Clause 1. — ;(Charge of Income Tax for 1955–56 and Surtax Rates for 1954–55.)

Part of Orders of the Day — Finance Bill – in the House of Commons at 12:00 am on 27th April 1955.

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Photo of Mr Roy Jenkins Mr Roy Jenkins , Birmingham Stechford 12:00 am, 27th April 1955

Doubtless all hon. Members of the Committee will wish to join me in congratulating the hon. Gentleman the Member for Stockport, South (Mr. H. Steward) on having surmounted the ordeal of a maiden speech. It is always an ordeal, but it may perhaps have been more so in the case of the hon. Gentleman because the imminence of coming events may have left him with less choice of the occasion on which he should speak than we normally have. I warn him, however, that he is on dangerous ground in making a maiden speech during the Committee stage of the Finance Bill. I was foolish enough to do that myself, and since then I have not been able to disentangle myself from the subject.

It is usual on these occasions to say that we will listen with interest on many future occasions to what the hon. Gentleman has to say, but in view of the highly marginal nature of his seat, it is difficult for me to say that this afternoon. Therefore, I will compromise by saying that if he can find another occasion within the next ten days on which to address the House, we shall be glad to hear him.

The hon. Gentleman, who spoke with great force, clarity and confidence, took the subject somewhat wide, as is the privilege of maiden speakers, but I have no doubt that you, Sir Charles, will be glad to hear that I propose to take it more narrowly. What we are dealing with primarily in this debate on the Question "That the Clause stand part of the Bill" is the standard rate of Income Tax.

The first thing I want to say to the Chancellor and the Committee about the standard rate of Income Tax is that it ought to be abolished. I see the hon. Gentleman the Member for Kidderminster (Mr. Nabarro) looking pleased and surprised. By that I do not necessarily mean any sweeping reductions of direct taxation, but that the term "standard rate" has become a most misleading misnomer.

The "Economist" made some interesting remarks on this subject last week. The term "standard rate" gives the impression that it is the rate of Income Tax which is paid most widely by almost everybody. In fact, very few things could be further from the truth. The standard rate is primarily a rate which applies to company taxation. The standard rate of Income Tax, as such, is paid by nobody who has a wholly earned income, because up to£2,000 a year the taxpayer gets earned income relief, so never pays the 8s. 6d. or 9s. in the£. Above£2,000, when he loses his earned income relief, Surtax is put on top of that. Therefore, somebody who lives on earned income never pays on any slice of his income at the standard rate.

What the standard rate of Income Tax applies to is, first, taxation of companies and, secondly, taxation on unearned income over the range of£600 to£2,000. It is unfortunate that a form of tax which applies so narrowly should have applied to it this term which appears to give it a general significance. Of course one cannot lay this at the door of the Chancellor, because it has long existed in our taxation system. I suggest that there are three distinct components. There is the normal rate of tax upon com- panies, there is the rate of tax upon earned income, and there is the rate of tax upon unearned income. It would be greatly for the clarity of the Committee, and even more of the country, if we could get away from that term and separate these three components, dealing with them separately if necessary.

Now I want to refer to the effects of the cut in the standard rate upon companies. As the Chancellor has told us, and as is clearly the case, and as many people, including the hon. Member for Stockport, South, have mentioned, a substantial part of the remission of taxation involving a cut in the standard rate falls upon companies. I would not say that companies do not play an important part in our national economy, but we need to consider carefully whether a cut in the rate of company taxation, such as is envisaged in this Clause, is likely, in present circumstances, to produce desirable developments from the point of view of the national economy.

We have had a number of statements from the Chancellor and other members of the Government indicating that it is beyond all doubt that at present the cut in the rate of taxation upon companies is bound to be in the national interest. But I ask them to approach this question not simply from the point of view of vehement separation, but from the point of view of trying to argue and consider it a little more closely.

I would suggest to the Chancellor that on past experience during his tenure of office there is very little evidence for saying that a cut in the standard rate of taxation in so far as it affects companies produces the sort of benefit which he wants. What are we primarily concerned about regarding companies at the present time? We are all very much concerned—it is common ground between both sides of the Committee—about the rate of investment.

Suppose we look back over the past three Budgets. We see that in the 1953 Budget, when the Chancellor made a cut, the improvement in the rate of investment was very small. Indeed, if one were to try, admittedly on a rather slender basis of evidence, to establish what happened as a result of the cut in the standard rate so far as company development was concerned, one would say on the evidence that there was practically no effect at all on the rate of investment—an increase, according to the Economic Survey, of about 1 per cent. for the manufacturing industry, and a very much more substantial effect on the distribution of dividends of about 20 per cent.

If we look at the 1954 Budget, when there was no cut in standard rate but when there was the institution of the specific incentive to invest—the investment allowances which we on this side of the Committee were very glad to support—then, so far as can be seen, we began to get some improvement in the rate of investment.

This year we go back to the older weapon of the cut in the standard rate, but no investment allowance. Presumably, the Chancellor hopes to see different results from those which he saw in the past. But I put it to the Chancellor, on the basis of this evidence—which I do not say is conclusive, because it is over far too short a period—that some specific incentive like the investment allowance is far more effective than a cut in the standard rate which is more inclined, on the basis of past evidence, to result in an increase in dividend distribution.