Orders of the Day — FINANCE (No.2) BILL

Part of the debate – in the House of Commons at 12:00 am on 9 May 1956.

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Photo of Sir Edward Boyle Sir Edward Boyle , Birmingham Handsworth 12:00, 9 May 1956

I cannot go beyond the passage I read, which seems to me to be perfectly clear. My right hon. Friend said: I repeat that our intention is to make reductions amounting to £100 million in the services provided for in the Estimates as published. I think that is perfectly explicit.

My hon. and learned Friend the Member for Northwich (Mr. J. Foster) raised a point on Clause 9. We are looking carefully at the Clause, and I cannot say anything except that we shall consider it carefully between now and Report stage.

The right hon. Member for Huyton devoted some 25 minutes of his 50 minutes to the question of tax avoidance. I must say that I thought that was rather out of proportion, and I thought that his hon. Friend the Member for Sowerby (Mr. Houghton), who knows so much about the subject, was looking a little anxious about what suggestion was coming next. I should like to answer one or two points the right hon. Member made. He raised once again the question of dividend stripping and why we did not introduce legislation before. I have refreshed my memory on the Finance Bill of last autumn. I see that during those debates I answered that question three times, the Financial Secretary answered it twice and the Solicitor-General once, but I am quite happy to answer it once again and say that it was not until after the Act of the financial year 1954–55 that we knew the extent of these tax avoidance devices.

As to tax loss companies, it is genuinely difficult to separate what one might call the rigged cases—and I hope that is a Parliamentary expression—from the continual and bona fide changes in shareholdings which are going on all the time, or bona fide amalgamations which are happening continually. It is extremely difficult to make a hard and fast distinction between them. In the matter of business expenses, the Inland Revenue operates under a strict law of 1948 under which directors or employees earning over £2,000 who receive expenses have to treat them as remuneration subject to deductions for genuine expenses.

The right hon. Gentleman suggested that a definite proportion of the expenses of entertainment should be disallowed. I think that that would be extremely arbitrary and might very well work out extremely unfairly between one individual and another.

There is one more serious matter to which I should like to refer at greater length. A number of speakers in the Budget debate, and also the right hon. Member for Smethwick and the hon. Member for Stechford (Mr. Roy Jenkins) referred to some figures in Mr. Kaldor's book. To be precise, they are on page 227 in a footnote which says that assuming that 105,000 Surtax payers before the war had increased their incomes by the same rate as the rise in the national income, and that in addition those with pre-war incomes of £700 more had had a similar proportionate increase, on that basis there would have been in 1952–53 436,000 Surtax payers paying £536million in Surtax, against an actual figure of 270,000 Surtax payers paying £130 million. That figure of £536 million quoted in Mr. Kaldor's book may quite possibly attract some publicity, and therefore I should like to point, out to the House quite frankly how worthless is that estimate.

Model calculations of this kind are what economists would call extrapolations from previous years, and they are pretty tricky at best. Mr. Kaldor himself made a famous one in the appendix to Lord Beveridge's book, "Full Employment in a Free Society", and I recall from my Oxford days a lecture by the late Sir Hubert Henderson in which he took pleasure in pointing out how every one of the calculations had turned out to be pretty false in post-war years. But in this case Mr. Kaldor has not even done the calculations himself. A certain Mr. P. R. Fiske did them.

It is not true to say that the earned incomes of Surtax payers rose at the same rate as the national income in the period 1938–52, and still less true to say that the unearned incomes of Surtax payers rose at the same rate. In fact, earned incomes of Surtax payers between 1938 and 1952 did not increase by 200 per cent. but by something like 100 per cent. The investment incomes of Surtax payers during the same period probably rose by something more like 40 per cent. In the case of the 100 per cent. one possible piece of evidence is the evidence of the Royal Commission on the Civil Service. These are based on the most careful estimates that I have been able to get.

The other point I should like to make is that not only is this 200 per cent. increase in the earned income of Surtax payers grossly unrealistic, but there are a lot of other factors which render a model calculation of this kind completely worthless. One must remember things like convenants, gifts inter vivos and, above all, one must remember in recent years the very high rates of Estate Duty and, another thing which is often forgotten but which is very relevant, the fact that we did have in 1948 something like a capital levy, the special investment contribution of Sir Stafford Cripps. That is something which people have very largely forgotten about, but it obviously made a very big difference for the purpose of the calculation.

I hope that the figure of £536 million contained in the footnote in this book, which I have read with great interest, will not be taken as authoritative because this is a model calculation based on certain assumptions which are demonstrably untrue.