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Investment Income Surcharge (Abolition)

– in the House of Commons at 12:00 am on 5th April 1978.

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3.57 p.m.

Photo of Mr John MacGregor Mr John MacGregor , South Norfolk

I beg to move, That leave be given to bring in a Bill to abolish investment income surcharge. This Bill is about jobs, about economic growth and about fair play. Whatever the earlier case for an extra impost, on investment income, the developments on the tax front and the growth in the tax burden over the past four years now mean that the surcharge is having seriously damaging effects in a number of important directions, and I seek this opportunity of drawing attention to them and tackling them. I wish to make six main points in relation to jobs, economic growth and fair play.

First, concerning jobs, there is now widespread agreement that in dealing with the appallingly high level of unemployment one of the main contributions in the future will have to come from the small businesses, because the public sector and the large and medium-sized companies in this country will be seeking in many cases to shed labour rather than to promote new jobs. Yet the small businesses are quite inadequately encouraged at the present time.

Much of the evidence to the Wilson Committee on the City has drawn attention to the problems of finance for small businesses. Indeed, the institutions, the banks and so on, are now doing much to assist in that area. But the real gap—and, I suspect, an increasing gap in the future—is for finance in start-up situations, in venture capital, and for the very small businesses, because the banks and institutions naturally do not wish to risk equity capital at that point since they have their own depositors to take care of.

Getting the small business off the ground is still one of our major problems. Previously, this used to be done by private investors who knew the locality, knew the people and were prepared to risk some of their spare capital in order to get these businesses going. It is done in this way in America and in other countries where positive fiscal incentives are given compared with the fiscal disincentives that we apply here.

Even the National Research Development Corporation, in its recent evidence to the Wilson Committee, said: The mortality rate of small companies is high, and this in turn inhibits support for new technology-based firms in general. Special measures, including increased fiscal incentives (or the removal of current fiscal disincentives), may be required to promote the growth of small innovative enterprises. The plain fact is that the risk of losing one's money in small businesses is high and the reward is virtually nil, especially at a 98 per cent. tax rate. I believe that it will be right—as I believe the Chancellor of the Duchy of Lancaster is considering—to introduce relief for losses against other income in order to assist start-ups. But the abolition of the investment income surcharge is also necessary to assist and encourage jobs in small businesses.

Secondly, turning to the more general aspects of growth, we are all agreed that we want to see more investment in British industry and commerce and, perhaps more important, better use of the investment. I would be the first to admit that encouraging saving is only one part of this problem. There is a need first to see the demand side increasing, as we do not have demand for new investment and for new capital on the scale required as we would all wish to see at the present time, because of the lack of confidence in British industry.

But at some stage the importance of the saver and the investor will come back into play. We do need to encourage new capital. Again, the investor gets poor rewards for subscribing to equities at present. For the high taxpayer the return is minute and after inflation is often acutely negative. Each year today there is a 5 per cent. decline in the number of shareholdings in British companies, and it is the individual small investor who is getting out. To a considerable extent that is a tax matter because of the fiscal benefits to the pension funds, on the one hand, and the fiscal disincentives of high rates of taxation, especially investment income surcharge to the direct investor, on the other.

Another worrying aspect of this matter is the ever-increasing reliance on institutional investment in the Stock Market. I believe that this should give us some considerable cause for concern, because it means intensified volatility in the market, possibly less investment in the secondary, middle and smaller public companies and hence greater difficulty for them in raising new capital, and some would also argue the risk of only a small number of investment decision takers in stock market investment tending to concentrate on investment fashions. The abolition of the investment income surcharge would help to redress that balance and to get more investment directly from investors into British industry through equities.

Thirdly, I want to turn to one particular aspect—growth in farming. About 45 per cent. of agricultural land today is tenanted. Yet the fiscal burdens on the agricultural landlord—unless again it is an institution—are now penal, partly because his returns are treated as investment income. If he is paying between 80 per cent. and 98 per cent. in tax, he is less likely to be willing to invest in improvements to land, buildings and machinery because of the feeble after-tax return at the end of it. This is harmful to agricultural production as well as to all the allied industries which depend on a successful and growing agriculture.

