhaps be of interest to the House if I mention that the cost of taking sixpence off the standard rate would be in the order of £72 million in a full year and £63 million this year. That is a lot of money and comparing that cost with the cost of doing other things, it is about equal to the cost of the other two reliefs which I have mentioned, the earned income relief up to the point I have increased it, and the child allowance up to the point which I have increased that. The cost of those two together—and I will give the figures later if they are asked for—would have been about as much as the cost of taking sixpence off the standard rate—reducing the rates by sixpence and making them 8s. 6d., 5s. 6d. and 2S. 6d. The cost of taking sixpence off down the line of 9s., 6s. and 3s. is roughly the same as the combined expense of giving the earned income relief and child allowance relief which I have given. Assuming that was the amount of money which there was to give away in this particular direction, I am pretty confident, not only that I have chosen aright, but also that in relation to the arguments deployed in this Debate it was right.
The hon. Member for Scarborough and Whitby (Mr. Spearman) asked if I could differentiate further between earned and invested income. That is exactly what I am doing. If you reduce the standard rate, there is no differentiation. But if you increase the earned income relief, there is a further differentiation in favour of earned income. The Profits Tax, taking it as a whole, involves a further differentiation against investment income, because it falls solely on dividends and investment income of that class. If we take the general plan on which we have been proceeding since this Government have been in power, there has been a constant shifting of the balance in favour of earned income as compared with investment income To that extent, therefore, we have done what I understood the hon. Gentleman to desire. The hon. Member for Devizes (Mr. Hollis) was one of the protagonists of the reform for raising the child allowance. He asked for that last year in a very persuasive speech. I must not go too much into the various arguments he put, but he was one of those who last year pressed me to do what this year I have been able to do, that is to make an increase of £10 for each child per year. That falls generally in favour of persons who earn their own income. Most of the parents of young children who will benefit by the increase of the child allowance are people who earn the major part of their income. Generally speaking, they do not give up earning their income until they are past being fathers—there are exceptions of course.
One of the interesting things—and I think it is just in Order to refer to this—in the Report of the Board of Inland Revenue this year is Table 46. Let no one miss Table 46. That shows the proportions in which at various levels the income of those with the higher incomes—the Surtax payers in particular—comes from earned income on the one hand, and investment income on the other. I must not develop that at this stage, but perhaps I will say something about it on the Finance Bill because it is worth attention. It does show that people with large incomes fall definitely into two groups. It is extremely unusual to find a person with a large income deriving that income half from earnings and half from investments. Generally, the total income is either from earnings without investments, or from investments without earnings. These two cases between them, account for the majority of Surtax payers, and the higher we rise, the more marked is the preponderance of these two types.
I ask the House to look a little more closely at a typical case, as shown in the Financial Statement, of what the rate of Income Tax and Surtax combined really is on the various incomes, according to the family conditions of the Income Tax payer. None of these people, whether single, married without children, or married with one, two or three children, pay 19s. 6d. in the £ on their whole income, although some of the speeches we have heard this afternoon would lead us to believe that they do. We had better get this on record. There is no taxpayer, however rich, who pays an effective rate of 19s. 6d. in the £ on the whole of his income. That is prevented by the various allowances which are made, for, as in the lower levels, they are all entitled to the various personal allowances.
I only interrupt the Chancellor to ask him to make it clear to the House that on a certain section of a man's income, he does pay at 19s. 6d. in the £; and, when talking about the effective rate, is not the real answer that at a certain point these people would have to pay what I call penal rates of tax?
The point is that it is a matter of how it is looked at. I do not think there will be any dispute about what I am saying. This can be looked at from either of two angles. A man can imagine his earnings as a succession of slices, and he can see what is the tax which falls on each slice. In that way we can regulate the Surtax. That is one way of looking at it. On the other hand, surely it is not out of place to say that taxation is so much on a man's income and is an average charge over the whole of that income. That is what is called the effective rate and that is what has always been displayed. I have not revolutionised anything in the Financial Statement, but it has been customary for many years to show it in that way, under Governments of all sorts and colours, and a very useful thing it is to show. In one column there is shown the scale of income and in another column is shown what the man with a certain income pays in a year. If we relate one to the other that is the effective rate, which means the shillings and pence in the pound that a man pays in Income Tax and Surtax (if any) on his whole income. That is a very important aspect of it.
Let us take the case of a married man with two children who earns £5,000 a year. If we look at page 30 of the Financial Statement we find that, before this Government came into office, the effective rate of Income Tax on his income was 11s. 0½d. in the £. Such a man would pay £2,757 out of his £5,000. That was before a Labour Government came into office.
That all depends on where a person is hit. There is nothing controversial about this. In 1945–46, before there was a Labour Government, but while the war was with us, a married man with two children with an income of £5,000 a year paid £2,757 in tax. In the following year, when the Labour Government had been in office for a year, he was only paying £2,542 or 10s. 2d. in the £ on his £5,000. That was due to the reliefs I was able to give in my first and second Budgets, in which I was able to reduce the standard rate of Income Tax by 1s. while adjusting the Surtax so that people should not get an unfair advantage from that. So this man with £5,000 a year in the first year of the Labour Government paid in tax £2,542 and under the new benefits in the present Budget he will pay £2,488. He is only paying now 9s. 11½d. in the £, so that things are, even from his point of view, slowly improving.
We can put it in this way, which I think is not an unfair way to put it. A man with £5,000 a year roughly speaking gets £50 a week tax free, which is £2,500 a year. On the other hand, if there is a man who is only getting a nominal £50 a week he does get a bit taken off and he does not get that amount tax free. All down the scale we have a number of gradations in which, when we subtract the nominal income from what the people are paid, we find a pretty steady ascent in the income scale. There is no taxpayer in this country, and if the matter is looked at mathematically there cannot in the nature of things be any taxpayer in this country, who is really paying 19s. 6d. on the whole of his income. Such an animal does not exist except, of course, in the passionate pleas we sometimes hear from the Conservative Party. I am merely establishing a simple proposition and I repeat it—there is no taxpayer who could, under our present law, pay as much as 19s. 6d. in the £ on the whole of his income.
