Clause 15. — (Increase of Surtax Rates for 1965–66.)

Orders of the Day — FINANCE (No. 2) BILL – in the House of Commons at 12:00 am on 7th June 1967.

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Question proposed, That the Clause stand part of the Bill.

4.25 p.m.

Mr. Peter Hordem:

From our discussions on rates of Surtax, we come now to discuss the surcharge on Surtax. I think that the Chief Secretary will wish to forget his speech on the rates of Surtax. I am sure that he will not wish it to be read either by those who take our expressed intention of joining the Economic Community seriously, or by any of those young executives who are contemplating their future and wondering whether or not to go to another country. What has been made perfectly clear by that speech is that the days of the brave new world, in which we could look forward to an army of white-coated scientists forging the new technology of socialism, have gone, and that we are right back to the days of the cloth cap and the bottle of H.P. sauce.

This surcharge on Surtax is the most discreditable part of what is a thoroughly turgid Finance Bill. In the two previous Finance Bills in which the Government have been engaged, we have dealt with a maze of complicated legislation. The Chief Secretary has previously referred to the Corporation Tax as being simplicity itself. For once, with regard to this Clause, we can agree with him. This Clause is simplicity itself, for it represents a vicious and retrospective swipe at those who already suffer the highest level of tax of any of the major countries.

It is a capital levy of the most primitive and penal kind. It is as though the Government, having tired of the sophisticated tortures of Corporation Tax, Capital Gains Tax and Selective Employment Tax had decided to revert to the good old-fashioned bludgeon—the kind of weapon the King of Tonga would have used 200 years ago to soak the richest people round him. It is the resort of every bankrupt Government throughout the world and throughout history.

We appreciate that the Chancellor of the Exchequer will claim that this is a special once-for-all measure, part of the desperate measures the Government took to save the £ last July when, it will be recalled, we were supposed to have been blown off course. The trouble is that we are always being blown off course. We are getting a little tired of the Chancellor's nautical expressions. Either he has a "shot in the locker" or he is telling us to hold "steady on course" or he is "flying the flag". He seems to think that he is some kind of Sir Francis Chichester, but do do not see him in that role. We rather regard him as the Flying Dutchman. We do not think that he will ever bring the ship home.

Whether we refer to the crisis of December, 1964, or that of June, 1965, or that of July, 1966, it has always been the high salary earner who has caught it in the neck. With increased Income Tax, the vicious Capital Gains Tax, and now the surcharge on Surtax, it is time to draw the consequences of these actions before the Chancellor of the Exchequer. The claim is that this is a special once-for-all action, but it seems to us, and it certainly seems to the economic commentators, that the Chancellor of the Exchequer is what is known in financial circles as stuck in a gluepot. He has a record borrowing requirement, he knows that unemployment is still rising, and that production is roughly where it was at the end of 1964. We have a picture of a massive increase in Government expenditure which has not been matched by any similar increase in productivity. It looks, therefore, as if by the time we get to the next Budget in April the Chancellor will be met either with a higher borrowing requirement with all its inflationary consequences or with the need for higher taxation. It will be all too likely that the Government will consider that some further action will be necessary and that this surcharge will prove, after all, to be not a once-for-all measure.

4.30 p.m.

The July measures in themselves did nothing whatever to improve the efficiency of the economy. We recall that they were designed to take £500 million out of the economy, of which this surcharge was due to withdraw £25 million. In retrospect, it says little for the Chancellor's claim before the election that he saw no need for a considerable increase in taxation. Even if we accept the need for £500 million, does it make sense economically to take £25 million out by means of this surcharge? Income from the year ending 5th April, 1965, formed the basis of assessment for the year 1965–66 and it is this surcharge which is retrospective to the tax year ending 5th April, 1965. As both the Income Tax and Surtax had already been disposed of, this sum could conceivably only have come from savings. Yet the Prime Minister claimed that demand would be reduced by this sum. One's patience with the Prime Minister's claims as an economist are growing pretty thin.

The surcharge had nothing whatever to do with the economic situation. It was purely a sop designed to placate those millions of people who had trusted the Government at the last election and were now being presented with the bill. This charge is nothing less than a levy upon income which the taxpayer was entitled to regard as fully taxed and for which no doubt he had made all his arrangements. What is the position of someone who had made his arrangements for paying his Income Tax and Surtax for the year 1965–66 and then went abroad and became a non-resident before the July measures? As a non-resident, is he liable for this surcharge? If he is, how is the money to be got? I hope the Chief Secretary will answer that point when he replies to the debate.

What is the position of someone who has ceased to trade since 1965–66 and is now retired? He is liable to this surcharge. What kind of justice is there for someone who retired on a very small pension and has to cough up this surcharge for which he will be liable? Then again, the averaging provisions of Section 238 of last year's Finance Act do not apply to dividend income received in 1965–66, so the liability for Surtax falls on investment income and would in any case be higher than in a normal year.

Of course there is a precedent for a capital levy of this kind. There always is, if one looks back far enough to a Socialist Government. Sir Stafford Cripps introduced what he called the Special Contribution in 1948 in that Socialist Government, but it had very different terms from those we are discussing. He said in his Budget speech: I now propose to make a special once-for-all levy, … that is rich: once for all— I recognise fully that regular taxation of this character would have a marked dis-incen-tive effect on saving, which is certainly not what we want."—[OFFICIAL REPORT, 6th April, 1948; Vol. 449, cc. 71–72.] Even that Government allowed a right of appeal, a right which was fully exercised at the time, but this surcharge allows no such thing. This levy is unique in modern times.

It is difficult to know which is the worst feature of it, whether the fact that it is retrospective, whether that there is no form of appeal whatever, or whether that it is entirely arbitrary in its treatment. I prefer to leave the retrospective element to my hon. Friends who, no doubt, will refer to it in their speeches. It is certainly no surprise that this whole Bill is a study in retrospection as is previous legislation and Finance Bills brought in by this Government. I wish to refer to the arbitrary element because it contributes a threat to the conduct of business in this country, and more especially the Government's ability to handle our economic affairs.