It also means that many are tending to bring land in hand as soon as they can, for fiscal reasons, which is harmful to future tenant farmers in this country. I believe that we should be seeking a definition of a working landlord and enable him to benefit from current agriculture fiscal reliefs. That is the way mainly to go forward to the benefit of agriculture generally. Meanwhile, the abolition of the investment income surcharge would help.

My last three points relate to fiscal justice and fair play. Fourthly, we now have an appallingly muddled position in relation to tax on savings. Wins on the pools or on horses are virtually tax-free. Savings through pension funds and life assurance obtain a variety of tax benefits which significantly affect the investment decisions of the saver. Gilts and other forms of Government savings, such as the Trustee Savings Bank, have considerable tax-free advantages which much distort the flow of savings patterns. It is important here to realise that the Government by their tax decisions are greatly benefiting themselves in relation to savings, especially in connection with high-rate taxpayers for whom gilts held for more than one year are enormously more advantageous than any other form of saving.

Only equities, building societies and other forms of private sector saving have to suffer the whole battery of taxes on savings. Investment income surcharge is one of the significant ones. Its abolition would help to remove distortions—indeed, gross distortions—which fiscal measures have so sweepingly introduced into savings.

Fifthly, I turn to the international comparisons. Few countries today have an investment income surcharge at all. None among our industrial competitors has rates on earned or on earned and investment income combined anywhere near ours reaching up to the top rate of 98 per cent., nor at the levels of income at which we impose them. I believe that it is no coincidence that we are not only so far out of line with them in our tax measures and tax burdens on direct and investment income but frequently out of line in our success in growth rates.

Sixthly, and most troubling of all, I want to draw attention to the quite unfair burden that the investment income surcharge now imposes on those with comparatively low incomes and on those aged over 65. Indeed, it is these groups with whom I am most concerned, despite all the other very important arguments, in pushing this measure today. One hundred and sixty thousand of those who pay investment income surcharge—or roughly one-third—have incomes below £4,000 a year. Indeed, this morning I had a letter from a constituent aged 58, who has just been declared redundant and who will have to make use of his redundancy payments and the savings which he has developed over his lifetime. He has an income—which he will expect not to grow from now on because he does not expect to get a job at his age—of about £2,000 a year and is naturally infuriated as he now finds that he is paying a marginal tax rate of 44 per cent. on that income.

Over 45 per cent. of those paying the investment income surcharge are pensioners. What I find so appalling here is the quite unfair situation where those who are fortunate enought to have occupational pension schemes or self-employed schemes have their savings treated as earned income after the age of 65. But there are those who are not able to be in that position, perhaps because they were in a company which did not operate such schemes or had a small business and were not able to afford the self-employed annuity schemes which were not so generous in the past. Those who concentrated their savings on building up their businesses and get their retirement savings out of that business, or in other ways, find that they have this huge burden at a very modest rate of income of a 49 per cent. marginal tax rate.

It is scandalous that those who built up their savings in this way should be discriminated against. As the Building Societies Association points out, a single pensioner pays at a rate of 49 per cent. with an income of £3,410, whereas someone single and of working age has to reach an income level of £6,945 before he pays above the tax rate of 34 per cent. That is quite monstrous discrimination.

What particularly riles these people is that this is not unearned income at all. What they are getting after the age of 65 is income out of savings earned out of a hard working life and out of taxed income during that working life. There is no wonder that there is so little incentive to save in certain directions today, especially after inflation is taken into account. No wonder that the children of so many of these people—[HON. MEMBERS: "Too long."]—should see themselves what has happened so that they no longer wish to save.

In conclusion, I recognise that there are many priorities in tax today. I have been among the first to argue for many of them, especially for those on low incomes and many others. I recognise that it may not be possible to carry through this measure exactly in this form at the present time. But I do believe that we should at least have amendments to this Bill to raise the threshold to £4,000 to bring it back in real terms to where it was only a few years ago to help the pensioners, or perhaps to abolish it altogether on the pensioners as the Building Societies Association has urged.

