Fair Taxation of the Wealthy

Opposition Day — [17th allotted day] – in the House of Commons at 6:50 pm on 16th July 2007.

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Photo of Alan Haselhurst Alan Haselhurst Deputy Speaker and Chairman of Ways and Means 6:50 pm, 16th July 2007

I must announce that Mr. Speaker has selected the amendment in the name of the Prime Minister.

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer 7:31 pm, 16th July 2007

I beg to move,

That this House
notes with concern the growing gap in wealth and income inequality since 1997;
calls for the publication of Office of National Statistics wealth inequality data since 2003;
regrets that the complexities of the tax system allow wealthy individuals to utilise tax loopholes;
notes with alarm the increasing number of wealthy individuals who are non-domiciled for tax purposes;
recognises the increasing burden that this places on middle-income families who are disproportionately affected by, in particular, stamp duty and inheritance tax thresholds, given that these thresholds have not been recently re-assessed to reflect large increases in house prices;
and proposes the tax system be amended to ensure that the wealthiest individuals pay their fair share.

I am grateful for the opportunity to introduce a debate on this subject on behalf of my Liberal Democrat colleagues. I am also grateful to House of Commons staff who, after much deliberation, admitted the word "fair", which I believe was quite controversial.

There are usually two broad approaches to debates on taxation. One is the argument about the level of taxation in the economy. Indeed, arguments have raged backwards and forwards between the parties as to whether as a country we are over-taxed or under-taxed. This debate is not about that subject. As I understand it, although the Conservatives approach the problem from the opposite direction, they broadly accept the current share of taxation in the economy, at least as an initial starting point, and are arguing about whether tax should be applied in a more sensible and equitable way. We believe that within the current level of taxation it would be possible to have a system that is fairer, simpler and greener. I want to focus on the first of those—the concept of fairness, by which I mean paying greater attention to the distribution of income and wealth.

To introduce some precision to the concept of fairness, it would probably help at the outset to monitor some of the recent trends in income and wealth distribution. It is fairly clear that since the Government came to power in 1997, income distribution as measured by the standard Gini coefficient initially deteriorated. It was rather odd that the Government were talking about fairness and equality after a long period of Conservative Government, yet for a considerable time income inequality widened. Subsequently, it has levelled off and is now roughly back to where it was in 1997. I guess that one of the major contributory factors was tax credits. Although Members on these Benches and on the Opposition Benches generally have been very critical of the tax credit system because of its administrative failings, there is little doubt that many people have benefited from it and it has contributed to the stabilisation, at least, of the income inequality measure.

The distribution of wealth, however, has become significantly worse. If we track the share of marketable assets held by the top 1 per cent., 5 per cent. or 10 per cent. of the population, we find that their share increased from 1997 to 2003 while the share of the bottom 50 per cent. shrank. Unfortunately, we cannot track what happened since 2003 because the Government no longer publish the data. They say that there are "methodological problems" with that. It is a tricky thing to measure, so I will be generous and acknowledge that that could be the reason, but it could also be rather embarrassing and so they do not wish to publish such data. None the less, we do not have data beyond that date. Such as we have suggest that the distribution of wealth was deteriorating during the Government's first six years in office.

The context in which we can assess the trends in income and wealth is difficult because of broader global trends. However progressive any Government wish to be, it is difficult to maintain an approach to income and wealth equality of the kind that was possible in more closed economies. We now have virtual freedom of movement of capital, and capital migrates to areas with the highest rates of return—that is the way the market works. That is true also of many people with high levels of skill and entrepreneurial ability; they pursue the best returns. It is probably also true that, because of the large-scale entry of China and, to some extent, India to the world economy, real wages have come under pressure everywhere. It is difficult for any Government in any circumstances to maintain very close levels of equality in an open economy. I start out by recognising that.

For that reason, it is probably best to look at comparative measures of how other rich countries perform. I recently dug out some data on the distribution of wealth. There is not a great deal of it around and it is difficult to compile. One set produced by the Central Intelligence Agency—perhaps an original source—which was put together by the Economic and Social Research Council, shows that although Britain has a more equal distribution than the United States, it has a substantially less equal distribution of family wealth than almost every other developed country. It is much worse than Scandinavia, France, Germany and most eastern and southern European countries. The same relative conclusion is reached in a parallel study carried out by an organisation called WIDER—the World Institute for Development Economics Research—which I believe is linked to the United Nations university.

Although it is understandable that because of the mobility of capital and skilled labour and the pressure of labour competition through trade, equality of income and wealth are under pressure, Britain seems to have become a relatively unequal country. One can reasonably ask that the Government do not pursue policies that make those disparities worse. I would like to concentrate on several of those policies, related specifically to taxation as it applies to wealth. We do not have a wealth tax in this country—it is probably no longer a practical concept, though the Swedes and French have tried it—but we have proxy taxes for wealth. We have taxes on capital gains, and taxes on stamp duty and inheritance, so I want to consider how those systems work and particularly some of the exemptions for non-domiciled investors—one of the main concessional areas of tax policy. There are, of course, much wider aspects of tax policy relating to income tax, tax credits and council tax, which colleagues and others might wish to refer to, but I will narrow my remarks to the areas that I have defined.