I think both sides of the Committee are agreed about the need for better management. Where we tend to disagree is about the need for incentives. The Chief Secretary may pay lip-service to the idea of incentives, but he certainly believes in taxing them, as was shown by his speech last night. What hon. Members opposite fail to realise is not merely that distances have now become so short as between one country and another— in effect we are only a few hours away, as my hon. Friend the Member for Ormskirk (Sir D. Glover) said last week—but that there is far more communication between firms in one country and another than there used to be. Therefore, the lively managers whom we wish to encourage are very much aware of conditions which exist in other countries.

Photo of Mr Joel Barnett Mr Joel Barnett , Heywood and Royton

The hon. Member obviously prepared his speech without reading all the facts and figures which were given by my right hon. Friend last night or in previous debates. I do not expect him to read my speech on the Second Reading of the Finance Bill, but he should look up some of these facts. He should look at some of the objective surveys on the whole question of incentives and the opportunities tax-wise available to our bright young executives. If he looks, for example, to Australia or Europe he will find that total tax levels are in many cases higher there than here.

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham

I do not know which speech of the hon. Member I should look at, but I shall certainly refresh my memory. I was referring to the difference in experience in this country and in the United States. There is no question that the figures for Surtax at a level of earnings anything like the £10,000 level are greatly in favour of the United States than of this country.

These people observe their counterparts. They observe not only that they are getting higher rewards before tax, which is a common phenomenon in both the United States and European countries, but that when Surtax comes into operation the difference becomes even more marked. Now, by means of this surcharge, they realise they have something else to deal with. This is a form of what can only be described as a bovine prejudice against them shown by this Government. This has been shown from time to time. First they had the increase in Income Tax to contend with, then the new form of Capital Gains Tax, then restrictions on expense accounts, then the taxing of stock options, and now this surcharge.

They ask why the Government should not do it again. They know that it has nothing whatever to do with the economic situation. It did nothing to help that situation. The Chief Secretary will no doubt say that it was done in an emergency, but what confidence have these people that there will not be other emergencies? They know for certain that at the next emergency they will be picked out for special attention and special treatment.

A great deal was said in the debate on the previous Clause about the brain drain. I have recently returned from the United States where I was looking at research centres throughout the whole of that Continent. I came into contact with a large number of business people. I could not but be aware of the number of Englishmen who have migrated to that country.

There was something in what the hon. Member for Heywood and Royton (Mr. Barnett) said. I do not believe the reasons for the brain drain is necessarily comparability of existing salaries. What is in their minds are future prospects. Prospects in the next five or 10 years matter to young emigrants going to the United States and the prospects there are greater for many reasons than they are in this country. Although many people take advantage of what they consider to be better conditions in the United States, the great majority stay, either because they like to be here or for family reasons. They do so on one assumption, namely, that the high taxation and other material disadvantages are known and certain, and that they know what the bill is that they have to pay. By this surcharge this basic assumption is completely destroyed, as also is their confidence in the Government's word.

Therefore, the cost of this proposal is nothing like the £25 million that it is supposed to be. It is to be measured in the disillusionment and antagonism of all the efficient and ambitious executives in business and industry. And it will be the country as well as the Government that will have to pay the price.

Photo of Mr John Lee Mr John Lee , Reading

Last night one hon. Member opposite deplored the absence of the Left from these debates. I hope for a few minutes to remedy that deficiency, if I may be so bold as to claim to be a representative of the Left.

I want to make one or two criticisms of the Clause. My criticisms are of a rather different kind from those made by the hon. Member for Horsham (Mr. Hordern). My complaints, which I hope to couch in reasonable terms, is that this 10 per cent. increase, once and for all, is not enough and will not last long enough. The hon. Gentleman referred to Sir Stafford Cripps's capital levy of 1948 and to the fact that that was to be once and for all. Ever since then I have been deploring the fact that Sir Stafford Cripps used such a phrase, partly because it was an absurdity constitutionally and partly—this is the more important point—because it has been an embarrassment to Labour Chancellors of the Exchequer ever since who would like to have repeated the exercise but who, perhaps, have felt inhibited from doing so.

My purpose is to chide my right hon. Friend the Chancellor for giving a promise in this year's Budget that this surcharge would not be repeated. I do this for several reasons. The first and most important reason for protesting about this is simply that, as this surcharge was introduced as one of many measures which were called for in an emergency last July, it should not have been removed, at least not until the other measures went as well. I say that the discontinuance of the surcharge is wrong simply on grounds of equity. Most of the other measures which were introduced last July were inevitably detrimental to lower-paid workers, in that they were designed to take a lot of money out of their pockets. Those measures have also had the effect of increasing the amount of unemployment among lower-paid workers. Were it not for the fact that we have had an exceptionally mild winter, there is no doubt but that the impact of the measures of last July would have been much more severe than it has been.

Photo of Mr Jock Bruce-Gardyne Mr Jock Bruce-Gardyne , South Angus

Would not the hon. Gentleman agree that all past experience shows that the effects of the measures of last July on unemployment will be shown much more violently next spring than they were last spring?

Photo of Mr John Lee Mr John Lee , Reading

I readily concede that it is possible that what happened in the cycle of events in 1961–63 could well be repeated. The worst effects of the measures of July, 1961, were not experienced until the winter of 1962–63. In other words, the worst may be to come. This only reinforces my case. If it was right to take this measure as a sop to placate the rest of the community who were hit much more severely by the measures of last July—the word "sop" is how the hon. Gentleman describes it; I would prefer to say, a tribute of impudence to dignity, that it was an attempt at equity and justice towards them—as long as there is a danger of people suffering from hardship on a large scale from the measures of last July, this surcharge should not be withdrawn.

4.45 p.m.

In a recent speech my right hon. Friend the Chancellor of the Exchequer said that the credit squeeze was being lifted and that we were in for rather better times. Unfortunately, this prophecy seems to have been falsified by the publication of the new Prices and Incomes Bill. I do not know what attitude hon. Members opposite will take to the Prices and Incomes Bill when it comes before the House for its Second Reading. I give advance notice that I have not the slightest intention of voting for it at any stage. I say this because I believe that it is an irrelevant and unfair measure, given the great maldistribution of wealth that exists.

It is, therefore, all the more deplorable that, at a time when we are extending statutory controls over wages, the comparable measures taken at the expense of Surtax payers should not be extended to cover the same period. Although the date of collection for the Surtax surcharge is September of this year, it relates back to the previous financial year. The period covered is a mere 12 months. The period covered by all the successive prices and incomes legislation is a great deal longer than that.