Oh, did they not? I have often heard it alleged, and when I was asked had I no sympathy for the person who was paying 19s. 6d. in the £, and said "No," I was accused of being an unsympathetic person. I explained that the reason why I had no sympathy was because such a person was an imaginary being, who does not tread upon the earth at all. There is another side to it, it is perfectly true. When an income goes above £20,000 or £30,000 or some intermediate figure—I have not the exact figure with me but it can be checked up and it is certainly more than anybody in this House is earning—that above that point, of course, 19s. 6d. is being paid. I might add that when one ascends to that height, and occupies such an important position, the interest in power and prestige and influence is much greater than the incentive given by a few more ha'pennies off the standard rate of Income Tax. I submit that at that level the incentive is in non-monetary things. A man earning such an income as that wants to make a good job of his work, and possibly wants to make his name live for ever.
Since the question of the Prime Minister's allowances has been raised, perhaps I may remind the House that I deliberately arranged a Question in the House the other day following a correspondence which I had had with the Leader of the Opposition to ascertain what the Opposition thought of this proposal. I was informed that, as I expected, the Opposition would think that this was a good proposal for the Prime Minister, and when I made a statement to that effect in the House it was generally greeted with approval and there was applause all round the Chamber. There was no supplementary question, either critical or otherwise, and therefore it went through as a generally agreed measure.
As a result all sorts of other people think they should be on a par with the Prime Minister from that point of view. But we cannot change the hierarchy of British public life in that way. The hierarchy of British public life lays down that we shall have an elected House of Commons with a Government responsible to that House, and the Prime Minister holds a unique and exceptional position whatever his party. He also incurs expenses of a unique and exceptional character. It is our view that he should stand in an exceptional position from that point of view, whether he happens to share the views of the party which at present has a large majority in the House, or even if, in the future, the Conservative Party should come in. But just because the Prime Minister has special treatment of that kind it does not mean that every Tom, Dick and Harry in the business world is to be allowed to place himself on the same pedestal as the King's primary adviser. Therefore I say that we do not accept this attempt to try to make this generally agreed arrangement about the Prime Minister an excuse for loosening the regulations about allowances applying to private business people. There is no intention of loosening up the present arrangements regarding expenses which are quite clear and have worked pretty well for a number of years.
Having said this, I should like to add that I cannot accept the suggestion that there should be any reduction at this stage in the standard rate of tax in addition to the reliefs I have given. I do not think the Opposition intend to oppose these reliefs, so that any argument developed here against the standard rate is an argument for reducing that rate in addition to the other reliefs I am proposing. I say that that would not be justified in the conditions of this year's finance, for reasons which I endeavoured to develop in my Budget speech. It would be an inflationary increase of purchasing power, without any assurance that we should obtain equivalent increased production in return, and we cannot this year afford anything of the kind. I have given the cost of 6d. off the standard rate as being of the order of £72 million a year in a full year, but some people have been asking for a shilling off.
A shilling would cost nearly £150 million a year. This is a case where you can double; there is no trick in the arithmetic and two shillings, in turn, would cost about £288 million, or nearly £300 million a year. These figures are wildly out of range of what is possible. So far as saving on the other side of the account goes it was very relevant to inquire, as some of my hon. Friends did inquire, whether it is suggested that we should aim at balancing the reduction in the standard rate that has been suggested against reductions in expenditure. It is out of Order, no doubt, for me to develop this at length, but I would say that it is really no good talking of economy—even with a big "E"—in the abstract. You must indicate where it is you propose to economise. In my Budget speech I said that I thought we could economise. I did not recognise the present level of total expenditure as being a minimum and I thought we could get below it. In particular I said that I thought that in the years ahead we could economise on defence and overseas expenditure generally. All over the world money is still being spent which I hope we shall be able to save. I said too that we might also be able to economise on some selected parts of our domestic expenditure; I emphasised the word "selected" because the great bulk of our domestic expenditure is, in my view, pretty static and not capable of early reduction.
Then there is the large body of expenditure on the social services and on the national debt which would, of course, be very much greater if it were not for the cheap money policy which is sometimes criticised. But even with that as a balance for the floating debt which has to be continued and renewed you have a very big expenditure, and I do not see how that can be quickly reduced over a short period of years. There is not a positive proposal before us, but I do say that in the general financial position in which we are, including the need to have this year a good surplus, the more you argue against elements in my surplus the less you can argue that the standard rate must be reduced. The more you argue against elements in the surplus—it has even been argued that the real position shows a deficit and not a surplus—the less can you argue that you should throw away at least £72 million of income tax revenue in the very vague hope of getting thereby additional incentives and production.
I hope, therefore, that the House will not desire to vote against the obtaining of this sum of money this year. With regard to the surplus, there have been suggestions that we should reduce surtax, but that I regard as totally inadmissible at the present time. I think it is a mistake, in fact, to take the surtax in these considerations separately from the general body of income tax. Surtax is a special device falling on incomes above 2,000 a year, but it has been to read and understood with income tax as a whole so as to give a graded scale all the way up. I merely say that I do not see my way at present to give away any more income tax revenue than will be given by the reliefs contained in my proposals.
Speaking as one of the Tom, Dick and Harry businessmen, I would point out that these rather slighting references have their dangers. Normally there is a veneer of bonhomie by which the real Chancellor is withheld from us, but suddenly a crack appears and he makes an unworthy gibe. If you go on biting the hand that feeds you long enough it may turn against you, and it looks as if some infuriated Surtax payer has been biting the hand that robs him. The main argument on incentive will arise more appropriately on the later discussions regarding the profits tax, but I should like to say to the Chancellor and to the hon. Member for Nuneaton (Mr. Bowles) that they both left out one extremely important factor.
When they speak of directors in the business world they seem to relate their activities solely to their own personal incomes and advantage and the results which accrue to them of their endeavours. In proportion, the director of a company is usually only a very small holder indeed in the shares of his company. His main duty is to the bulk of his shareholders and the danger of having too high a level of taxation is really that in the case of the good director—and I venture to say that although he may be called Torn, Dick or Harry he is a good director in this country on the whole—his sense of responsibility to his shareholders leads him to consider the risk he is taking on their behalf and not the effect on his own income.