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Photo of John Redwood John Redwood Conservative, Wokingham

Will the hon. Gentleman explain how it would be fairer to impose a poll tax or rubbish tax on people on low incomes in addition to their local income tax, which he proposes? Why would it be fairer to charge small businesses extra business rates if there happens to be an improvement in their neighbourhood that they could not control and that does not benefit them? Under the hon. Gentleman's supplementary business rate proposals, that would mean a big leap in their business taxes.

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer

I am not quite sure where the right hon. Gentleman has got the idea that we are proposing a poll tax on people on low incomes. He has wholly misunderstood that. The only taxation relating to individuals that we propose is the complete elimination of the council tax system and its replacement by local taxation based on ability to pay.

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Photo of John Redwood John Redwood Conservative, Wokingham

The hon. Gentleman should read section 4.0.12 of his document, "Reducing the Burden", which states that Liberal Democrats "support giving authorities" the "powers to introduce" rubbish taxes.

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer

If the right hon. Gentleman read the document more carefully, he would discover that—if he is talking about the collection system, which has been controversial in the Communities and Local Government Committee—we are in favour of giving local authorities discretion. Surely the right hon. Gentleman, who I know is a highly economically literate man, would accept that where there are pollution and externalities, they have to be properly charged for. That applies to waste disposal as to other things.

The first of the major exemptions given by the Government is in relation to capital gains tax. In 1997, the system inherited from the noble Lord Lawson had the merit of simplicity, as capital gains were taxed at the same rate as income. The system worked reasonably well and was accepted by businesses as providing reasonable incentives. I recall—Mr. Redwood is probably the only other Member present who was part of the discussions—that a radical change in the capital gains tax regime was introduced by Mr. Robinson.

The key new concept was taper relief, whereby individuals and businesses should be granted relief depending on the length of time that they held on to their assets. That was severely criticised at the time, certainly by the Liberal Democrats, and, I believe, by the Conservatives too. The argument was advanced that the concession would prove to be very expensive, that businesses would find ways of collecting the relief without changing their behaviour, and that trying to use taxation in that way would eventually prove counter-productive. In retrospect, we know that businesses have taken enormous advantage of the taper relief rules in ways that are quite unconnected with the original intentions to encourage ventures and to encourage individuals to hold their assets for long periods, to reduce what was called the "churning" of investment.

The issue has surfaced in the context of so-called private equity companies. I shall not use this debate as an opportunity to speak for or against that form of corporate governance—there are arguments for and against it—as it is not the right context. Some of those companies, however, have availed themselves of generous tax relief, and have created the situation in which they hold on to assets as a result of carried interest for several years—two years if they are classified as a business—and pay as little as 10 per cent. in tax. That gave rise to the popular story about private equity companies paying tax at 10p in the pound, and their cleaners paying tax at 20p in the pound.

Criticism has come from outside the industry, some of which is well informed and some less so, but it is worth quoting one of the leading advocates of that method of corporate governance, Jon Moulton, of Alchemy Partners, who has been doing that kind of business for many years. He said in relation to his own business:

"in this country, the exchequer loses out. The chancellor should be thinking again about the tax revenue he loses" as a result of leveraged buy-outs. He acknowledges the enormous cost to the Exchequer of the concession that his industry has been granted.

One could argue that that problem could be dealt with selectively. There was a memorandum of understanding under which that form of carried interest was allowed tax relief, and that could simply be closed and dealt with on a selective basis. That would probably be unfair to the private equity industry, however, as such companies are only one of several types of company taking advantage of such a generous loophole.

To give an example that has nothing to do with private equity, in Property Week a few weeks ago, the retiring chairman of British Land, Mr. Ritblat, described his experience:

"The reason why I sold the shares is terribly simple. The benefit of business asset taper relief when you are still the employee of a company is colossal, the difference of 10 per cent. tax to 40 per cent. Selling them now means I save £20 million in tax. Tell me one person who wouldn't want to save themselves £20 million?"

He was not claiming in any sense that he had contributed to entrepreneurial endeavour; he had simply found a way of managing his property portfolio in a way that saved himself enormous amounts of tax as a result of the Government's taper relief concession. We would argue that that tax relief has been grossly, excessively generous, with very little positive economic outcome. It is a strange form of tax, as the total tax yield to the Government—£4 billion—is considerably less than the Government's own estimate of the value of the relief, which is £6 billion. We would argue for going back to the much simpler system that the Government inherited in 1997.

The second group of tax measures that I want to discuss is those relating to non-domiciled investors. The concept has been around for roughly two centuries—since income tax was introduced. From its inception, it was understood that it would be fair and an encouragement to the City of London, which was then in its embryonic form, for people to be taxed on their income in Britain but not on the income that they accrue overseas if they have good claims to be non-domiciled and not to have strong, traditional connections with this country. That developed in an ad hoc way, and was formalised first after the first world war, and secondly after the second world war.

It is clear that that system has caused some dissatisfaction, probably expressed most cogently and aggressively by the current Prime Minister when he was the shadow Chancellor of the Exchequer. In 1994, he undertook to close the loophole under which

"those who are non-domiciled are able to live in the UK free of tax".

He did not lose sight of that concern: in the pre-Budget report of 2002, he returned to the subject. He argued that we need to revisit the question:

"It is generally accepted as fair that those with a long-term connection" to a country

"owe a special obligation to support the social structures of the state."