But it is because I believe that the arguments long term for abolition are so compelling that I have sought to bring the Bill forward in this way today in order to encourage the wealth creators and the risk takers.

4.8 p.m.

Photo of Austin Mitchell Austin Mitchell , Grimsby

I rise to oppose this iniquitous proposal. Indeed, the case against it is so simple and so clear-cut that I hope I shall have the support of Opposition Members in opposing it.

The basic issue is that there is a clear distinction between earned income and what used to be called unearned income or dividend income. The two should be treated differently for tax purposes. The distinction comes because earned income is inevitably more precarious because it can be affected drastically by health, unemployment, injury and cut-back whereas dividends come rolling in inevitably. Even if for some strange reason dividends stop there is still the capital to fall back on and that capital in itself confers a greater taxable capacity than simple earnings.

There has also been a distinction between that and earned income, which implies personal work and personal effort, and which has always been regarded as socially more worthy than simply living on the efforts of others. There is a distinction betwen those who labour with their hands and brains, or both, and those who toil not neither do they spin.

There is a distinction, too, based on the fact that work implies expense, such as getting to work, which dividend collection does not imply. Finally, there is a distinction based on political philosophy. I am not talking about the difference between capitalism and labour. We all know that capitalism is the exploitation of man by man. Under Socialism it is the other way around. I am talking about equality. We are the party of equality, and we believe that wealth should bear its share of the tax burden that faces this country. This is a very minimal share—£310 million a year. I hope that this burden will be increased by a wealth tax, rather than reduced by the abolition of the unearned dividend surcharge.

There is a distinction, which has been accepted by every Government since 1907, between earned and unearned income. This has been accepted by every Conservative Government, including Lord Barber of the printing presses, who introduced the surcharge. In supporting this measure the Conservative Party is going against its own history. It introduced this surcharge.

It is interesting to trace the evolution of this thinking because "The Right Approach" made no mention of the abolition of the surcharge. But then came the revised standard version, "The Righter Approach"—in other words "The Right Approach to the Economy"—which issued this clarion call: We are increasingly doubtful about the wisdom of retaining any kind of Investment Income Surcharge; Brave, stirring stuff. "Increasingly doubtful"—I can visualise them steeling themselves to come out with such a sweeping, generalised statement. The mountains have apparently laboured a bit further now and produced the hon. Member for Norfolk, South (Mr. MacGregor) and his ridiculous measure, which is an achievement.

It is interesting that after eight years of evolution in policy the Conservative Party is now back with the policies that it put forward in 1970—on immigration, labour relations, tax and on its attitudes towards incomes policy. Selsdon man still lives on as the Selsden person. The hon. Member for Norfolk, South has gone even further, because he has taken us back 70 years to the Conservative Party of Balfour and Salisbury—the last Conservative Party that did not recognise the distinction between earned and unearned income.

The hon. Member for Norfolk, South talks of examples overseas. But our main competitors—the United States, Japan. Italy and France—all recognise some kind of distinction between earned and unearned income.

The measure is further unnecessary. The hon. Member for Norfolk, South made the case for those with a small amount of capital. Indeed, as he spoke, a positive pantheon of widows, orphans and small business men—all smaller than himself, though maybe not in substance—and divorcees flitted into my vision around his head, all wailing and gnashing their teeth. This was partly at the weakness of his argument and partly at the picture he painted. In fact, the tragic picture he was painting is just not true. The problems of the small man and of the old can be taken care of by exemptions which this Government increased last year to £1,500 and to £2,000 for those over 65. These exemptions mean that we are talking about those with big money.

Take the old people over 65, for example. The exemption of £2,000 before surcharge means that we are talking about people who have capital of over £20,000. This is a pretty hefty sum by any standards, although perhaps not by the standards of the hon. Member for Norfolk, South. He has spoken about divorcees, but they qualify for an exemption of £1,500 plus a further maintenance income of £1,500, which means a total maintenance of £60 a week before the surcharge comes into force. Most Grimsbarians are not paying maintenance of £60 a week to their divorced wives. I do not know what it is like elsewhere, particularly in Norfolk, South, but most of us in the North would regard that as big money.