If the incidence of taxation, of double taxation overseas and various other taxes which he cannot properly evade and does not try to evade, becomes too great, he must in the end say to himself, "This is a risk which I dare not and should not take." The one free permission the Government gives to everybody in business is to take a 100 per cent. loss, but when it comes to the profits, their interest becomes keener, and if, as I hope to show later when the Debate turns to the Profits Tax, the burden of this taxation, duplicated as it is in many cases, becomes too great, the director must say, "I cannot afford to go into this new business or to extend my present business." While he may be ready to take a good commercial risk, and I think the Chancellor will agree that that is the essence of commerce, if he has to take on a two or three to one bet against the interests of his shareholders, sooner or later there comes a point when he will not do it.
In all seriousness, if instead of jibing at the representatives of private enterprise, who do go about and create all over the world businesses which help in the export drive and which help to increase the real wealth of this country and of the Empire, he would try to see what they are really trying to do; if, instead of denigrating them, with that facility he has for cheap phrases which drive them down in the public estimation, he would see that their interest is not only in their own personal income but is also in pride in their work and in looking after the interest of their shareholders, who are the general public, the Chancellor would be doing the country and his own party a very much greater service if he took this advice.
In that connection I should like to raise one point. During the right hon. Gentleman's Budget marathon. in one of his moments of uncontrolled ebullience which occur with all too great a frequency, the Chancellor made a little jibe about the bad rate at which the Income Tax and Surtax payers had paid up. That is very germane to the question we are discussing. If taxation is evaded or paid late, sooner or later it must have some effect on the rate of taxation which has to be imposed to make up for those deficiences. I therefore think we are entitled to hear from the Chancellor a series of figures to substantiate that statement. Possibly on the Finance Bill, we ought to be told whether and why the payments have been slower this year than last, whether the payments in the higher or surtax brackets have been slower than in the lower brackets, the P.A.Y.E. or small taxation brackets. The Chancellor has made, as he does so frequently, one of those accusations which for various reasons, political or financial, he may think it is right to make, but I think it is only right that he should produce some evidence in support of the accusation he flung out so freely. I hope he will see the necessity for this.
Finally, I would like to say, on the whole question of the level of taxation, that we are no more an island from the point of view of finance than we are from the point of view of strategy. If industry in this country is being more heavily penalised than in other countries, and if therefore in the world's markets in which we have to compete a greater weight is being hung upon our industrialists than their foreign competitors have to bear, the export drive on which he lives and thrives, and whose failure would sink him quite irretrievably, must be damaged. I would suggest that the Chancellor must take into account the other countries where there is a more enlightened policy of encouraging and appreciating industry rather than offering it a plum one day and a kick the next. That should be in his mind when he is framing his taxation in general. We cannot contract out of competition in this world. Stability cannot be achieved inside a a vacuum, as he and some of his colleagues seem to think. I would put in a very earnest plea to the Chancellor to make some comparative study of the incidence of taxation on industry, and its increase in a very short while. The President of the Board of Trade in a recent speech clearly said that industry is shifting throughout the world. There are countries which used to be only producers of raw materials and importers of manufactured goods which are now coming into the manufacturing group. We shall have to compete with them when they start to manufacture, and if our taxation structure handicaps industry and production in this country too heavily, then in Lancashire where my constituency lies, in the textile engineering and other industries we shall suffer most severely.
When we on this side make accusations against the Government that they are too doctrinaire, I think we have in our mind very often that the Government should look more practically at what is happening outside the orbit which they control from their part-worn mandate. I suggest it would be extremely wise of the Chancellor not to continue on the path of scoring easily against the industrialists, the Tom, Dick and Harry of business, but to try to do now what he will have to in the end, namely, take them into amicable and real partnership. Without them he cannot exist, but with him I fear they will not be able to continue to carry on much longer.
Like my hon. Friend the Member for Nuneaton (Mr. Bowles) I am only provoked to intervene very briefly in this Debate by some of the arguments of hon. Members opposite. There is one argument which hon. Members opposite are neglecting which in my view disposes of their case, for reducing direct taxation, and which justifies the Chancellor in the policy he is pursuing. That simple fact is that the rise in profits since before the war has been much larger than the rise in wages. I am not sure whether that is generally realised, and it might be worth the while of some hon. Members to look at page 10 of the White Paper on the National Income, Command 7099. It is of interest to see that wages, as a percentage of the national income, actually fell between 1938 and 1945 from 41.4 per cent. to 41.3 per cent., whereas rent, interest and profits went up, as a percentage of the national income, from 33.3 per cent. to 39.1 per cent. Even if one takes 1946, wages are only slightly up, from 41.4 per cent. to 42.3 per cent., but rent, profits and interest have gone from 33.3 per cent. to 36.7 per cent. The outstanding fact is that wages have fallen as a percentage of the national income since before the war.
It follows—I am sure the Chancellor has realised this, and I know he will not forget it—that as there had been no increase in direct taxation, the actual share of the national income which the wage-earners were getting would have gone down. It is only because we have had higher direct taxation that the income of wage-earners has been maintained. It is even more interesting, I think, to look at another table on page 11 of the same White Paper, which give the figures after payment of taxes. There it is shown that even after payment of these extremely heavy taxes there is remarkably little change. Wages have gone up between 1938 and 1946 from 39 per cent. of the total national income to 44 per cent., and rent, interest and profits come down only from 37 per cent. to 33 per cent. That means that after all these enormous direct taxes on large incomes have been paid the shift is only 4 or 5 per cent. of the total national income one way or the other. It also follows from that that the actual money income after taxation which is going into rent, interest and profits today is much higher than it was before the war. I think that should be realised. The recipients of rent, interest and profit who, as the Chancellor pointed out, are by and large different individuals, are getting a much higher money income today after payment of taxation than they were in 1938.