He initiated an inquiry into the non-domicile tax regime in the following terms:

"the current rules determining residence and domicile have developed over the past 200 years, are complex and poorly understood, and do not reflect the reality of today's more integrated world".

He initiated an inquiry in the Treasury with a view to tightening up those rules.

The spirit of the age was also expressed by Mr. Peter Mandelson, as we can now call him, who described the new Government as "intensely relaxed" about people getting filthy rich, as long as they paid taxes. He was anxious that the Government should close down the loopholes.

The question arises: how do the loopholes operate, and do they operate entirely in accord with the spirit of non-domicile?

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Photo of Steve Webb Steve Webb Liberal Democrat, Northavon

My hon. Friend mentions the comment about being relaxed about the wealthy getting even wealthier. Does he recall the then Prime Minister being interviewed on "Newsnight", being pressed repeatedly on whether it was a bad thing that the gap between the rich and poor was growing, and serially evading the question? Given that our debate is about fairness in the tax system, is my hon. Friend as relaxed as Mr. Mandelson about that gap, or does he think that there comes a point beyond which gross inequalities are damaging to society?

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer

I am not relaxed about that matter, as it is a subject of legitimate concern. There are two issues: one is whether one is relaxed about inequality; the other, about which Mr. Mandelson was quite right, is that one can be more relaxed, providing that the very wealthy pay their share of tax. In many non-domicile cases, it seems that tax is not being paid that should have been paid, at least if the spirit of the system was being observed. Let me describe one or two different ways in which the system now operates so that capital gain that accrues in the UK does not carry taxation.

We need only consider the evidence given by tax advisers, who are often quite public and free with their advice. Mr. Andrew Tailby-Faulkes, a tax partner at Ernst and Young, described some of the mechanisms currently employed.

First,

"For... residents who remain foreign domiciles it is possible to set up dual contracts for work in the UK and overseas, again with the overseas portion not taxable unless remitted to the UK."

That is a common practice among people who are in the City for several years. Another tax adviser, Lee Hadnum, author of "Non Resident and Offshore Tax Planning", describes preferential tax treatment as

"a fantastic tax break because it means that your investments can grow (offshore) tax-free for many years and potentially indefinitely".

One of the technical aspects is the opportunity, which is increasingly being sought, for non-domiciles to accrue capital gains in the United Kingdom on which they do not pay tax. One of the reasons is that the tax avoidance principles do not apply to non-domiciles in relation to capital gains tax, and it is therefore relatively easy to shift capital gains tax into overseas trusts.

A third example, although tricky and technical, illustrates the opportunities that are now becoming available. It has generally been assumed that while it is possible for non-domiciles to find a way of not paying income tax and capital gains tax, inheritance tax is payable and is paid. One tax adviser, however, has described the mechanisms that are developing to prevent its being paid.

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Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

The hon. Gentleman speaks of taxes that it is difficult or impossible for non-domiciles to evade. Will he confirm that the one tax that they cannot avoid paying is the council tax that he proposes to abolish?

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer

We are talking about people who are extraordinarily rich. The amount paid in capital gains tax is so trivial that it hardly makes a difference to the sums we are describing. If one is Mr. Mittal and one has just bought a £50 million house, paying £1,500 to the local council hardly constitutes a major contribution to British revenue.

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Photo of Andrew George Andrew George Liberal Democrat, St Ives

The Conservatives introduced a council tax system under which £150 million a year was used to subsidise second homes for the wealthy when many thousands of people in constituencies like mine did not have a first home. Does my hon. Friend agree that, in contrast to the Conservatives, we need to think of ways of introducing a fair system to ensure that where scarce housing must be rationed, it is given to those who need it rather than to the wealthy who simply take advantage of second homes for investment purposes?

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer

My hon. Friend is right, and he has helpfully prompted me to mention something that I omitted from my remarks about capital gains tax taper relief. Clearly if people buy property and hold it for 10 years as individuals—if not as companies—and resell it as an investment, that not only bids up prices in areas such as his, but provides a substantial tax shelter for the individuals concerned.

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Photo of David Taylor David Taylor Labour, North West Leicestershire

Mr. Hammond implied that payment of council tax by the rich somehow compensated for their avoidance of other taxes on a grand scale. Someone in a property in this borough of Westminster—the one owned by the Mittals, say, which is worth £48 million—paying band H council tax is probably paying less than an ordinary working person in a band D house in North-West Leicestershire. That is not much of a compensation, is it?

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer

The hon. Gentleman has made my point for me, in a striking way.

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Photo of John Redwood John Redwood Conservative, Wokingham

Does the hon. Gentleman also think it unfair that well-off people who are legally settled in Britain and paying taxes here can buy every new issue of national savings and accumulate a very large sum which is entirely free from tax on income and capital gains? Does he want to stop that as well?

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer

To be honest, I have not reflected on the concession that is given. I would rather reflect on it than attempt a glib answer, and as that was an interesting question, I shall do so.

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Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

I am grateful to the hon. Gentleman for his generosity in allowing a series of interventions. May I return to his point about taper relief on non-business assets over 10 years? Does he recognise that within that gain, in the absence of indexation, is a significant element of inflationary gain? Will he comment on his party's proposals, which involve taxing what is a purely inflationary gain at the end of that period?