The second reason why I think that this surcharge should have been repeated is that, however quickly the crisis in the Middle East is settled, it is bound to have a damaging effect on our economy. I do not believe that we are likely to emerge from the impasse in the Middle East—I do not believe that the oil supplies, which are to be interrupted—

The Deputy Chairman:

Order. The hon. Gentleman is drifting away from the Question, "That the Clause stand part of the Bill", which is what we are discussing.

Photo of Mr John Lee Mr John Lee , Reading

I will try to come back to that, Mr. Irving. All that I wished to say was that the economic difficulties which we are likely to be in as a result of the crisis in the Middle East may well make another bout of emergency meassures necessary. I hope that they will not be of the same kind as those of last July. If they are, it may well mean the re-introduction of the surcharge. If there is any truth in the contention by hon. Members opposite that this sort of thing is a disincentive to enterprising businessmen, it will have a greater disincentive and demoralising effect if, the surcharge having been taken away, it is necessary to reintroduce it.

My third reason for deploring the fact that this measure is for only a one-year period is contained in the arguments of the hon. Lady the Member for Finchley (Mrs. Thatcher), who said last night that the crucial point for disincentives in income was about £1,500. That is below the level we are concerned with in Surtax. The hon. Lady is probably right. If we could reduce taxation in the lower levels, from £1,500 downwards, we should do far more to keep people of considerable professional ability in this country. It is not Surtax which is the real disincentive. In the main, people make their choice as to where they will work when they take on a job for the first time. If they decide to stay in this country when they first take a job, they are likely to remain. Of course, if they go abroad, they are lost to us often for good.

One of the reasons why we are losing people in the medical profession, for example, is that starting salaries are too low. It has nothing to do with the Surtax. Surtax does not apply and cannot apply to doctors starting out, and the same applies to the entrance grades of the scientific Civil Service and many comparable groups. All the arguments which we heard last night, the harrowing tales about hardship to the Surtax payer, have no bearing on the situation whatever.

My final reason for saying that this measure does not go far enough is this. Whatever may be said about comparable rates of taxation in this country, on the Continent of Europe or in the United States—there has been a welter of contradictory information on the subject— it remains true that, however high the nominal rates may have seemed, the impact on the redistribution of wealth in this country has been remarkably small. One has only to look at the distribution of capital wealth as it was before the First World War and as it is now. In spite of two world wars, in spite of very high nominal rates of death duties and quite high Income Tax and Surtax rates over much of that period, the great bulk of privately owned wealth is still concentrated in a few hands.

More than that, the distribution of incomes shows that there has been a remarkable slowing down of redistribution of wealth in Britain. It is broadly true that, during the war and the period up to 1957, taxation had the effect of causing a redistribution of wealth in favour of the poorest sections of the community. This has not been so apparent since 1957. The people at the top, who undoubtedly suffered a great deal from the tax levels which applied under the post-war Labour Government and the first years of the Conservative Government, have seen a slowing down, they have been respited, one might say, from further redistribution. A parallel process has been seen at the bottom end of the scale as well. The bottom 30 per cent. of income recipients have had, substantially, no improvement in the period since 1957.

This means that my right hon. Friends have a good deal of backlog to make up. They have to make up for the fact that tax changes in the last few years of the Conservative Government were, on the whole, retrograde. One of the ways in which they can make up for that would be by being tough with the Surtax payers. I am very glad that this measure was introduced last July. It was not nearly enough by way of a sop to those of us who, in any case, felt that some of the measures of last July were, on any assessment, grossly unfair, but at least it was something.

Last night, my right hon. Friend the Chief Secretary made a good speech in dealing with the cant and humbug we had been having during the Institute of Directors benefit match played on the benches opposite in our discussions on Clause 14. I should have been a little more severe, but I think that his speech last night showed that, perhaps, his heart is in the right place. I only hope that, by the time the next Budget comes, we shall have a really good cracking capital levy which will make high Surtax levels unnecessary. In the meantime, perhaps my right hon. Friends will reconsider their decision that this shall be only 10 per cent. for one year.

Photo of Mr Jock Bruce-Gardyne Mr Jock Bruce-Gardyne , South Angus

First, I apologise to my hon. Friend the Member for Horsham (Mr. Hordern) for not being here to hear the opening passages of his speech. I hope that anything I say will not cover the same ground.

I do not know what effect the hon. Member for Reading (Mr. John Lee) had on his right hon. Friend the Chief Secretary, but he alarmed me. I was not worried so much by the nonsense which he talked at the end—I am not afraid that the Chief Secretary or his right hon. Friends will follow that sort of advice when framing their next Budget—but what frightened me was the hon. Gentleman's reminder that the ominous month of July is fast approaching. He seemed to forecast that we were in for the usual annual July package. I hope that he is wrong, but it is only fair to remind the Committee that this is a tradition which the present Government have established.

I interrupted the hon. Gentleman to point out that, on past performance, the likelihood was that the peak of unemployment as a result of the measures of last July would be reached next spring rather than this spring. The hon. Gentleman drew the conclusion that the proposal we are now discussing did not go far enough and should be extended so that everyone shared in the misery created by his Front Bench when it reached its height next spring. The conclusion I draw is quite different. In my view, the last thing we are likely to want as the peak of unemployment approaches is a further effort to depress internal demand. In other words, this proposal, apart from anything else, is a piece of utter economic nonsense.

Photo of Mr John Lee Mr John Lee , Reading

I take it from his last remark that the hon. Gentleman disagrees with his hon. Friend the Member for Horsham (Mr. Hordern) when he says that this levy comes out of savings and not out of income and, therefore, is not a depressant on demand.

Photo of Mr Jock Bruce-Gardyne Mr Jock Bruce-Gardyne , South Angus

I am sure, that to some extent, it comes out of savings, but I shall deal with the impact of it in detail a little later. In some respects, it will definitely have a depressant effect on demand, and I shall cite examples to show that.

Photo of Mr Joel Barnett Mr Joel Barnett , Heywood and Royton

When dealing with that point, perhaps the hon. Gentleman will deal also with the point his hon. Friend made when he said that this was really a capital levy.

Mr. Bruec-Gardyne:

If the hon. Gentleman will allow me to make my speech, I shall cover that ground as I proceed.