For those reasons I welcome the Chancellor's decision not to make any cut in direct taxation. I welcome the increase in Death Duties which he has introduced, and I would have liked to have seen perhaps a greater increase in Death Duties to offset some of this shift of national income from wages which has occurred during the war. I hope that in his next Budget, and in further Budgets of this Government, that policy will be maintained. As against that, it seems to have been made clear today that the policy of the Opposition in this matter is a reduction in Surtax and in the standard rate of Income Tax, and a reduction in food subsidies. That would, of course, mean a heavy transfer of income away from the wage earners to wealthier sections of the community. That is, very briefly and simply, the choice before us, and I want to record my support for the alternative which the Chancellor has chosen.
Having listened to the speech of the hon. Member for North Battersea (Mr. Jay), I think I understand the Chancellor's temptation to indulge in some of the fallacies in which he has indulged, but since I wish to combat some of the views he has put forward, and which the hon. Member for Nuneaton (Mr. Bowles) had previously put forward, I will start by saying to the Chancellor that on some of the important points which he raised I find myself in agreement with him. I think the Chancellor was quite right when he said that if he were able to give only a limited reduction in taxation, he should give precedence to the personal reliefs, and that is, indeed, what the Opposition asked him to do last year. Where I think the Chancellor's speech was disappointing was that he showed so little consciousness of how great an evil direct taxation at this level is.
On the question of incentives, it seems to me that what the right hon. Gentleman and the hon. Member for Nuneaton said had this amount of truth in it. We all know that in many walks of life there are a great many incentives that have nothing to do with money. There is, for instance, the love of one's job, the pleasure of doing it well—and all the other incentives that we know well. There are many hon. Members who do an amount of work which certainly could not be explained by any monetary reward which they get for it. I think hon. Members in all parts of the House are familiar with that variety of incentives. What we have to consider is something that came out very noticeably in the speech of the hon. Member for Nuneaton. In all the cases that he gave of men doing extremely hard and devoted work for no great monetary reward, he mentioned safe jobs. What we have to consider, when we are thinking of the question of incentives in the national interest today, is what incentives are required to make men take great risks in unsafe pursuits. There the level of taxation can be a very real deterrent to increased work and productivity. This subject of incentives is not a problem which is mentioned and accentuated by the Opposition and which the Government deny; on the contrary, in various Government publications, and in particular in their last and most famous White Paper, the importance of incentives is very much recognised. It is not only in the case of Tom, Dick and Harry among the capitalists mentioned by the Chancellor that decreased productivity through lack of incentive is to be feared. The White Paper mentioned very important categories of manual workers where productivity has very seriously declined, and it recognises in terms the desirability of payment by results. In all those cases where incentives are recognised by the Government as necessary, a high level of taxation is a deterrent.
I find myself in agreement with the Chancellor in his general contention that it is necessary to consider the standard rate of Income Tax and Surtax together; that is logical, and I do not think I have ever taken a different course; but when the right hon. Gentleman talks about the level which the two together represent over the whole income, he is not, of course, dealing with the problem as it presents itself to the man who is already earning a certain amount and has to consider the inducement for doing more work, or taking more risks, to create more profits. To that man it is the rate on his next slice of income which decides whether there is any inducement or not. The case of Lord Nuffield has been mentioned. There was a case brought to the attention of the world more recently in the obituaries on the late Mr. Ford. There was an interesting article, which many hon. Members may have read, in "The Economist," which pointed out that whatever we may think of the desirability or undesirability of such vast fortunes, undoubtedly from the point of view of the country in which they were created and earned, the country bought its millionaires extremely cheaply, because of the immense benefit derived from the productivity that those men had created.
The hon. Member for West Fife (Mr. Gallacher) supports me in the only way in which he can support me, and I welcome his assistance. Another simple recognition of the need for more incentive comes in the White Paper, where it speaks, I think quite erroneously, of shortage of manpower as though it were equivalent to a shortage of men. Of course, a shortage of manpower and a shortage of men are not the same thing. To talk about a shortage of manpower, meaning that we have too few people, is to say something that is almost useless, because, although one might make slight alterations by new labour coming in from abroad, on the whole the working population is something that is given and that we cannot substantially alter. Manpower in an industry is the product of the numbers engaged in the industry and the average amount of work each does, and that amount of work can be increased by incentives. That is recognised from time to time in the White Paper. But a level of taxation at its present rate, if it is to be long maintained, will be a great deterrent to increased work and productivity.
The only other matter I wish to mention, because it has been mentioned in so many speeches in the Debate on this Resolution, is the question of expenditure. I think it is common ground on both sides—at any rate it is common ground between the Opposition and the Chancellor of the Exchequer—that expenditure is too high. Very often the challenge is thrown out from the other side when we mention that expenditure is too high, "What would you reduce?", as though they themselves were not going to reduce anything. That is where they are making a quite elementary error. The course on which they are embarked is inflation. The inflation already exists. If that inflation progresses, it will reduce all rewards. It will reduce the social services. Even if the nominal payment per week which a man gets remains the same, it will nevertheless be reduced because the inflation will reduce the value of money.
To speak as though the alternatives were on the one hand some considered and carefully thought out reduction in expenditure, and, on the other hand, going on quite cheerfully as we are, is demonstrably wrong. The real alternative is between a sensible and planned reduction of expenditure and a reduction of real receipts and all nominal money values through inflation. I know that sometimes Government organs and Government supporters talk about inflation as a possible risk of the future, as though it were something which did not exist already. If any such hon. Members are sitting here today, I repeat that the existence of actual inflation has already been admitted as long ago as last January in a Government White Paper. It is expressly admitted in paragraph 19 of the "Statement on the Economic Considerations affecting relations between Employers and Workers." So to go on pretending that inflation is a mere possible risk of the future when it is an actual fact at present is to make a very great error indeed.