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer

It is true that in the report we published we did not set out how an inflation taper system might operate. I certainly accept intellectually that inflation should be compensated for in some way, and when we are called on to set out our policy in more detail, we shall describe how that can be done.

I also acknowledge, as the hon. Gentleman has raised this broader question, that when it comes to capital gains tax there are certain benefits from the taper relief. It was designed to encourage particular types of company. Defending the position that I am taking, Lady Noakes, a Conservative spokesman on these matters, inquired in another place:

"My Lords, does the Minister agree that some of the tax incentives utilised by private equity were designed to support and encourage real venture capital? If he agrees, can he explain why investment in early-stage companies has declined from 10 per cent in 1998 to 2 per cent in 2005?"—[ Hansard, House of Lords, 10 July 2007; Vol. 693, c. 1285.]

The original objectives of the concession have clearly not been met.

I am happy to take interventions, but I was interrupted at a point at which I was trying to explain about the complex ways in which sophisticated tax advisers can help non-domiciles to avoid paying inheritance tax, which is one of the most difficult taxes to avoid in the United Kingdom. According to Mr. Tailby-Faulkes, whom I quoted earlier,

"UK property is always within the IHT net on the death of the owner, even if they haven't been domiciled in the UK.

A simple way to mitigate this is to have a mortgage on the property... But one problem is that if foreign income or gains are used by the foreign domiciled borrower to pay the mortgage then these will be taxable remittances."

That is a problem, but he has thought his way through it:

"A solution can be to take out a loan with a foreign lender; as long as this is on interest-only terms, using foreign income and gains to pay the interest costs will not count as a taxable remittance."

There are mechanisms to deal with even the most intractable tax-avoidance problems.

It was precisely because of that set of concerns that the Prime Minister, then Chancellor of the Exchequer, wished to initiate a review of the whole question, which he did in the 2002 pre-Budget report. He said:

"Building on this work, the Treasury and the Inland Revenue will assess how the current rules work in practice, and will publish a background paper to aid discussion of how the rules compare with the Government's principles."

What happened to that 2002 initiative? No report has ever been published, no review of policy has ever been described, and no calculations have ever emerged to establish whether or not it would be beneficial to the United Kingdom.

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Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

When our hon. Friend Norman Baker asked that very question during Treasury questions last week, he received the following answer:

"The Government's review of the residence and domicile rules is ongoing. The Government are mindful that any change to the current system would need to balance carefully the principles of ensuring fairness and of promoting the UK's international competitiveness."—[ Hansard, 12 July 2007; Vol. 462, c. 1605.]

Does my hon. Friend agree that if the review is "ongoing", it is about time we received a report?

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer

One would have thought that five years might produce a less bland analysis of the issue. In the meantime, some of us have been trying to find out how far the Treasury progressed with its inquiries and what are the preliminary results. I asked the then Economic Secretary to the Treasury, Ed Balls—now Secretary of State for Children, Schools and Families—about that some months ago. When I asked him specifically how much tax had been forgone as a result of the concession, he replied:

"Estimates of the tax forgone in the UK as a consequence of the use of the remittance basis by those not domiciled in the UK are not routinely made... No estimates have been made of the economic benefits to the UK from the retention of the domicile laws on taxation."—[ Hansard, 30 April 2007; Vol. 459, c. 1383W.]

That was five years after the study had been initiated.

Part of the problem with the right hon. Gentleman's answer is that—although I am sure that this was not intentional—it is not actually true. The Government have been obliged on several occasions to divulge the results of their work. A few years ago, a freedom of information request by a magazine called Accountancy Age produced what is described as "a heavily redacted memo" from the Inland Revenue to the Paymaster General, dated 15 December 2003. The memo contained the statement:

"Many non-domiciled residents pay substantial amounts of UK tax. We estimate that, in total, they pay about £5 billion in UK tax and NICs but only escape tax of about £1 billion of unremitted income and gains."

Therefore, there is a basis for an analysis—and, indeed, there might be a positive outcome.

I repeatedly press the Government for updates on those figures and more detailed analysis, and the answer I receive is remarkably secretive. The latest statement from Her Majesty's Revenue and Customs is:

"HMRC does hold some information prepared since 1 January 2005...but we are not proposing to disclose that information because we think that the information is subject to an exemption under section 35 of the Freedom of Information Act 2000—information held for the formulation or development of government policy."

I ask the following obvious question: what on earth have the Government got to hide? If this is a beneficial relationship—if it is to the benefit of the UK economy—why do the Government not publish, given they have nothing to lose? All we are asking for is a straightforward statement of the benefits to the UK in tax terms, the revenue that is being forgone and a balanced evaluation of whether this is good for the UK economy. In the final analysis it might well be a perfectly sensible arrangement that is necessary in a globalised world economy, but I would like to see such a proper analysis of that. Instead, the Treasury have addressed the matter in a secretive manner.

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Photo of David Taylor David Taylor Labour, North West Leicestershire

Does the hon. Gentleman accept the thesis of the previous Government—and, indeed, of the current one—that any vigorous attempt to tighten the domicile rules will undermine the City's role as a global financial centre? Does he acknowledge that there is a trade-off, and at what point would he be willing to trade off some flexibility on the definition of domiciled status?

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer

The hon. Gentleman is right that there is a trade-off, and it would be foolish to be dogmatic one way or the other.