It is worth looking back to the origin of this proposal in the famous July putsch last year, when the Prime Minister told us that all his hopes had collapsed. He explained the purposes behind the package he was proposing, and, among other things, he said: Action is needed equally to deal with the problem of internal demand, public and private, and to redeploy resources, both manpower and investment, according to national priorities, and check inflation".—[OFFICIAL REPORT, 20th July, 1966; Vol. 732, c. 628.] Significantly, the right hon Gentleman did not explain precisely where the 10 per cent. increase in Surtax fitted into this pattern. He would have been hard put to do so, but I suppose that one can make an assumption about what the Government had in mind. I do not think that this in the least contradicts the argument advanced by my hon. Friend the Member for Horsham. The package was put together in great haste. It certainly did not make much sense. The Government assumed—one can only take this from reading the Prime Minister's words—that the 10 per cent, increase in Surtax in the autumn of 1967 would have an effect on internal demand in the autumn of 1966, when they were wishing to operate with depressant effect on demand. But can that have been right? I should have thought that it was obvious to the meanest intelligence that this was absolute nonsense. It was presumably the need to depress and reduce the level of internal demand that was the excuse the Government gave for the proposal.

5.0 p.m.

My hon. Friend the Member for Horsham said a great deal, with which I totally agree, about the effect of the proposal on the sort of people who are figuring in the brain drain, those we can least afford to lose. That is one of the most important objections to the proposals. I want to draw attention to a case that has come to my attention which indicates how this sort of proposal impinges on another sector of the community, though I do not suggest that it is a sector which may be contemplating emigration, or that it will contribute directly to our economic or industrial growth.

I am thinking of the case of an elderly lady constituent of mine, a widow of 70. She enjoys an earned income of about £400 a year, from her State pension and an officer's widow's pension, and also has an unearned income of about £3,000 a year from her own and her late husband's savings. In 1966, this unearned income was inflated by about £150 as a result of the bunching of dividends before the 1966 Finance Act. This year, that income will be about £250 lower. It will not be merely £250 less than last year, but £250 less than she has been accustomed to receive from her savings in previous years, because of the arbitrary effect of bunching, the effect of the squeeze and determined Government discrimination against distributions, and the effect this has had on the dividends from her savings.

Hon. Members opposite will, of course, argue that a lady with an unearned income of £3,000 a year probably falls in the parasite class. [Interruption.] I assure the hon. Member for Heywood and Roy-ton (Mr. Barnett) that I would not include him in the group of those who react in that way.

Photo of Mr Joel Barnett Mr Joel Barnett , Heywood and Royton

I simply said that neither is she on the poverty line.

Photo of Mr Jock Bruce-Gardyne Mr Jock Bruce-Gardyne , South Angus

I would not suggest for one moment that she is on the poverty line. That is not my argument. My argument is that while a stagnation in one's earnings involves hardship, a loss of earning power inevitably involves greater hardship, and when one is living on a fixed income, largely from one'? savings, a sharp drop in income in any one year may face one with real difficulty in trying to adjust one's expenditure to it.

This lady has a controlled tenant in her house, who pays the princely rent of £10 a year. While she was away the tenant, through carelessness, allowed severe damage to occur to the house, in which the lady also lives, and she now faces substantial repair bills. Her expenditures have thus risen sharply in a year in which her income has already fallen. On top of this, in September she must meet the surcharge under the clause, which I believe—the Chief Secretary will correct me if I am wrong—will amount to about £12 10s. for her.

I do not suggest that that will have an overwhelming impact for a lady in this position and that it will completely submerge her. But it is another impost on her at a time when her income has already been sharply reduced, and when the expenditures she faces have already sharply risen. She claims that one effect—she may be exaggerating—is that she will be unable to undertake a visit which she has been projecting for a long time to her grandson in Ireland, who she has never seen. Clearly, the sum of £12 10s. was not the overriding consideration, but she claims that it was one consideration.

What I find inexcusable about the Clause is that this sort of sacrifice is imposed. The Chief Secretary sniggers. Of course, £12 10s. to somebody in receipt of his salary as Chief Secretary is an insignificant matter, but if he was living on a fixed income which had declined while his expenditures had risen sharply he might look at it in a rather different light.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

I wanted to intervene merely to say that I was not sniggering. I shall deal with the arguments later.

Photo of Mr Jock Bruce-Gardyne Mr Jock Bruce-Gardyne , South Angus

I am glad to hear that the Chief Secretary was not sniggering. That was certainly the impression I got.

One of the most objectionable aspects of the Clause is that it is complete nonsense to think that withdrawing the sum of £12 10s. from this lady in the autumn of 1967 has anything to do with curing the economic problems of 1966, when the impost was imposed. I do not suggest that the Chief Secretary or even the Chancellor should be blamed for the nasty, vicious, little side-swipe contained in the Clause. It was clearly the product of the imagination of the Prime Minister. It has all the hallmarks of his personality upon it. But I hope that we do not dismiss too lightly the sort of impact which this and other measures can have on elderly retired people who are dependent on the income from savings which they have accumulated over the years, and who now find that that income has substantially dropped as a result of Government measures.

One last point about the proposal is worth considering, apart from the arguments so ably deployed by my hon. Friend the Member for Horsham. I wonder whether there may be another side effect of the proposal which is calculated to damage the efficiency of industry. Precisely because there are so many cases like that I mentioned, and because the level at which Surtax begins on unearned income is so much lower than the Surtax level on earned income, a proposal like this actively discourages—and was perhaps intended to discourage—distributions by companies and was intended further to divorce shareholders from the companies they own.

No doubt, in so far as this proposal was not just thrown in as a side swipe in the rather curious package with which we were presented last July, and in so far as it discriminates against distributed profits and helps to divorce the shareholder from the company he owns, it follows the pattern of a good deal of Government legislation.

The shareholders in a company are the one element in it exclusively concerned with its profitability and hence are most directly concerned with its efficiency. In so far as these proposals further divorce the shareholder from the company he owns, and further discriminates against distributed profits, it may add a further marginal effect to the rest that the Government have done to discourage economic efficiency in industry and the channelling of funds to industries and companies where they can be most efficiently and profitably used.

If we have another series of July measures this year—I hope and believe that we shall not, but I am sure that if we do not we shall have them next year under this Government—one of the reasons for them will be precisely that the Government have been introducing legislation of the type represented by the Clause.