Those are the points I make. The Chancellor is right—assuming that he has strictly to limit the amount by which he can reduce taxation—in giving precedence to personal reliefs. In doing so he is adopting the advice the Opposition gave him at least a year ago. The point that I beg him to keep in mind is that the present level of direct taxation, if maintained for long, is disastrous. It will act as a deterrent to increased work and productivity, not only among the richer capitalists but among the ordinary wage earners. The rate of taxation need not be nearly as high as 19s. 6d. in the £ to be a deterrent to extra effort. At a much lower level, the tax can become a deterrent to extra effort. If, as is possible, a general reduction of that level of taxation is only possible through a reduction in expenditure, let no supporter of the Government be under the illusion that such reduction can only take place by deliberate act. It can also take place, and it will take place, if they are not careful, through the inevitable process of inflation.
I am surprised at the Chancellor of the Exchequer this afternoon because he has shown absolutely no emotion and has been most unaccommodating to the Opposition in relation to the pitiful tale which has been unfolded. One would have thought, hearing the story of the impending disaster for the rich classes, that he would have taken warning. The right hon. Gentleman the junior Member for the City of London (Mr. Assheton) warned the Chancellor that he was putting a premium on dishonesty and suggested that he was tending to develop speculation of the worst possible kind by his methods of taxing the people. Surely the Chancellor of the Exchequer will take note of a warning like that and wilt think about the matter once more?
Something else besides money value requires to be taken into consideration, but I have heard nothing from hon. Members opposite this afternoon. Human values will have to be taken into account—human values that have never been taken into account by Tory Governments. Today we are insisting on the fact that these things shall receive proper consideration. There are also social standards that have to be taken into consideration. If by the grace of God I happened to have been sitting on the Benches opposite and living up to the social standard that I might have been, and if an hon. Member sitting on those Benches had been sitting over here and had the experience that some of us have had, quite naturally we should have seen things from a different angle. We should each have seen things as the other sees them.
This is not a question of emotion but a question of fact, and the fact remains that in society today there are people who cannot maintain their position on £100 a week. They are telling us this afternoon that they cannot maintain their social standards on £100 a week.
The very fact that the social standards are such that it costs so much to maintain them is a liability on the country at present because it entails hefty staffs to maintain that social standard for those people. Those staffs would otherwise be engaged in more useful work. That ought to be faced. If the Chancellor is not prepared to bring the extremes more closely together than they are today, he will fail in his job. I am satisfied that he knows his job and that the object he has in view is to bring together the extremes which have been prevalent in human society for 100 years.
Let me put this to hon. Members opposite. If their present position is such that by penal taxation their life is becoming not worth living, surely they can drift back into the artisan class and find a useful job? I have heard it said that before some of them would take on a useful job, they would commit suicide. As to the conditions that exist today, people in our station of life who for generation after generation have never known anything except fear of the future and day in day out have been eating out their hearts, are seeing things quite differently. They will change society whether hon. Members opposite like it or not. That is the fact they have to face. There is only one way it can be done, by bringing together the extremes. If we cannot bring together the extremes in a peaceful way, believe me, there will be other methods used. I am quite satisfied that our Chancellor is seeking the right way—
Before we leave this Resolution, I have one brief request to make to the Chancellor, and that is that between this and the Finance Bill next year, he should give serious consideration to the question of making a differentiation between the taxation on earned and unearned incomes at the higher levels of income as well as at the lowest levels. I appreciate that there are objections to penalising retired people, old people, widows, and so on, who are living on modest incomes derived from fixed-interest securities. It is not fair to penalise them. However, I cannot see why the man who has the industry, the energy and capacity—and on the whole such are exceptional men—to make an income of perhaps £5,000 or £10,000 a year, and save out of his income, as he used to be able to do, should be taxed at precisely the same level as the man who happens to inherit a great fortune. The hon. Member for Oldham (Mr. Fairhurst) said that we are moving into a new society in this country. That is true, but it is not a Socialist society and it is not a Conservative society. It is becoming, inexorably, a managerial society, and that would have happened, is happening, and will happen in the unfolding of events, whatever Government sat on those Benches.
Surely the hon. Gentleman does not think so ill of the working classes as not to realise that a high percentage of the managers of industry at the present time are either themselves working-class men, or of working-class origin. That is how our society has developed. Yet he is consigning what he calls the working classes to manual labour for all time. It takes the Government side of the House to do that.
The hon. Gentleman is mistaken. I am not suggesting at all that the working classes are strictly and solely the labouring classes. Quite a number of the working classes may be found on the opposite benches.
All I am suggesting is that we have gone a long way towards developing a managerial society in this country, and I suggest that many of the managers are working-class people, and will be more and more so as time goes on. I think it is a bad thing for this country that men of exceptional energy and capacity—take Mr. Henry Ford for instance, who has already been mentioned—should be denied the possibility of earning more than perhaps £3,000 or £4,000 a year, because that is what the present position involves. There is no incentive for a man of exceptional ability in this country to attempt to earn more than £3,000 or £4,000 a year. I do not think it runs very contrary to Socialist theory, so far as I am aware, when I say that in our present position, we want to command the full energies of every class in this country and, above all, of the managerial and executive classes and the most able men. I say there is no ethical justification for taxing those people who are making say between £3,000 and £6,000 a year at exactly the same level as the man who happens to have inherited a large fortune.
I think, therefore, that there is a stronger case for differentiating between the taxation on earned and unearned incomes at the higher levels than at the lower levels. I am not disposed to say that the Chancellor should have made very substantial cuts in direct taxation this year because, despite his protestations, despite all the "Aunt Sally's" he set up and knocked down in his Budget speech, this Budget is an approach to what I would call a counter-inflationary tendency in this country and, as such, it is to be commended. However, I ask the right hon. Gentleman to give serious consideration to this possibility of differentiation between taxation on earned and unearned income, because the fact remains that not enough incentive is being given to all classes in this country at the present time to work hard and to produce.
I have listened with interest to the many arguments which have been advanced from the benches opposite on this question of incentive in relation to taxation, and I am amazed at what I regard as a great fallacy, namely, that the rate of taxation which is now proposed by the Chancellor is in direct antagonism to the principle of incentive. The hon. and learned Member for the Combined English Universities (Mr. H. Strauss) went so far as to make a statement that the millionaire created great wealth for the country, and he was assuming that the present rate of taxation would act in such a way as to prevent such a person from continuing to create wealth. As far as I can see it, taxation has little relationship to incentive, because capitalist organisation at the present time is directed largely to the avoidance of taking risks. Industry has become largely monopolistic in character, and its object is not the taking of risks and new development, but rather the avoidance of risk and the creation of monopoly undertakings.