I have another quote on non-domicile tax relief from a leading City tax specialist, Richard Murphy:

"When I have sat with Treasury officials and asked them why don't they do something about this, it is because they are frightened the money will leave London and they think there is a benefit to this."

We say, "Quantify the benefit." That is all that we are asking for. The benefit could indeed be huge—as Mr. Redwood said. If so, why is the Treasury so frightened of making the case? One would have thought that it would be a straightforward and easy case to make, but in almost five years of deliberation the Treasury have clammed up completely in terms of giving any facts or analysis of the situation.

One reason why the Treasury ought to focus on this question is that it appears to be easy to get non-domiciled status. I was not aware that that was the case until one of my staff who has a grandfather from Switzerland made inquiries. He asked, "If I wanted to become a non-domicile taxpayer, how would I do that?" Those who wish to do so get a four-page form which must be filled in. So far as I am aware, there is no extensive vetting by the Inland Revenue. They just proceed, even though they might have very tenuous connections with the UK. It might be for that reason that the number of those involved is rising rapidly: there were 105,000 in 2003-04, 112,000 in 2004-05, and perhaps the Minister will tell us how many have been granted that status since.

I do not wish to make a dogmatic case for or against this form of tax relief for very wealthy people. Like David Taylor, my instinct is that there could be some sensible limitations. One obvious limitation would be to restrict the number of years for which it is possible to enjoy non-domiciled status. Allowing that period to go back to the era of people's grandparents or parents seems to me to be remarkably generous. A period of 20 years, which would align with the inheritance tax rules, might be a fair compromise. It would also be fair and right that even if we were to allow non-domiciled investors to continue, in the interests of the City, to enjoy tax relief on their overseas income—although I should say in passing that the Americans do not allow that—some specific exemptions, such as that capital gains tax is not subject to anti-avoidance rules, clearly should be dealt with.

I hope that what I have said will stimulate debate on the non-domiciled rules—I do not think we have ever had one during my 10 years in Parliament. I have said a little about capital gains tax, and I wish to talk briefly about a couple of other major taxes of importance to the very wealthy.

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Photo of Steve Webb Steve Webb Liberal Democrat, Northavon

Before my hon. Friend moves on, he mentioned anti-avoidance and I ask him to touch briefly on the concept of a generalised anti-avoidance rule. I am a layperson in terms of these matters, but I have always felt that a presumption that active avoidance techniques should be ruled out as a point of principle would be preferable to the current piecemeal approach. Does my hon. Friend agree?

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer

Yes. We have argued for that, and I believe that the Government want to move in that direction, although they have been slow in implementing that. What my hon. Friend proposes is obviously right and would make it more difficult for companies to set up in business with the specific purpose of promoting anti-avoidance. The Government have made it clear that they want to tighten up where they can. However, the Government are having a drive on tax evasion, as opposed to tax avoidance. They have offered a generous amnesty to large numbers of very wealthy people who have not been paying taxes that they legally should have paid. A perfect combination of policies would be to pursue assiduously the evaders while tightening up on avoidance.

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Photo of David Taylor David Taylor Labour, North West Leicestershire

The hon. Gentleman is being generous in giving way. On the appropriate approach to avoidance schemes, will he look at the early-day motion 1652 that I have co-sponsored, which draws attention to the regrettable attitude of the five big accountancy firms to devising, promoting and implementing tax avoidance schemes on a grand scale that have no commercial substance? Those firms are heavily involved in artificial loans, fictitious assets, secretive trusts and transfer pricing, which deprive the Exchequer of billions of pounds every year and therefore restrict social investment, and which transfer the load of financing public services to taxpayers with less means than the very rich people whom those five accountancy firms service.

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer

The hon. Gentleman is right, and I am sure that those firms would say that as long as the system permits it, why should they not pursue fee income from their clients? The only way to prevent that would be to have the kind of rule that has been described. It is my understanding that the Government want to move in that direction. Will the Minister tell us how far they have got?

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Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

My hon. Friend might be interested to know that during discussions of this year's Finance Bill there was some evidence of mini general anti-avoidance rules being discussed in terms of issues such as stamp duty land taxation. However, the industry's concern is that that might be in addition to the existing Government regulation, and it asks for a simplification instead of additions to the already complex taxation system.

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer

I thank my hon. Friend for that intervention. She worked extremely hard on the Finance Bill and is much closer to the technical issues than I am, and I am sure that she is right.

Let me say a few words on unfairness in relation to other taxes that bear upon wealth. Stamp duty is a tax on transactions rather than a wealth tax, but it does relate to property assets. Two elements of unfairness should be dealt with. The first involves what is technically known as the slab system. When a certain threshold is reached—£250,000 for the 3 per cent. limit—the purchaser pays the full 3 per cent. on the total sum. Therefore, somebody who purchases what is nowadays quite a modest house pays £7,500. Somebody who buys a house worth £500,000—in much of south-east England that would be a modest home—will pay 4 per cent. on that total, which amounts to a £20,000 tax bill in cash. That is an extremely onerous form of taxation and, moreover, it is not progressive.

Another beneficial loophole to those who are well organised and wealthy means that if they arrange to buy a house through a corporate offshore vehicle, they can pay as little as 0.5 per cent. stamp duty. Many very wealthy people use that loophole. I am surprised that the Government have not alighted on that problem in their efforts to combat tax evasion.