Photo of Mr Robert Sheldon Mr Robert Sheldon , Ashton-under-Lyne

The hon. Member for South Angus (Mr. Bruce-Gardyne) referred—and undoubtedly we shall still hear from time to time references—to the brain drain and the increase to be expected in it because of an increased rate of taxation. I thought that this issue had been settled once and for all by my right hon. Friend the Chief Secretary of the Treasury last night. He dealt with it so adequately then that anyone who was not convinced was either not present, cannot or does not read or has his ears stuffed. In view of the rebuttal he delivered last night, arguments such as those put by the hon. Gentleman and his colleagues today carry little weight with us.

The surcharge on Surtax came about as a result of the measures of 20th July. The hon. Member for Horsham (Mr. Hordern) said that it was always the high earner who caught it in the neck. That is a surprising statement, even from him. My hon. Friend the Member for Reading (Mr. John Lee) pointed out that the effect of the wage freeze upon the lower-paid workers in particular but certainly on all workers was most severe. They did not have the opportunities for avoiding some of the results of the July measures as certain, though not all, Surtax payers had.

When we come to examine the impact of the surcharge, we see surprising signs of how it has worked. I shall quote the standard cases given in the Annual Report of the Commissioners of Inland Revenue. First, there is the married man with three children, two under 11 and the third between 11 and 16, and with an income of £2,500. The increase due to the surcharge in his case amounts to £5, or 0·2 per cent. If the family income is £5,000, the increase is 1 per cent.; if the income is £10,000, the increase is just over 2 per cent.; if the income is £15,000, the increase is a little under 3 per cent.

When we think of the increases that were forgone by the industrial workers and the great difficulty that they have had, we see that, in fact, the burden has been placed on them and not on the Surtax payers. It may well be that my right hon. Friend the Chancellor of the Exchequer could have been more adventurous and increased the surcharge. That he did not do so is a sign of restraint which should be applauded by hon. Members opposite and not condemned.

5.15 p.m.

Photo of Mr John Temple Mr John Temple , City of Chester

I apologise for not having been here for the first part of the debate, but I enjoyed the whole of the debate on Surtax yesterday and spoke of the disincentive of high rates of marginal taxation in the debate on the Second Reading.

The provisions in the July measures saw a significant happening. Up to then, it was thought that the Prime Minister was a planner. He was still held in a certain amount of awe in certain sectors, but at that moment he made a distinct and significant change from a planner into being a pragmatist. It was a significant change of tactics on his part. Certainly, no one could say that a retrospective increase of 10 per cent. in Surtax was a matter of planning. Of course it was not. It was not a matter of monetary pressure. It was nothing of that nature. It was purely a political swipe at a very small sector of the community to whom succeeding Chancellors ought to be incredibly grateful because they are contributors to the Revenue on a large scale.

I say that at that stage the Prime Minister became a pragmatist because he had always said that in economic planning what he wanted to bring about was the maximum amount of investment in the private sector. But it is just these Surtax payers who invest heavily in the private sector. If the Prime Minister really wanted to do serious damage to investment in the private sector, none could be worse than an increase of 10 per cent. on Surtax in this one year. It obviously means to Surtax payers that it must be expected that, under a Labour Government, increases of taxation of this nature may well take place just because there is a crisis.

The hon. Member for Reading (Mr. John Lee) called for a capital gains tax of a severe nature. This is another swipe at the capitalist. The Socialists are very unwise indeed to levy these severe taxes on capitalists within our society because it is upon capitalists in our society that consistent growth of the economy depends.

Photo of Mr John Lee Mr John Lee , Reading

I said a capital levy, not a capital gain. It is a most important difference.

Photo of Mr John Temple Mr John Temple , City of Chester

I appreciate that, but my remarks apply just as much to the case of a capital levy—indeed, more so. The suggestion would be absolutely disastrous. Throughout the world today, whether in capitalist or in Socialist countries, there is great lack of capital. Many people have referred to the capital hunger of the world. But it is only the persons of considerable wealth who really can invest in a substantial way and bring about a vast increase in the output of any mixed economy such as the Socialist Party claims to sustain in Britain.

By this Clause, and in failure last night to accept our proposals for diminution of the general Surtax level, the Socialists have unfortunately once again clearly demonstrated their antipathy towards capital, and since capital is something that I believe will bring about growth in our country I do not believe that Socialism and growth can ever be synonymous.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

I start with an apology to the Committee. I am sure that hon. Members will agree that, on most occasions, whatever my other failings, I try to provide information asked for by hon. Members. On this occasion, due to my lack of foresight, I am totally unprovided with any details of any of the taxes in Tonga 200 years ago. I am sorry. The hon. Gentleman is right and I apologise, but that is the only part of his speech which I am unable to answer. The rest I will be glad to answer in so far as it was not answered by my hon. Friends, to each and every one of whom I am grateful for his constructive, interesting and relevant speech. In so far as it was not answered I should say that it was destroyed by his hon. Friend the Member for South Angus (Mr. Bruce-Gardyne) who, not having heard what the hon. Gentleman said, gave an entirely different point of view and neutralised most of what the hon. Gentleman said.

I will be only too glad to reply to anything that is left. We are covering ground which has previously been covered, so I will only refer to the arguments rather than go into them at length.

The general reason for this was made clear by the Prime Minister. He made it clear that it was for one year, and I suggest that is the end of the argument. It was expressed to be a one year addition, and therefore for one year only it must be. My right hon. Friend put it in the context of the general contribution that most Surtax payers would wish to make in the general circumstances prevailing at the time. The comments which have been made by the hon. Member for South Angus can in no sense be representative of the average Surtax payer, who would not suffer to the same extent as the less well-to-do section of the community, the average wage earner. I feel sure that the average Surtax payers would not object to this modest contribution in order to demonstrate that they share in the responsibilities in a reasonable and fair way.

Photo of Mr Jock Bruce-Gardyne Mr Jock Bruce-Gardyne , South Angus

Surely the point is that the Prime Minister was referring to the circumstances of the time. The circumstances of the late summer of 1966 were totally different from the circumstances of the time when this impost will have to be paid.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

The circumstances were relevant at the time. There are all sorts of circumstances—economic, political and psychological—and every measure announced by the Prime Minister was relevant in all these contexts. The main claim is that this is an excessive burden which falls on people retrospectively when they have disposed of their income and have no knowledge of what the impost is likely to be.