The hon. Member asks what encouragement is being given. I would say that as long as there is a human brain, there will always be encouragements. I do not think that monetary reward is the one and only incentive to encouraging an individual no achieve something of great consequence to his country, and great satisfaction to himself. Some of the greatest men that the country and the world have ever known have not been induced by monetary reward. Some of our greatest inventors have died in poverty, and they did not invent the many things we now enjoy because of monetary reward. Therefore, I think we are quite wrong if we assume that taxation has any great relationship to incentive. The hon. Member for East Aberdeen (Mr. Boothby) referred to Henry Ford, and said there was no opportunity for an individual of exceptional capacity to achieve what Henry Ford achieved. Anyone who imagines, in the world as we know it today and in our present state of capitalist organisation, that any individual has any prospect whatever of achieving what Henry Ford started many generations ago and if anybody is foolish enough to think that he could start from humble origins and build up anything like the undertaking if Henry Ford he is quite mistaken. Quite a number of capitalist organisations already in existence would soon see to it that he was squeezed out of business before he got very far.
Is the hon. Gentleman referring only to the opportunities for brains and enterprise in this country, or outside it? Does he not realise that the argument he is using is a direct incentive to the export of brains and enterprise from this country to others where they will have better opportunities?
I do not think so. There was a great deal of truth in what the hon. Member for Oldham (Mr. Fairhurst) said about changes taking place in this country. I believe we are entering a new system of society in which the money incentive will recede into the background. To argue that people in managerial capacities, especially in public enterprises, are motivated very largely by the level of taxation imposed on them, is quite unsound.
If there is no such thing as monetary incentive, why does the Chancellor of the Exchequer not only give large salaries to members of these new nationalised boards, but lush expenses, motor cars, etc.? Does he not feel that after these large salaries other incentives are necessary?
On the theory of the right hon. Gentleman the Member for Bournemouth (Mr. Bracken), if those emoluments are doubled, automatically the individual would contribute very much more than he is already doing. That theory is absolutely absurd. I believe that hon. Members opposite are living in the days of Queen Victoria. They do not seem to realise that we are marching on to a different type of society. If there are some people in the country who will not contribute to the wealth of the nation unless they can make great wealth, largely out of the labour of other people, and wish to go abroad, they are entitled to go. But there are many other people in this country who are ready, competent and capable of taking their places and carrying on the work and responsibility of the country.
Will the hon. Member answer this point in regard to the entrepreneur who has to provide capital for an enterprise? If he loses his capital, all is lost; but if he succeeds, the greater part of his gain goes to the Chancellor of the Exchequer. The arguments the hon. Gentleman is using do not—apply to the 80 per cent. which go to the Chancellor.
That may be. There are individual cases which hon. Members may be able to advance, but I am dealing with the general principle of incentives in relation to taxation. I think hon. Members opposite have rather overloaded this point. I am not going to say that up to a point no monetary incentive exists, but, there is a limit, and I believe that hon. Members opposite are going far beyond that limit and assuming that unless we can cultivate the millionaire and abolish all taxation, there will be no incentive for individuals to give of their best to the nation. I do not believe that. I believe that my right hon. Friend is right in the standards he is fixing. I do not believe that taxation at the existing level is at all detrimental to any man giving the best of his brain and energies to the welfare of the nation.
First I wish to thank the Chancellor for his gracious reference to me and to say that in the way in which he put it one can hardly disagree with him. "Assuming that the amount of money to be given away were such," was the way he put it. Assuming that, we agree that the ways in which it could be given were desirable. But it is just that assumption that we want to examine. The hon. Member for Acton (Mr. Sparks), since he sees fit to twit us with being out-of-date, should read Peter Drucker's "Big Business," and he would see that he is a generation behind the times in his understanding of the present attitude of business towards monopolies. As to his point about incentives, as hon. Members have said on both sides of the House, people work for all sorts of other things besides money. But, nevertheless, money is an incentive. There remains the question of taxation, and there is such a thing as penal taxation. Hon. Members opposite are always ready to cry out about the deterrent when miners and agricultural workers have to pay Income Tax. They seem to have a belief in the moral superiority of the rich over the poor. I have nothing of the kind. I believe in the equality of man. I believe no one likes paying Income Tax. If there is an hon. Member in this House who does not dislike paying the tax, I would be glad to see him. If money were as unimportant as the hon. Member thinks it would hardly be worth while discussing financial problems at all. The hon. Member for North Battersea (Mr. Jay) gave extremely interesting statistics about the division of the national income. Surely the great question is not how the cake is sliced but how to get a bigger cake to slice.
Yes, and the hon. Member looks forward to the future, but we have to deal with the facts as they are now, and have to remember that this country is neither a Socialist nor a capitalist country, but a half and half country. I recollect that the hon. Member for Rugby (Mr. W. J. Brown) once said that there was something worse than Socialism or capitalism, and that was a condition under which neither Socialism nor capitalism can work. That is the danger of the situation into which we may be drifting today.
There are two propositions I would like to leave with the House. The first is that we have to face the fact that if we have to maintain the present level of expenditure, we must have a penal burden of taxation. That is a matter of the gravest concern, because there is a whole volume of evidence of civilisations being brought to an end by the excessive burden of taxation. I did not find much comfort in the figures which the Chancellor quoted about the relative burdens now and during the war. It is perfectly true that people bear such a burden during a crisis believing it is the price they have to pay for a secure life afterwards. When they are asked to pay in peacetime they say, "What is the point of paying now? For what? When is it going to end?" While it may be bearable during the war, it may be very dangerous, detrimental and destructive of society during peace.