We are not talking about small business men or farmers. Their income is earned income and therefore does not qualify for the levy. In other words, we are seeing today a typical Conservative device of shoving the widows, the orphans and the small business men in the front line of a battle which is really about big moneyed interests and capital. The Conservatives are really defending the vested interests of those with money.

One can always argue, as the Conservative Party did last year in the Finance Bill Committee, for an increase in the exemptions. But that is totally different from sweeping away the entire principle of the surcharge. The two things are totally different. It is impossible to contain in the same argument a demand for an increase in exemptions and a demand for the abolition of the surcharge.

It is not for me to say whether the Chancellor intends to increase the exemptions in his forthcoming Budget. I cannot get to see him because he has been so tied up with the hon. Member for Cornwall, North (Mr. Pardoe), and we cannot get past the debris of Liberal Party policies in order to get into his office to put the case for it.

In the present situation in which Government spending and public employment are the main drive motors of the economy, and in which, unless Government spending is maintained, there will be a massive increase in unemployment, we have only limited scope for tax cuts. What tax cuts can be made in such a situation they should and must go to the less-well-off, rather than handing out £310 million to the moneyed interests and those with capital to play with.

To conclude, there is a clear distinction between earned and unearned income which all parties have recognised since 1907, the Conservative Party included. The anomalies that exist can be taken care of by an increase in the exemptions in the same way that they were increased last year. This is a totally different argument from that of abolishing the surcharge entirely.

Abolishing the surcharge is essentially a piece of special pleading based on specious arguments about incentives and savings. In fact savings are going up and they have been going up for the last three years under this kind of regime. What the Conservatives are really defending are vested interests. That is all right for the kind of debating school politics we are seeing today, but it cannot be incorporated in the manifesto of any political party which aims to run this country when it grows up. Therefore, I hope that hon. Members will join me in opposing and voting against this proposal.

Question put, pursuant to Standing Order No. 13 (Motions for leave to bring in Bills and Nomination of Select Committees at Commencement of Public Business):—

The House divided; Ayes 150, Noes 166.