I can quantify the degree of excessive-ness by giving a simple example of a married man with no children, earning £6,000 a year or £120 a week—not wholly impoverished. The rate of additional Surtax he is called upon to bear by this impost, which has been criticised so strongly by the hon. Member for South Angus, is a total of £8 7s. ld. over the whole year. I do not regard that as a very high impost on gross earnings of £6,000 a year. I am not talking about net figures; I am talking about the additional impost of 10 per cent. Some of us realise what we are talking about if others do not.

Photo of Sir John Hall Sir John Hall , Wycombe

Do I understand that this is roughly £100 for the year out of a net income which is considerably less than the £6,000 which the right hon. Gentleman is talking about?

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

I have tried to make it clear. The additional Surtax of 10 per cent. payable under the Clause amounts over the whole year to £8 7s. 1d.

Photo of Sir John Hall Sir John Hall , Wycombe

Then I am right in my calculation. To get an assessment we must know what the net income is.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

The net income is decreased by £8 7s. Id. over the whole year out of a gross income of £6,000. The total additional Surtax payable over the whole years is £8 7s. 1d., and people earning £6,000 a year would not be likely to feel that this is wholly intolerable.

The more fundamental principles of the weight of taxation, on which this is an added burden, I will deal with shortly. It is only on earnings over £15,000 a year, or £300 a week, that the effective rate of taxation on an average individual, married with two children, exceeds 10s. in the £. It is only on earnings above £15,000 a year that our effective rates of taxation broadly become more burdensome than in other countries. The Chancellor yesterday gave figures to show that in terms of direct taxation the share of G.N.P.—the figures are in HANSARD but I quote them from memory—is about 18 per cent. in this country whereas the average for the Six is 22 per cent. The burden of taxation is higher in each country of the Six. Ours was the lowest—18 per cent. compared with 22 per cent. The complaint that this is wholly opposed to going into Europe does not rest on any foundation.

We need not discuss the brain drain. I am delighted to see the hon. Member for Ormskirk (Sir D. Glover), who made an effective speech last night demonstrating that it was because of the high level of taxation that there had been this enormous brain drain to Australia. I think he said that ¾ million people had gone to Australia recently. Unfortunately, he had not informed himself of the figures. I quoted them last night to show that at each level of taxation the rate in Australia was higher, considerably higher in many cases. I gave the figures from £900 a year up to about £15,000 a year. We need not go into that again.

The final argument is that this is retrospective. Let me refresh hon. Members' memories as to what happens with Surtax. It is not until the Finance Bill of the year following the basic year of assessment that the rate is announced. The relevant rate which has now been increased by 10 per cent. was announced last year in the course of the Finance Bill, but before this rate was lawful and, therefore, before it was known as the final lawful rate and long before anybody had to consider paying it, it was increased by 10 per cent. Everybody knew it was increased by 10 per cent., because the Prime Minister said so. It is absolutely nonsense to say that there is any element of retrospection in this. It follows the normal procedure. All that one can say is that the figure that was first announced was increased by 10 per cent. before it became effective. The answer to the hon. Gentleman's question about a nonresident or, indeed, anybody else, is that everybody knew before the Finance Bill became law what the rate of Surtax would be. It is because it would be inconvenient to go over the whole procedure again at that point of time that it has been left to this occasion.

I hope it will be realised that the Clause is wholly justified. The tax is not an excessive impost; the rate of taxation is not high. We are one of the less heavily taxed countries. There is no bar in this to going into Europe. The European taxes with which we are concerned are indirect taxes. I hope that the Committee will be good enough to give us this Clause.

5.30 p.m.

Photo of Mr Iain Macleod Mr Iain Macleod , Enfield West

I feel that we ought to divide on this issue shortly, because we have a long way to go. The Chief Secretary might not have gathered from our reception of his speech last night that we were extremely grateful to him for it. A number of quotations from it will appear in our Campaign Guide at the next General Election. In spite of my preoccupations this morning, I have taken steps to see that that is so.

Some of the right hon. Gentleman's hon. Friends seem hypnotised by the Chief Secretary's ability to select countries to suit his argument. We know the Chief Secretary too well. His argument on Second Reading was destroyed yesterday in the selection of countries for comparison and in the argument about the brain drain he has looked all over the world until he has come up with one country, Australia.

Goodness knows how many different reasons there are why people go to Australia. One important reason is that there is not a Socialist Government there. I do not have the figures before me, and I speak entirely from memory, but I am fairly certain that even over Australia the Chief Secretary has done it again and has stopped quoting the Australian figures exactly at the moment when it suited him. Am I not right in thinking that the top rate of taxation in Australia is about 70 per cent? The right hon. Gentleman's one country in the world runs out on him exactly at the moment, of course, when he brings that part of his argument to an end.

We all use comparisons selectively. I do it myself. We all pick the statistics which suit our side of the argument. That is a tradition of debate in the House of Commons.

Photo of Mr Iain Macleod Mr Iain Macleod , Enfield West

I hear a barrister cheering me, but it is also a tradition of the law courts, and it is not a bad tradition at that. But the hon. Member for Reading (Mr. John Lee) must not be so naive as to believe that because he hears the Chief Secretary say something about Australia, that is that. The right hon. Gentleman stopped using the figures for Australia beyond the point where they suited his argument.

We all know why this provision was included in the measures of 20th July last year. They were the most punitive measures ever taken by a Government in this country in peacetime. The Socialists, as they always do, put in one piece of malice which they could be certain their back benchers would cheer. We on this side of the Committee have seen this happen half a dozen times. Every time we try to anticipate what a Socialist Government will do in a Budget, or whatever it might be, we always ask the same question: what will be the little piece of vindictiveness and malice?

There is no doubt—and this is what we shall vote on—about its being absolutely blindingly irrelevant to the problems of the country, which were serious enough in July last year. It was put in purely as a sop to people like the hon. Member for Reading. I am not sneering at his point of view, which I understand, and which is that the Clause does not go far enough, but he should recognise that it is a sop to him and has no relevance whatever to the nation's economic situation. That is why we wish to register our opposition to it.

Question put, That the Clause stand part of the Bill: —

The Committee divided: Ayes 239, Noes 149.

