Charge of Income Tax for 1978–79

Part of Orders of the Day — Finance Bill – in the House of Commons at 12:00 am on 10 May 1978.

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Photo of Mr Peter Rees Mr Peter Rees , Dover and Deal 12:00, 10 May 1978

This is a modest amendment. After the traumas of the last five hours and the debate on Monday, that is perhaps as well. It will give the Government a chance to collect themselves, to reconsider their position and to view for the first time in their career a little more dispassionately than they have been used to doing in the past the whole question of investment income.

When I consider the amendment, to echo the words of Lord Clive in rather different circumstances, I am astounded at my own moderation. It is perhaps important to give the Government a chance to calm themselves and to consider again this whole question.

The amendment is designed to raise the threshold for investment income surcharge for those under the age of 65 from £1,700 to £2,000 and for those of 65 and over from £2,500 to £3,000. As I said, I hope that it will enable us to debate calmly and dispassionately the weight of tax which we feel should be imposed on investment income.

I know that the whole question of investment income, at least in public if not in private, touches a raw nerve in the Labour Party. Investment income conjures up for Labour Members, particularly those below the Gangway, vast plutocratic wealth which deserves to be taxed into the ground. But we know that, in private at least, the Government Front Bench take a slightly different view. We wish to probe the sincerity of their approach to the role of private capital in a mixed economy.

Even if one felt that investment income as properly defined was deserving of the particularly harsh imposts which have been heaped upon it since 1974, it must almost be a matter of common ground that the definition is extremely haphazard. Indeed, the anomalies have been pointed out from an early stage. Mr. Gladstone in 1853, as you will recall, Mrs. Butler, in an epic debate—I am not suggesting that you personally were presiding over our debates in those days, but I know of the close attention that you pay to all debates on financial and fiscal matters—attempted to draw a distinction between what he called lazy income and hard-won income. At the end of the day he admitted that it was impossible to draw a very clear line. In a, memorable debate, Mr. Gladstone—I know that the hon. Member for Cornwall, North (Mr. Pardoe) will be treading in Mr. Gladstone's footsteps tonight because of the support he will be giving to the amendment—recognised that there was no clear, decisive, practical distinction between the two categories of income.

Perhaps the debate has not moved on a great deal since then. The anomalies are too glaring to admit of this sharp distinction. I am sure that the Financial Secretary, if and when he catches your eye, Mrs. Butler—or it may be the Chief Secretary—will attempt to deal with this matter. We always welcome the Chief Secretary's interventions, particularly because in his professional capacity he has such a keen and expert knowledge of the distinctions between the various categories of incomes. I have no doubt that we shall have a notable and sympathetic contribution to the debate. It will give him a chance to re-establish his self-esteem after the disasters which have struck him and his team just recently and on Monday.

9.30 p.m.

But we bear the right hon. Gentleman no ill will. I do not know whether his heart is in the right place, but his head is in the right place provided that he is given the chance to exercise it. We know also, however, that he can be a little intimidated by his right hon. and hon. Friends below the Gangway. There have been moments when I have detected even that bold spirit quail before the glances of his hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker) or those of his hon. Friend the Member for Coventry, South-West (Mrs. Wise). There is only one of them in the Chamber at the moment, so perhaps we can encourage the right hon. Gentleman to flights of unaccustomed valour.

I wish to focus the Committee's attention on some of the categories of income which by no stretch of the imagination can be called, in Mr. Gladstone's phrase, lazy income. First, I take the case of the shopkeeper and the farmer, people who by any standards work hard all their lives but whose efforts may not produce very large incomes, so that they cannot take advantage of the retirement annuity provisions. When they come to take an easier role in life and sell their shops or farms, they realise a small amount of capital and invest it.

Is the income from those investments to be treated more harshly than, for example, the income of a civil servant—I pick a category at random—who has an inflation-proof pension which, under the rather bizarre rules by which the Inland Revenue operates, is regarded as earned income?

Next, I take the case of people who have had to save for their retirement. The Committee will recall that prior to 1956 it was not possible for the self-employed or even for those who were not in pensionable employment to make provision out of gross income for their retirement annuities. There must be many people today who are subsisting on savings income who could not make that provision. Are they to be singled out for harsher treatment? I am sure that the Chief Secretary, with his compassion—if he can for a moment break off his conversation with the Financial Secretary—will agree, and when he speaks later he will, no doubt, endorse what I say. Perhaps, even if he is not able to go all the way with us on these amendments, he will be prepared to commit the Government to look a little more closely at the definition of earned and investment income.

Next, let us take the case of a person who has bought his own house but who, through the demands of his employment, has to move to another part of the country. He retains his house and lets it. Is the income from his house to be regarded, in Mr. Gladstone's phrase, as lazy income?

The fact that these anomalies occur has been practically conceded by the Government, first in the provision introduced in this year's Finance Bill to treat maintenance payments exclusively as earned income. There is an anomaly which has been corrected, against—I draw the Committee's attention to this—the statements in Labour's 1976 manifesto which described maintenance payments as a rather virulent form of tax avoidance. I am happy to see that the Chief Secretary has escaped from the thrall of Transport House and has taken a rather more generous view of maintenance payments. I am sure that the Gingerbread group and others outside who follow our debates will give him full credit for that. I am now asking him to extend his horizons a little and see whether he can accord the same kind of treatment to other forms of income.

Next, what about annuities to retired partners of professional firms? A small measures of relief has been conceded in past Finance Acts for income of this kind. When we go into Standing Committee we shall press the Chief Secretary to look at this matter further. He may have to declare a personal interest, but we shall respect him all the more for that. It will demonstrate that he has a warm personal and enduring interest in these problems.

Even if the definition of earned and investment income could be accurately and comprehensively drawn, what case is there for singling out investment income—to spare the susceptibilities of Labour Members, let me call it savings income from now on—for the special treatment which it now receives?

When Mr. McKenna was defending the decision of the Liberal Administration in 1907 to introduce the earned income relief, he rested his case on the argument that income from employment was of a precarious nature. Since then, times have changed and a little has been done to make employment less precarious. We have had the Employment Protection Act and redundancy payments. I do not mean to say that income from employment is necessarily of the same quality or on the same basis as savings income which is perhaps derived from capital. But the contrast is not as stark as it was in 1907. Some would say that the balance has tilted the other way.