The second proposition is that if we are to have this level of expenditure we have to face the fact that, however the figures are juggled with, taxation is going to be definitely a deterrent to production. That being so, we have to consider which of the different methods of taxation is the least deterrent, and that raises the question of whether we should not reconsider to a large extent the whole traditional attitude to direct and indirect taxation. We have to consider whether the old formulae about division between direct and indirect taxation have not to a very large extent now become irrelevant; whether, under modern circumstances, with the burden of taxation such as it is, and granted that it will have a bad deterrent effect, it will not have a less deterrent effect if a greater proportion is levied indirectly than if a greater proportion is levied directly. I am inclined to think that if we must have this level of taxation at all, we should shift a greater burden of it on to indirect taxation. That might once have been considered a party point but I do not think it is so today. I see the hon. Member for Chesterfield (Mr. Benson) is doing me the courtesy of listening to me. I hope that he will address the House. He made some valuable and interesting observations on these lines in the previous Budget Debate, and I hope that we shall have the benefit of his observations again.
We must face the fact that we are living in an extremely dangerous situation. It is absurd to throw the social services into our teeth, because if our financial system collapses, the social services will be the first thing to "go west." That is the very matter at issue—whether we can preserve the social services. There could be no more naked fraud than an insurance system under which people had to make a contribution at one price level and receive their benefits at another price level. The question is not whether we shall abandon the social services, but whether a financial policy is being pursued in this country at the moment under which the social services will survive.
We have had an interesting discussion which seems to me to have been based on what is usually called orthodox economics. I am one of those who do not accept the orthodox economics of political economy as taught in the various leading schools, even in the London School of Economics. It is taken for granted by hon. Members opposite that the present system of political economy, built up by the business men of the country, through the mercantile system and the capitalist system, is the only one that exists. They have made no allowance, especially the hon. Member for East Aberdeen (Mr. Boothby), in talking about incentives and the relief that should be given to earned income at a higher level, for the fact that we are living in an age of monopoly. This is not an age of capitalism but an age of capitalism plus monopoly based on the private ownership of land. They have never answered the argument—
I am quite agreeable to keep to the limits which have been permitted to other Members. The discussion on this Income Tax Resolution has so far been based on ordinary orthodox economics, which I do not accept. The hon. Member for Devizes (Mr. Hollis) talked of the equality of man, and said he believed in it. I maintain that not only the monetary system but the fact of the existence of a monopoly system means that the Chancellor is asking that money made under the monopoly system, and through the monopoly system, should be handed back by those who are privileged to get the benefit of monopoly.
My party have attempted to do that previously. The monopolistic value of land must be dealt with before land can be taxed on its value. I do not accept the ordinary definition of capital. It is very important, when hon. Gentlemen opposite are talking about the monetary system and the capitalist system, to remember that they really mean a monopolistic system. The hon. Member believes in the equality of man, not under equal conditions but under unequal conditions. I say that the whole system is wrong. The hon. Member says that civilisations have fallen through bad taxation. Which civilisation has fallen through penal taxation?
Neither the French Revolution nor the Roman Empire fell through excessive taxation—[Laughter.] There is always laughter in the House when the truth is being spoken. That is one of the methods adopted by hon. Members opposite when they cannot meet an argument. They say that it is farcical or they ridicule it. This question of political economy is fundamental. I disagree entirely with all the arguments from the other side of the House. In asking for this Resolution the Chancellor is simply trying to get back into the common purse something which has been taken from the common purse through the fact that the present capitalistic system allows the monopolists to get the bulk of the money which the community in this country has produced collectively.
The hon. Member for East Aberdeen talked about the managerial system. Under the capitalist system the bulk of the workers produce the wealth of the country from the land and from capital. The managers may assist. The owners may assist also, but the bulk of the money which is collectively put into the country is produced by the workers of the country. All this holus-bolus of trying to deceive the electors of the country about what the Chancellor is doing because he is trying to move away from the orthodox system, and is trying to do something which will bring benefit to tee workers—
If the hon. Member thinks that managers are so useless, wily does he allow his Government to pay such enormous salaries and expenses in all the monopolies which they themselves have set up?
The hon. Member always adopts the dodge of putting a question based on a false premise. I never said that managers were useless. That is typical of the arguments from the other side of the House. They start with a false premise and try to put one in a difficulty. I never said that managers were useless. I said that they were useful persons like workers, but I emphasise the fact that in spite of the managers and owners, the bulk of the wealth of the country is produced by the workers who work under those managers and owners.
I do not know whether the noble Lord wishes to speak in semi-darkness. I think it would be best to see what effect there will be when the lights are extinguished.
I feel inclined to apply to this Resolution on Income Tax the same tests as I applied yesterday to the Resolution on tobacco. Would large reductions in Income Tax—much larger than those given by the Chancellor—act in an inflationary way, and would they act as an incentive? There seems to be a fairly widespread disposition in the House, with which I am afraid I do not agree, that large reductions in taxation now would actively promote inflation. Now there are two sources from which the Chancellor can draw to meet a given figure of Government expenditure. They are, the sources of taxation and the sources of loans, If taxation is reduced, loans can be increased. That is a self-evident fact. We have seen throughout the war years very sharp changes in the ratio between loan receipts and taxation receipt. I am not opposed to deficit financing even at this time of high employment and economic crisis. In fact, I am pretty sure that if the Chancellor had used that method of definite financing in this Budget and reduced taxation that would have acted as an incentive and helped us to overcome the crisis faster than we shall as things now are.
Perhaps that looks a little odd to hon. Gentlemen who know my views about national savings. My opposition to national savings is not because savings provide money to meet a deficit in the Budget. It is because the interest offered on national savings is poor, because the money is inflated away and because the objects of the savings are party political. The money is inflated away because the aggregate of personal spending by the community at large—everyone's individual expenditure—coupled to the spending by the Government—national expenditure—is greater than national productivity, and not because of deficit financing per se. Reduction in Income Tax and consequential deficit financing is not, in my view, necessarily inflationary
If the Chancellor knocked a shilling off the Income Tax it ought not to be assumed that that shilling would be immediately spent in the shops. In these days it is much more likely to be used to reduce an overdraft, to increase a deposit, to increase the fluidity of the money market, all of which helps the Chancellor with his loan operations. The money comes back to the Chancellor but it is in another form. It comes back to him in another form after effecting an enormous easement in the individual's personal position. It is not inflationary to pipe water from one cistern into another. What is inflationary is the pressure in the cistern. That pressure, surely, is introduced by the very high level of Government expenditure placed directly alongside the aggregate personal expenditure.