Division No. 348.]AYES[5.35 p.m.
Abse, LeoFitch, Alan (Wigan)McNamara, J. Kevin
Allaun, Frank (Salford, E.)Fletcher, Raymond (Ilkeston)MacPherson, Malcolm
Alldritt, WalterFletcher, Ted (Darlington)Mllalieu,J.P.W.(Huddersfield,E.)
Allen, ScholefieldFloud, BernardManuel, Archie
Anderson, DonaldFoley, MauriceMapp, Charles
Archer, PeterFoot, Sir Dingle (Ipswich)Marsh, Rt. Hn. Richard
Armstrong, ErnestFord, BenMason, Roy
Atkins, Ronald (Preston, N.)Forrester, JohnMayhew, Christopher
Atkinson, Norman (Tottenham)Fowler, GerryMendelson, J. J.
Bacon, Rt. Hn. AliceFraser, John (Norwood)Millan, Bruce
Bagier, Gordon A. T.Freeson, ReginaldMiller, Dr. M. S.
Barnett, JoelGalpern, Sir MyerMilne, Edward (Blyth)
Baxter, WilliamGardner, TonyMitchell, R. c. (S'th'pton, Test)
Beaney, AlanGarrett, W. E.Molloy, William
Bellenger, Rt. Hn. F. J.Ginsburg, DavidMorgan, Elystan (Cardiganshire)
Bence, CyrilGordon Walker, Rt. Hn. P. C.Morris, Alfred (Wythenshawe)
Benn, Rt. Hn. Anthony WedgwoodGourlay, HarryMorris, Charles R. (Openshaw)
Bessell, PeterGray, Dr. Hugh (Yarmouth)Morris, John (Aberavon)
Binns, JohnGreenwood, Rt. Hn. AnthonyMoyle, Roland
Blackburn, F.Grey, Charles (Durham)Newens, Stan
Booth, AlbertGriffiths, David (Rother Valley)Noel-Baker, Francis (Swindon)
Bowden, Rt. Hn. HerbertGriffiths, Rt. Hn. James (Lianelly)Noel-Baker, Rt,Hn.Philip(Derby,S.)
Braddock, Mrs. E. M.Grimond, Rt. Hn. J.Ogden, Eric
Bradley, TomHamilton, James (Bothwell)O'Malley, Brian
Bray, Dr. JeremyHamilton, William (Fife, W.)Oram, Albert E.
Brooks, EdwinHamling, WilliamOrme, Stanley
Broughton, Dr. A. D. D.Hannan, WilliamOwen, Will (Morpeth)
Brown, Rt. Hn. George (Belper)Harper, JosephPadley, Walter
Brown, Hugh D. (G'gow, Provan)Harrison, Walter (Wakefield)Page, Derek (King's Lynn)
Buchan, NormanHart, Mrs. JudithPaget, R. T.
Buchanan, Richard (G'gow, Sp'burnHaseldine, NormanPannell, Rt. Hn. Charles
Butler, Herbert (Hackney, C.)Hazel1!, BertPardoe, John
Cant, R. B.Heifer, Eric S.Park, Trevor
Carmichael, NeilHenig, StanleyPavitt, Laurence
Carter-Jones, LewisHerbison, Rt. Hn. MargaretPearson, Arthur (Pontypridd)
Castle, Rt. Hn. BarbaraHooley, FrankPeart, Rt. Hn. Fred
Chapman, DonaldHorner, JohnPentland, Norman
Coe, DenisHoughton, Rt. Hn. DouglasPerry, George H. (Nottingham, S.)
Coleman, DonaldHoy, JamesPrentice, Rt. Hn. R. E.
Concannon, J. D.Huckfield, L.Price, Christopher (Perry Barr)
Corbet, Mrs. FredaHughes, Emrys (Ayrshire, S.)Price, Thomas (Westhoughton)
Carddock, George (Bradford, S.)Hughes, Hector (Aberdeen, N.)Price, William (Rugby)
Crawshaw, RichardHughes, Roy (Newport)Probert, Arthur
Crossman, Rt. Hn. RichardHunter, AdamRankin, John
Cullen, Mrs. AliceJackson, Colin (B'h'se & Spenb'gh)Rees, Merlyn
Darling, Rt. Hn. GeorgeJackson, Peter M. (High Peak)Rhodes, Geoffrey
Davidson, James(Aberdeenshire,W.)Jenkins, Hugh (Putney)Roberts, Albert (Normanton)
Davies, C. Elfed (Rhondda, E.)Jones, Dan (Burnley)Robinson, W. O. J. (Walth'tow, E.)
Davies, Ednyfed Hudson (Conway)Jones, J. Idwal (Wrexham)Rodgers, William (Stockton)
Davies, Harold (Leek)Jones, T. Alec (Rhondda, West)Rose, Paul
Davies, Ifor (Gower)Kelley, RichardRoss, Rt. Hn. William
Davies, S. O. (Merthyr)Kerr, Dr. David (W'worth, Central)Rowland, Christopher (Meriden)
Delargy, HughKerr, Russell (Feltham)Rowlands, E. (Cardiff, N.)
Dempsey, JamesLawson, GeorgeSheldon, Robert
Dewar, DonaldLeadbitter, TedShinwell, Rt. Hn. E.
Diamond, Rt. Hn. JohnLestor, Miss JoanShore, Peter (Stepney)
Dickens, JamesLewis, Arthur (W. Ham, N.)Short,Rt.Hn.Edward(N'c'tle-u-Tyne)
Dobson, RayLewis, Ron (Carlisle)Short, Mrs. Renee(W'hampton,N.E.)
Doig, PeterLipton, MarcusSilkin, Rt. Hn. John (Deptford)
Donnelly. DesmondLoughlin, CharlesSilkin, Hn. S. C. (Dulwich)
Driberg, TomLyon, Alexander W. (York)Slater, Joseph
Dunn, James A.Lyons, Edward (Bradford, E.)Small, William
Dunwoody, Mrs. Gwyneth (Exeter)McBride, NeilSnow, Julian
Dunwoody, Dr. John (F'th & C'b'e)McCann, JohnSpriggs, Leslie
Eadie, AlexMacColl, JamesSteel, David (Roxburgh)
Edwards, Rt. Hn. Ness (Caerphilly)MacDermot, NiallSteele, Thomas (Dunbartonshire, W.)