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Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

I carefully read the Liberal Democrat document that was published last week, and I have a question about the slab versus the slice system. The hon. Gentleman proposes to move from the slab to the slice, but will he confirm whether that will apply at the £500,000 threshold, or is the document suggesting that when £500,000 is reached, the entire value of the property will become subject to the 4 per cent. rate from the first pound?

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer

We are recommending the principle that it should apply up the scale. Exactly how that will operate depends substantially on the state of the property market. If the hon. Gentleman wants a good description of how a reformed stamp duty system would work, several years ago the Council of Mortgage Lenders produced a set of numbers showing how a progressive scale of charges would work. We would endorse that principle, although the detailed arithmetic would have to be reworked in the light of current numbers.

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Photo of Andrew George Andrew George Liberal Democrat, St Ives

I apologise for dragging my hon. Friend back to property taxation and capital gains tax on second homes. The issue is not just raising fair taxes on those with wealth, but using the available records of those who would have to pay capital gains tax as a means of rationing properties through the planning system if a change-in-use class order were introduced, as our party proposes. Does my hon. Friend agree that the issue is not just fair taxation, but using the tax system to ensure that properties can be rationed so that those in the most desperate housing need, rather than second home owners, get properties?

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer

I would quibble a little over the word "rationed", but the sentiment of my hon. Friend's intervention was helpful and supportive, and I agree with him.

I do not want to spend long on inheritance tax because those who suffered through discussion of the Finance Bills of the past few years—my hon. Friend Julia Goldsworthy soldiered on the front line—have talked about inheritance tax ad nauseam for hours, if not days. There are some odd features of the way in which the inheritance tax system has worked out in recent years, and the numbers are simple. Since 2000, the number of estates valued at more than £2 million for inheritance tax has declined by 8 per cent., in the context of an enormous increase in the number of properties worth more than £2 million. The number actually paying inheritance tax has fallen. On the other hand, the number of estates valued at between £300,000 and £500,000 has increased by 20 per cent. Essentially, the tax is voluntary for those at the top end of the scale because they have access to sophisticated advice, while middle class families—that is essentially what we are talking about—who are not familiar with the various devices available to them, particularly through gifts, are paying the tax, unaware of the potential for avoiding it. Clearly that is fundamentally unsatisfactory.

I shall summarise a few of our proposed steps to make the system fairer—they are modest, and part of a much more comprehensive approach to taxation—to bring together the threads of my argument. First, it is clear that the reliefs on capital gains tax—such as taper relief—should go because they are expensive, unfair and reward wealth unsatisfactorily with no evidence that they produce significant economic change of behaviour.

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Photo of Stewart Hosie Stewart Hosie Shadow Spokesperson (Women), Shadow Spokesperson (Home Affairs), Shadow Spokesperson (Treasury)

On capital gains tax, if I remember correctly, the personal allowance is £8,800. Where do the Liberal Democrats see that allowance going? Will it fall to £1,000, as was suggested last year when they published their previous document?

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer

That is a fair question, and we have reconsidered the issue in the light of discussion with people in the investment industry. We did indeed propose a substantial reduction in the allowance, and we have rethought it. Our current proposals, which are set out in our report, make no suggestion of changing the level of allowances, for the simple reason that a large number of small investors would otherwise be caught. The hon. Gentleman asked a sharp question, and picked up on the fact that our proposals suggest a modest change.

Secondly, we propose some tightening up of the non-domicile rules. We do not want to abandon them, but we want to change the residency requirements, and to cut back on some of the provisions, particularly concerning capital gains tax. Thirdly, we want to tighten the rules applying to corporates buying property and escaping stamp duty. We want to clamp down on inheritance tax avoidance by extending the seven-year rule on gifts to 15 years.

Behind those policies are bigger ones, notably, as the Conservative Front-Bench spokesman intervened to say, abolishing council tax because in relation to income it is highly regressive, and much the most regressive of all forms of taxation. We want to scrap it entirely, and to replace it with a tax based on people's ability to pay—their income. That would help to improve the overall equity of the tax and distribution system.

The Government have talked a great deal about progressive consensus and fairness. They have presided over a system of distribution of income and wealth that has not improved income and has deteriorated in terms of wealth. Taxation clearly has a part in correcting that, and I commend the motion to the House.

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Photo of Andy Burnham Andy Burnham The Chief Secretary to the Treasury 8:16 pm, 16th July 2007

I beg to move, To leave out from "House" to the end of the Question, and to add instead thereof:

"notes that since 1997, the Government has undertaken a comprehensive programme of reform to the tax system, which has encouraged saving and rewarded enterprise, reduced child poverty, supported hard-working families and provided security for all in old age, and welcomes the fact that these reforms strike the right balance between encouraging enterprise and investment, maintaining the UK's international competitiveness and delivering a modern and fair tax system, in which all pay their fair share of tax."

Let me begin with some facts that provide the essential context for this debate. In this financial year, the top 1 per cent. of earners—those with a pre-tax income of £117,000—will pay 22 per cent. of all income tax. The top 5 per cent. will pay 41 per cent., and the top 10 per cent. will pay 52 per cent. of all income tax gathered.