Division No. 159]AYES[4.16 p.m.
Adley, RobertAtkinson, David (Bournemouth, East)Beith, A. J.
Arnold, TomAwdry, DanielBell, Ronald
Atkins, Rt Hon H. (Spelthorne)Banks, RobertBennett, Sir Frederic (Torbay)
Benyon, W.Hayhoe, BarneyPage, Richard (Workington)
Berry, Hon AnthonyHolland, PhilipPardoe, John
Biffen, JohnHooson, EmlynPenhaligon, David
Biggs-Davison, JohnHoroern, PeterPeyton, Rt Hon John
Blaker, PeterHowe, Rt Hon Sir GeoffreyPowell, Rt Hon J. Enoch
Boscawen, Hon RobertHowell, David (Guildford)Pym, Rt Hon Francis
Bottomley, PeterHowell, Ralph (North Norfolk)Raison, Timothy
Brittan, LeonHowells, Geraint (Cardigan)Renton, Rt Hon Sir D. (Hunts)
Brocklebank-Fowler, C.Hunt, David (Wirral)Renton, Tim (Mid-Sussex)
Brooke, PeterHunt, John (Ravensbourne)Rhodes, James R.
Brotherton, MichaelHutchison, Michael ClarkRhys Williams, Sir Brandon
Buchanan-Smith, AlickJames, DavidRidley, Hon Nicholas
Budgen, NickJenkin, Rt Hon P. (Wanst'd&W'df'd)Ridsdale, Julian
Burden, F. A.Jessel, TobyRoberts, Michael (Cardiff NW)
Chalker, Mrs LyndaJohnson Smith, G. (E Grinstead)Roberts, Wyn (Conway)
Clark, Alan (Plymouth, Sutton)Johnston, Russell (Inverness)Rossi, Hugh (Hornsey)
Clark, William (Croydon S)Jopling, MichaelRost, Peter (SE Derbyshire)
Clarke, Kenneth (Rushcliffe)Kaberry, Sir DonaldSt. John-Stevas, Norman
Cooke, Robert (Bristol W)King, Tom (Bridgwater)Scott-Hopkins, James
Corrie, JohnKnox, DavidShaw, Giles (Pudsey)
Costain, A. P.Lamont, NormanShaw, Michael (Scarborough)
Dean, Paul (N Somerset)Langford-Holt, Sir JohnShelton, William (Streatham)
Douglas-Hamilton, Lord JamesLe Marchant, SpencerShepherd, Colin
Drayson, BurnabyLewis, Kenneth (Rutland)Shersby, Michael
Durant, TonyLloyd, IanSims, Roger
Eden, Rt Hon Sir JohnMcCusker, H.Smith, Cyril (Rochdale)
Edwards, Nicholas (Pembroke)Macfarlane, NeilSmith, Dudley (Warwick)
Elliott, Sir WilliamMacmillan, Rt Hon M. (Farnham)Smith, Timothy John (Ashfield)
Eyre, ReginaldMcNair-Wilson, M. (Newbury)Spence, John
Fairgrieve, RussellMarten, NeilSproat, Iain
Farr, JohnMather, CarolStanley, John
Fell, AnthonyMaude, AngusSteel, Rt Hon David
Fletcher, Alex (Edinburgh N)Mawby, RaySteen, Anthony (Wavertree)
Forman, NigelMaxwell-Hyslop, RobinStradling Thomas, J.
Fowler, Norman (Sutton C'f'd)Miller, Hal (Bromsgrove)Taylor, Teddy (Cathcart)
Gardiner, George (Reigate)Mitchell, David (Basingstoke)Temple Morris, Peter
Glyn, Dr AlanMolyneaux, JamesThatcher, Rt Hon Margaret
Goodlad, AlastairMontgomery, FergusThorpe, Rt Hon Jeremy (N Devon)
Gow, Ian (Eastbourne)Moore, John (Croydon C)Townsend, Cyril D.
Gower, Sir Raymond (Barry)Morrison, Charles (Devizes)Wakeham, John
Grant, Anthony (Harrow C)Morrison, Hon Peter (Chester)Warren, Kenneth
Gray, HamishMudd, DavidWeatherill, Bernard
Grimond, Rt Hon J.Nelson, AnthonyWhitelaw, Rt Hon William
Grist, IanNewton, TonyYoung, Sir G. (Ealing, Acton)
Hamilton, Michael (Salisbury)Nott, John
Hampson, Dr KeithOppenheim, Mrs SallyTELLERS FOR THE AYES:
Hannam, JohnPage, John (Harrow West)Mr. John MacGregor and
Harrison, Col Sir Harwood (Eye)Page, Rt Hon R. Graham (Crosby)Mr. John Cope.
Havers, Rt Hon Sir Michael
Allaun, FrankDavies, Rt Hon DenzilHayman, Mrs Helene
Anderson, DonaldDeakins, EricHeffer, Erie S.