Edwards, William (Merioneth)Macdonald, A. H.Strauss, Rt. Hn. G. R.
Ellis, JohnMcGuire, MichaelSwingler, Stephen
Ennals, DavidMackenzie, Alasdair(Ross&Crom'ty)Symonds, J. B.
Ensor, DavidMackenzie, Gregor (Rutherglen)Taverne, Dick
Evans, Albert (Islington, S.W.)Mackie, JohnThorpe, Rt. Hn. Jeremy
Faulds, AndrewMaclennan, RobertTinn, James
Fernyhough, E.MaoMillan, Malcoin (Western Isles)Tuck, Raphael
Finch, HaroldMcMillan, Tom (Glasgow, C.)Varley, Eric G.
Wainwright, Edwin (Dearne Valley)Whitlock, WilliamWinnick, David
Wainwright, Richard (Coine Valley)Williams, Alan (Swansea, W.)Woof, Robert
Walden, Brian (All Saints)Williams, Clifford (Abertillery)Yates, Victor
Walker, Harold (Doncaster)Williams, Mrs. Shirley (Hitchin)
Wallace, GeorgeWillis, George (Edinburgh, E.)TELLERS FOR THE AYES:
Watkins, David (Consett)Wilson, Rt. Hn. Harold (Huyton)Mr. W. Howie and
Wellbeloved, JamesWilson, William (Coventry, S.)Mr. Ioan L. Evans.
Alison, Michael (Barkston Ash)Hall, John (Wycombe)Nabarro, Sir Gerald
Allason, James (Hemel Hempstead)Hall-Davis, A. G. F.Nicholls, Sir Harmar
Awdry, DanielHamilton, Marquess of (Fermanagh)Nott, John
Baker, W. H. K.Hamilton, Michael (Salisbury)Onslow, Cranley
Bell, RonaldHarrison, Brian (Maldon)Osborne, Sir Cyril (Louth)
Bennett, Sir Frederic (Torquay)Harrison, Cot. Sir Harwood (Eye)Page, Graham (Crosby)
Berry, Hn. AnthonyHarvey, Sir Arthur VerePage, John (Harrow, W.)
Bitten, JohnHarvie Anderson, MissPercival, Ian
Birch, Rt. Hn. NigelHawkins, PaulPounder, Rafton
Blaker, PeterHeath, Rt. Hn. EdwardPowell, Rt. Hn. J. Enoch
Bossom, Sir CliveHeseltine, MichaelPrior, J. M. L.
Boyd-Carpenter, Rt. Hn. JohnHiggins, Terence L.Pym, Francis
Boyle, Rt. Hn. Sir EdwardHiley, JosephRamsden, Rt. Hn. James
Braine, BernardHill, J. E. B.Renton, Rt. Hn. Sir David
Brewis, JohnHirst, GeoffreyRidley, Hn. Nicholas
Brinton, Sir TattonHogg, Rt. Hn. QuintinRossi, Hugh (Hornsey)
Bromley-Davenport, Lt.-Col.Sir WalterHolland, PhilipRoyle, Anthony
Brown, Sir Edward (Bath)Hordern, PeterRussell, Sir Ronald
Bruce-Gardyne, J.Hornby, RichardScott, Nicholas
Buchanan-Smith, Alick(Angus,N&M)Hunt, JohnSmith, John
Buck, Antony (Colchester)Irvine, Bryant Godman (Rye)Stainton, Keith
Bullus, Sir EricJenkin, Patrick (Woodford)Stodart, Anthony
Burden, F. A.Jopling, MichaelStoddart-Scott, Col. Sir M. (Ripon)
Campbell, GordonKerby, Capt. HenrySummers, Sir Spencer
Carr, Rt. Hn. RobertKimball, MarcusTapsell, Peter
Channon, H. P. G.King, Evelyn (Dorset, S.)Taylor, Sir Charles (Eastbourne)
Chichester-Clark, R.Kirk, PeterTaylor,Edward M.(G'gow,Cathcart)
Cooke, RobertKitson, TimothyTaylor, Frank (Moss Side)
Costain, A. P.Lambton, ViscountTemple, John M.
Crosthwaite-Eyre, Sir OliverLancaster, Col. C. G.Thatcher, Mrs. Margaret
Dalkeith, Earl ofLloyd, Ian (P'tsm'th,Langstone)Tilney, John
Dance, JamesLongden, GilbertTurton, Rt. Hn. R. H.
d'Avigdor-Goldsmid, Sir HenryMcAdden, Sir Stephenvan Straubenzee, W. R.
Dean, Paul (Somerset, N.)Macleod, Rt. Hn. lainVaughan-Morgan, Rt. Hn. Sir John
Dodds-Parker, DouglasMcMaster, StanleyWalker, Peter (Worcester)
Doughty, CharlesMacmillan, Maurice (Farnham)Ward, Dame Irene
Eden, Sir JohnMaginnis, John E.Weatherill, Bernard
Elliott.R.W(N'c'tle-upon-Tyne.N.)Maude, AngusWebster, David
Emery, PeterMawby, RayWhitelaw, Rt. Hn. William
Errington, Sir EricMaxwell-Hyslop, R. J.Wills, Sir Gerald (Bridgwater)
Eyre, ReginaldMaydon, Lt.-Cmdr. S. L. C.Wilson, Geoffrey (Truro)
Fortescue, TimMills, Peter (Torrington)Wood, Rt. Hn. Richard
Gaibraith, Hon. T. G.Mills, Stratton (Belfast, N.)Woodnutt, Mark
Gibson-Watt, DavidMiscampbell, NormanWorsley, Marcus
Gilmour, Sir John (Fife, E.)Mitchell, David (Basingstoke)Wright, Esmond
Glover, Sir DouglasMonro, HectorWylie, N. R.
Gower, RaymondMorgan, Geraint (Denbigh)Younger, Hn. George
Grant-Ferris, R.Morrison, Charles (Devizes)TELLERS FOR THE NOES:
Gresham Cooke, R.Mott-Radclyffe, Sir CharlesMr. Jasper More and
Griffiths, Eldon (Bury St. Edmunds)Munro-Lucas-Tooth, Sir HughMr. Anthony Grant.
Gurden, HaroldMurton, Oscar

Clause ordered to stand part of the Bill.