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Several hon. Members:

rose —

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Photo of Andy Burnham Andy Burnham The Chief Secretary to the Treasury

I was about to say that to most normal people, if not Lib Dems, those figures would suggest that the income tax system in this country was both fair and progressive, but if they want to correct me I will gladly give way.

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Photo of Steve Webb Steve Webb Liberal Democrat, Northavon

It is Steve Webb, Madam Deputy Speaker, although if I say something silly, it is my hon. Friend.

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Photo of Steve Webb Steve Webb Liberal Democrat, Northavon

Thank you, Madam Deputy Speaker. The Chief Secretary said that the richest 1 per cent. of income earners pay 22 per cent. of income tax, but that statistic is meaningless unless we know what proportion of income they have. Can he tell us what proportion of income the richest 1 per cent. have?

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Photo of Andy Burnham Andy Burnham The Chief Secretary to the Treasury

I do not know whether that is a question from Mr. Davey or Steve Webb. The important point is that the top 1 per cent. pay 22 per cent. of all income tax, and they are people with a pre-tax income of £117,000.

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Photo of Andy Burnham Andy Burnham The Chief Secretary to the Treasury

I must make some progress, but I shall give way again.

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Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

In welcoming the Chief Secretary to the Treasury, perhaps I could help him with some information. Is he aware that the richest 20 per cent. pay a lower proportion of their income in tax than the poorest 20 per cent.?

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Photo of Andy Burnham Andy Burnham The Chief Secretary to the Treasury

I shall come to some of the figures, but it is interesting that the minute I raise the subject of taxes, Liberal Democrat Members get excited and want to pick holes. That suggests that they are slightly sensitive about the subject. I did not hear the words "pips" or "squeak" during the contribution of Dr. Cable, but I would not have been surprised if they had crept in at some point.

In this country, we have a system of taxation that is both progressive and fair, and it has underpinned an unprecedented period of economic growth in this country—59 consecutive quarters, to be precise—and unprecedented investment in our public services. Any proposals for change that could put that hard-won stability and prosperity at risk would need to be considered very carefully—particularly any proposals for more radical change. That is the problem with today's debate. I think it was originally entitled "Fair taxation for the super-rich".

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Photo of Andy Burnham Andy Burnham The Chief Secretary to the Treasury

Mr. Hammond—I welcome him to his new Front-Bench role—nods in agreement. Those words have strangely disappeared from the title of today's debate. The point is that tax is complicated, as Dr. Cable made clear. Any changes to taxation need to be informed by a balanced view across the whole economy and considered in the round. By taking one issue in isolation, as the hon. Gentleman did, he and his colleagues are seeking to suggest that there are easy answers and easy targets. That is the politics of the student union. Coupled with last week's optimistic proposals for income tax giveaways, it can be concluded that the timing of today's debate suggests a certain nervousness about upcoming by-elections on Thursday.

Over the past 10 years, the Government have had a record to be proud of in increasing fairness in our tax system and society. We have made the tax system fairer by closing loopholes and clamping down on tax avoidance to ensure that everyone pays the right amount at the right time and pays their fair share. We have reformed the tax and benefits system to help to create a fairer society, providing more support for work, families and pensioners and cutting child and pensioner poverty, both of which were rising in 1997. In developing our tax policy, we have recognised that the surest foundation for a fair society is stable macro-economic performance that delivers jobs, growth and opportunity for all.

Under this Government, Britain is better off. Household net wealth is the highest that it has ever been, up 65 per cent. from 1997. There are 1.8 million more home owners than 10 years ago and the average household is £1,000 a year better off because of our changes to the tax and benefits system. From April next year, we will cut the basic rate of income tax to its lowest rate for more than 75 years. It is not the super-rich who are benefiting from the changes but those in the lowest income decile, who have seen the greatest percentage increase in their net income as a result of our tax and benefit changes. Between 1979 and 1997, the poorest 20 per cent. of households saw their income grow by less than 1 per cent. a year in real terms, while the richest 20 per cent. saw theirs grow by more than three times as much. Since 1997, the poorest 20 per cent. of households have seen their income grow by 2.2 per cent. a year—faster than that of the richest 20 per cent. So the Government have halted the dramatic rise in household income inequality that the country saw in the '80s and early '90s.

The Institute for Fiscal Studies has found that without the Government's reforms to the tax and benefits system, income inequality would have continued to rise sharply. In 1997, the UK had the highest child poverty rate in Europe. Since then, we have reduced child poverty faster than anywhere in Europe, with 600,000 children lifted out of relative poverty. The number of children in absolute poverty has been halved. To build on those achievements, this year's reforming Budget went further with plans to simplify the tax system, to provide help for pensioners and support for families, and to make work pay. As a result, four in five households will see no change or will be better off. Increases in child tax credit will help lower to middle income families and help the Government to take a further 200,000 children out of relative poverty. Some 580,000 pensioners will be lifted out of income tax altogether.

I have spent time setting out that record because it provides the context for the consideration of the issues that the hon. Member for Twickenham has brought to us today. He began his remarks by calling for "a greater attention to the distribution of income and wealth"—if I quote him correctly. It is interesting that the hon. Gentleman called such a debate when I believe that he called the Government's increases in the national minimum wage "dangerous". That is a difficult position for him to hold when he begins a debate by preaching to this side of the House about the distribution of income and wealth.