Archer, Rt Hon PeterDean, Joseph (Leeds West)Horam, John
Armstrong, ErnestDempsey, JamesHuckfield, Les
Ashley, JackDoig, PeterHughes, Roy (Newport)
Ashton, JoeDormand, J. D.Hunter, Adam
Atkins, Ronald (Preston N)Douglas-Mann, BruceJackson, Miss Margaret (Lincoln)
Barnett, Guy (Greenwich)Duffy, A. E. P.Jenkins, Hugh (Putney)
Bates, AlfEllis, John (Brigg & Scun)John, Brynmor
Benn, Rt Hon Anthony WedgwoodEnglish, MichaelJohnson, James (Hull West)
Bennett, Andrew (Stockport N)Ennals, Rt Hon DavidJones, Alec (Rhondda)
Bidwell, SydneyEvans, Fred (Caerphilly)Jones, Dan (Burnley)
Bishop, Rt Hon EdwardEvans, Gwynfor (Carmarthen)Judd, Frank
Booth, Rt Hon AlbertEvans, Ioan (Aberdare)Kaufman, Gerald
Bottomley, Rt Hon ArthurEvans, John (Newton)Kelley, Richard
Bray, Dr JeremyEwing, Harry (Stirling)Kerr, Russell
Brown, Robert C. (Newcastle W)Faulds, AndrewKinnock, Neil
Campbell, IanFernyhough, Rt Hon E.Lamborn, Harry
Cant, R. B.Flannery, MartinLamond, James
Carmichael, NeilFletcher, Ted (Darlington)Litterick, Tom
Cartwright, JohnFoot, Rt Hon MichaelLomas, Kenneth
Castle, Rt Hon BarbaraForrester, JohnLyon, Alexander (York)
Clemitson, IvorFraser, John (Lambeth, N'w'd)Lyons, Edward (Badford W)
Cocks, Rt Hon Michael (Bristol S)Garrett, John (Norwich S)MacKenzie, Rt Hon Gregor
Cohen, StanleyGarrett, W. E. (Wallsend)McNamara, Kevin
Coleman, DonaldGeorge, BruceMadden, Max
Cowans, HarryGolding, JohnMallalieu, J. P. W.
Cox, Thomas (Tooting)Gould, BryanMarshall, Dr Edmund (Goole)
Craigen, Jim (Maryhill)Graham, TedMarshall, Jim (Leicester S)
Crawshaw, RichardGrant, George (Morpeth)Meacher, Michael
Crowther, Stan (Rotherham)Grant, John (Islington C)Mendelson, John
Cryer, BobGrocott, BruceMikardo, Ian
Dalyell, TamHarper, JosephMillan, Rt Hon Bruce
Davies, Bryan (Enfield N)Harrison, Rt Hon WalterMitchell, Austin
Molloy, WilliamRodgers, George (Chorley)Thompson, George
Moonman, EricRooker, J. W.Thorne, Stan (Preston South)
Morris, Rt Hon Charles R.Ross, Rt Hon W. (Kilmarnock)Tinn, James
Morris, Rt Hon J. (Aberavon)Rowlands, TedUrwin, T. W.
Mulley, Rt Hon FrederickSedgemore, BrianVarley, Rt Hon Eric G.
Murray, Rt Hon Ronald KingShaw, Arnold (Ilford South)Wainwright, Edwin (Dearne V)
Newens, StanleySheldon, Rt Hon RobertWalker, Harold (Doncaster)
Noble, MikeSilkin, Rt Hon S. C. (Dulwich)Watkins, David
O'Halloran, MichaelSilverman, JuliusWhite, Frank R. (Bury)
Orbach, MauriceSkinner, DennisWhitehead, Phillip
Orme, Rt Hon StanleySmith, John (N Lanarkshire)Wigley, Dafydd
Ovenden, JohnSnape, PeterWilley, Rt Hon Frederick
Padley, WalterSpearing, NigelWilliams, Rt Hon Shirley (Hertford)
Palmer, ArthurSpriggs, LeslieWilson, Gordon (Dundee E)
Park, GeorgeStallard, A. W.Wilson, William (Coventry SE)
Pavitt, LaurieStewart, Rt Hon DonaldWise, Mrs Audrey
Perry, ErnestStewart, Rt Hon M. (Fulham)Woof, Robert
Phipps, Dr ColinStoddart, DavidYoung, David (Bolton E)
Radice, GilesStott, Roger
Richardson, Miss JoSummerskill, Hon Dr ShirleyTELLERS FOR THE NOES:
Roberts, Albert (Normanton)Taylor, Mrs Ann (Bolton W)Mr. Terry Walker and
Robinson, GeoffreyThomas, Dafydd (Merioneth)Mr. Roderick MacFarquar.
Roderick, CaerwynThomas, Ron (Bristol NW)

Question accordingly negatived.