Then there is the other test of incentives which has been liberally discussed this afternoon. Hon. Members opposite are in this difficulty about incentives. They seem to think it wrong for persons coming from private industry and persons who are associated with this side of the House to earn large salaries, whereas it appears to them to be quite right that the Prime Minister should have a gross salary representing £105,000 per annum, and that members of the Coal Board and the Air Transport Boards should all have high salaries. They seem to think in the case of these people that high salaries in office are associated with incentive. If they objected to that they would ensure that such salaries were not paid. Further than that, they realise the curbing effect of high taxation upon the salaries of these persons, because they agreed with the decision of the Government to put these people in a separate class where free emoluments are given and the full scale of taxation is not paid.
I believe that a large reduction in taxation ought to have been given in this Budget. It would have had an enormous effect upon incentive. A reduction of is. or 1s. 6d. in Income Tax would act as an incentive, I suggest to hon. Members opposite, in exactly the right place. This afternoon the Chancellor of the Exchequer referred us to the Tables in the Financial Statement. I take the very page he mentioned, page 30, and I look there at the scale of incomes between £350 and the more or less fictitious £100,000 which are those upon which Income Tax is paid. I am not particularly concerned with Surtax. I agree that there should be reduction in Surtax, but I think that the effect of the reduction in Income Tax of 1s. would have been much more wide- spread throughout this whole range of income. We want to increase incentives in the scale below £2,000 a year. It is just as important that the professional man and the small trader, and persons of that quality, earning between £350 and £2,000 should have this reduction in tax, as it is that the higher paid man should receive benefit by way of a Surtax reduction. From the Table it will be seen that a married couple with two children pay no tax at all until £400 a year is earned. After that, of course, taxation is paid on a steadily increasing scale.
For reasons which I gave to the House yesterday, I do not want to reduce taxation on the very low incomes because I do not think that it would act as an incentive. Here is a case where a shilling reduction would tackle exactly that range between the £400 a year scale and the top level. I think that ought to have been done in this Budget. There are £270. million surplus in the Budget to provide the money. I am not so concerned about the surplus. The Chancellor argued that part of that surplus might be said by us to be really and truly below the line. That may be the case. I have already said that I would not object to an unbalanced Budget this year for this purpose. Even if that £270 million was inaccurate, I would still be prepared to finish this year with a deficit. The Chancellor gave the cost of a shilling reduction as £130 million—
I beg pardon. I put the figure down wrongly. That is to be set against £270 million surplus or, if that is not accurate, against some lower figure; but if he had given it and charged that amount of £144 million, I still do not think that his Budget would have been unbalanced, though I should not object if it was for reasons which I have given. I am perfectly certain that a very large incentive would have been given to the people in this range of income, and that would have materially helped us to overcome the economic crisis.
May I, in the first place, say how much I regret the fact that I was not able to be present when the Chancellor made his speech earlier today, but I had to give evidence to a Committee upstairs. I certainly quite agree that it would be better if, instead of our pouring money away down a great many side lanes, the Chancellor had the courage to cut a shilling off the Income Tax. Whatever the noble Lord might think, I would never suspect the Chancellor of not having the courage to go as far as that, but it certainly would take a lot of courage.
We have heard this afternoon a good deal about the higher grades of income. We have had some very astonishing but very interesting speeches about monopolies and that kind of thing. I am not going into that, though I would point out that there is one mistake which has been made in a number of speeches, and that is the idea that the Chancellor has something to give away. The Chancellor has nothing whatever to give away. All that he can do in his Budget is to refrain from taking as much as he is taking at the present time. The idea that the Chancellor can give anything away is absurd.
I want to speak about a section of the community which has not actually been mentioned this afternoon, and which has had very little notice taken of it in this and other Budgets. This is the very large section of the community living on small or comparatively small fixed incomes, and they represent many tens of thousands of people in this country. There are people of that type in almost every constituency, but, undoubtedly, in a constituency such as mine, they are in much more considerable numbers than up the country. There are men and women, some of whom have retired on pension, others of whom have retired on small means, possibly bought by themselves or inherited, but, in any case, living on fixed incomes which they cannot hope, in the ordinary case, to increase at all. These individuals today, I believe, are suffering more seriously than any other section of the community. They had, before the war, their £200 or £300 a year, and they have had piled on their shoulders a considerable weight of taxation. They have seen their income considerably reduced by taxation, but, in the main, they have not grumbled very much, though I have had a few letters from them.
The fact remains that the buying value of their income is far lower than it was before the war, apart from taxation. These are the people who are suffering most today, and, although I could make out a case for incentive on some other lines, I say that these people, taking the country as a whole, have had none of the increases of wages or profits, but are just living on the same income as they had before the war. Whatever the Chancellor may be able to do now—and I doubt if he can do much this year—these people, above all other people in this country, are feeling the burden of taxation most, and they are certainly far from being the least deserving people in the country. Many of them have spent a lifetime in the service of the country, some of them in the Civil Service abroad, and they are now feeling the pinch far more than other people.
May I now say a word on dividends, which seem to be rather in the minds of hon. Gentlemen opposite just now? I have never understood, and my constituents have never understood, why it is that hon. Gentlemen opposite think that dividends which produce income and taxation are wrong. They are always telling us that it is wicked to do this and that, but, actually, there are very few people in this country who do not take up a dividend of some sort and who do not rejoice in it. On one occasion, I remember that I was saying what I wanted to see, and I put this point, both from the Income Tax point of view and the individual point of view: "Give us far larger and far more dividends everywhere. Particularly, I want far larger and far more dividends of the type which comes from capital pure and simple, and is the largest distribution of capital in this country, and that is the dividend from the co-operative society." The more we can get more dividends distributed among the people, the better it will be for them, and that is why I think it is wrong to draw a very strict line between income which comes from capital and income, not always necessarily any better deserved, which comes from other sources.