I shall come to that point later when I deal with what the tax structure should look like if we are to remove the anomalies to which I have referred.
The curve of the average tax rate against income at the highest levels is more or less comparable with the United States, France and Germany but at the lowest levels of income there is a tremendous hump. This hump, starting at the lowest taxable incomes of around £50 a week and continuing at well above twice the average rate of tax of other countries — to about £150 a week — is a gross anomaly with which we must deal. The extreme case—I accept it is the extreme case — in the hump in the average rates of tax at the lower levels is the poverty trap. A married man with two children who earns between £50 and £90 a week, taking into account all the benefits, many of which are means-tested — benefits in kind, such as school meals as well as cash benefits—loses virtually all increases of his income in tax. I refer hon. Members to the tables in the recent report of the Treasury and Civil Service Committee on the structure of personal income tax and income support.
As the problem concerns not just the poverty trap, with people paying marginal rates of tax of about 100 per cent., but those who pay marginal rates of tax of 50 per cent. and above who are still on low incomes, we must consider quite fundamental changes in the tax structure. This Bill is addressed to only 3 per cent. of taxpayers who pay tax above the standard rate. It does nothing for the 97 per cent. of taxpayers who are the bulk of the population. The Bill has reduced from 4 per cent. to 3 per cent. the number of people on higher rates of tax. The Bill deals with only a tiny minority of the population.
By reducing the rate of tax at the top end of the scale, one effectively increases the rate of tax at the bottom end. Any Chancellor must design his tax structure to produce the required tax yield. The Bill further skews the distribution of income tax so that the great majority of people end up paying higher rates of tax. [Interruption.] If Conservative Members disagree with me I hope that they will rise to correct me. The Select Committee report spells this out in great detail.
The tax system is really a see-saw, but it is a great deal more complicated than a two-dimensional see-saw. The tax system is a multidimensional creature because it deals not only with levels of income but with family, age, employment or non-employment, earned income and unearned income. The combination of these different considerations makes tax reform such a complicated problem.
The Sub-Committee of the Treasury and Civil Service Committee, under the chairmanship of my hon. Friend the Member for Oldham, West (Mr. Meacher), did an outstanding job in producing a report that was built on a vast amount of evidence from the Treasury, the Inland Revenue and the Department of Health and Social Security. The purpose of the report was to ascertain what changes in the levels of taxation, allowances and rate bands would be needed to correct some of the anomalies, while accepting the discipline of the same tax yields at the end of the day. To constrain the complexity of the problem, the present structure of social security benefits was similarly accepted. Within these constraints the Sub-Committee produced a number of combinations and considered four in detail. It considered the impact of these measures on a large statistical sample of actual Taxpayers and not just on the basis of sample cases such as the married man with two children.
Taxpayers are not neatly packaged concepts. There are combinations of age, income and family status, which are uneven. For example, not many people claiming age relief have four children. Not many taxpayers on high levels of income have a large number of children. The combinations in which the large numbers of taxpayers fall should be the principal preoccupation of the Chancellor of the Exchequer and the Treasury in making a Budget, but it seems that they do not adopt that approach. In the tables which appear at the back of the press releases and the accompanying Budget statements, we never see set out the impact of the Government's proposals in terms of the number of taxpayers affected by them. It is never stated that 10 per cent. of the population will gain and that 90 per cent. will lose or that one particular combination will benefit a tiny proportion of the population and damage a large proportion.
The Sub-Committee came to some interesting and significant conclusions in examining the impact of the present tax structure on a statistical sample of taxpayers, and considering possible changes in the structure. More's the pity that the end of the Parliament prevented proper consideration of the recommendations. I hope that a Sub-Committee will return to the task in this Parliament and that the Government will study closely the arguments that are produced. In the circumstances, the Sub-Committee's consideration of these issues was considerably mangled in Committee. That comment can be applied to the tax distribution that Conservative Members would like, as well as to that which Labour Members would prefer.
It is not the 3 per cent. of the population who are affected by clause 1 who matter. It is not the higher rate taxpayers who really matter. We should be concerned primarily with the 97 per cent. of taxpayers who pay the lower levels of tax and who go straight on to the standard rate as soon as they start paying income tax.
The package considered by the Sub-Committee which highlighted the problem most sharply was the one which integrated national insurance contributions and the income tax system. The anomalies lie in the different thresholds. Once someone starts paying the contributions, his payments are based on the whole of his income, because there are no allowances. However, he will stop, in effect, at a relatively low ceiling of only one and a half or two times average earnings. It would be logical wholly to integrate national insurance contributions with the income tax structure.
The second assumption — it is one to which the House will have to give a great deal more attention—is the justification for the married man's allowance I invite hon. Members to read the argument in detail. I merely say that it seems that the most sensible course would be to abolish the allowance and to increase child benefit. If we abolish the allowance and increase child benefit to £20 a week, there will be a major impact on the types of family and the stages in life that constitute the greatest need for tax relief and produce the greatest social problems.
The Sub-Committee felt that there was a need to introduce a graduated system of tax so that people would not be faced immediately with a marginal rate of 39 per cent. They could come in, for example, at 15 per cent.
If we are to produce the same tax yield by means of this package—I think that many Conservative Members will consider that reasonable in terms of its objectives—it will be necessary to levy the highest rate of 60 per cent. on those who are in receipt of over one and a quarter times average earnings. That would produce a tax structure that would be a great deal more just than the present one.
The direction in which the injustice is most starkly visible is the high initial rate of tax which hammers those on the average and lower rates of income. The second direction is the treatment of children compared with the treatment of the childless couple. Also to be considered is whether the married man's allowance should be based on an assumption that the typical family is the man and non-earning wife or whether the individual should be regarded as the basic unit, which would lead to men and women being taxed on an equal basis. Provision for the family would be made through the much increased allowances for the children.
I was not a member of the Sub-Committee that considered these matters but I applaud its work. I recognise that my hon. Friend the Member for Great Grimsby (Mr. Mitchell) was an active and fertile member of the Sub-Committee, which was under the chairmanship of my hon. Friend the Member for Oldham, West. However, I consider that the restructuring they proposed of income tax and the national insurance system points the way ahead. We shall not get anywhere merely by fiddling around with tax rates and allowances within the present system. Equally, we shall not solve the problem by thinking that we can abolish income tax or greatly change the total amount of revenue that we need to raise from income tax. I hope that the opportunity will be taken in Committee to examine these issues in rather more detail and to direct ourselves to a fundamental restructuring of the tax system.