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Photo of Andy Burnham Andy Burnham The Chief Secretary to the Treasury

I will give way, and I hope the hon. Gentleman will confirm that that was what he said.

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer

It was not what I said. I and my party have voted for the minimum wage and—in Committee—for every increase. I said that it would be dangerous if the Government proceeded with increases in the minimum wage that were not aligned with the recommendations of the Low Pay Commission, which governs the minimum wage. The context is quite different. We are fully supportive of the minimum wage and the increases that have taken place. [Interruption.]

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Photo of Andy Burnham Andy Burnham The Chief Secretary to the Treasury

I will not apologise. Let us say that the hon. Gentleman is ambivalent, at the least. I recall hearing him or one of his colleagues calling for a regional minimum wage, and that is different from a national minimum wage, which this party introduced and to which we remain steadfastly committed. It is a different thing, and at the very least people who are watching this debate will conclude that there is a certain ambivalence on the part of the hon. Gentleman on that issue.

Today, the hon. Gentleman was noticeably silent on the tax proposals that he introduced last week. He made a long speech, going into all possible corners of the tax system, but did not dwell on the new package of proposals that he put forward last week. I read them, like the hon. Member for Runnymede and Weybridge—it is terrible that we have to spend our weekends reading Lib Dem tax documents, but such is life. But it was raining anyway and what else can one do on a wet Saturday? I want to challenge the hon. Member for Twickenham to tell me in simple terms what the proposals would do to "improve" the distribution of income or wealth in this country. May I ask him—

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Photo of Andy Burnham Andy Burnham The Chief Secretary to the Treasury

The hon. Gentleman wants to intervene again, but he should let me ask the question first. Am I right to say that reducing stamp duty on properties worth up to £500,000 and raising the inheritance tax threshold to the same amount would not benefit everyone in this country and perhaps only a certain few?

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer

The Chief Secretary asked me what effect the proposal would have on income distribution. Our analysis, which has been corroborated by the Institute for Fiscal Studies, is that it would benefit all income groups except for the top decile.

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Photo of Andy Burnham Andy Burnham The Chief Secretary to the Treasury

Let me give the hon. Gentleman my analysis, and that of the Treasury, of some of the proposals. Unless I am mistaken, he did not mention this once in his remarks, but the proposal is to cut 4p off the basic rate of income tax. Our calculation is that that would cost £18 billion in 2008-09—he agrees with that—and £19 billion in 2009-10. That is a lot of tax on petrol or flights. If he is suggesting that he can raise that amount by closing "tax loopholes", it is a big claim to make.

Our analysis shows that Liberal Democrats' policy would most benefit the highest earners. About one in five households in the bottom income decile would gain, whereas all households in the top income decile would gain. The average gain per household increases as one goes up the income scale, with households in the top decile gaining, on average, 50 times the amount of households in the bottom decile. Three quarters of the cost of that policy would be spent on the top four income deciles, with one quarter going to the top income decile alone. Less than 1 per cent. of the total cost would be spent on households in the bottom decile. True or false?

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Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

Has the Chief Secretary compared the impact that he has just described with the impact of a 2p cut in the basic rate of income tax across the income distribution bands? What would be different?

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Photo of Andy Burnham Andy Burnham The Chief Secretary to the Treasury

I invited a response on the point that I was making. The debate was called by the Liberal Democrats and I began by laying out some of the Government's policies. The figures that I have given for the Liberal Democrats' policies are staggering for a party that has come to the House this evening talking about narrowing the income gap and lecturing the Government. I note that there has been no effort to repudiate my analysis.

We should think about the income distribution effects of the Liberal Democrats' proposed changes and then about their proposal for a local income tax. In his report on local government finance, Sir Michael Lyons concluded that a local income tax was feasible, but he added that it would mean

"substantial increases in tax for the working population."

In addition, green taxes would have to bear the brunt of achieving the huge savings that would be needed to deliver a 4p income tax cut. What on earth would that do to the taxes on travel faced by the average family? Would an annual holiday be put beyond the reach of the average family in my constituency? I believe that they would struggle if the cost of holidays were to increase significantly. The hon. Member for Twickenham was noticeably silent on all those points and I am amazed that he did not refer once to his party's proposals in his speech.

Let me talk about some of the changes that the Government have made to tackle avoidance and to close loopholes. We have taken steps to make sure that everyone pays their fair share of taxes and we have acted in respect of each of the personal taxes. In response to contrived avoidance schemes to avoid income tax and national insurance contributions, usually marketed to a small number of individuals receiving substantial City bonuses, we made a clear statement in December 2004 that future schemes would be legislated against with effect from that date, not from the date of the legislation. We estimate that, had that statement not been made, more than £1.7 billion of tax and national insurance contributions would have been avoided through such schemes.

More recently, we have acted against abuses of sideways loss relief, with a fair and proportionate response that allows SLR to be used for legitimate business reasons but protects £760 million—three quarters of a billion pounds—in tax. We have also acted to prevent avoidance of inheritance tax by introducing pre-owned asset rules in 2004 that take a fair share of tax when someone gives away an asset but continues to benefit from it. On capital gains tax, this year's Finance Bill, which is to be debated in another place tomorrow, introduces a targeted anti-avoidance rule designed to put an end to the contrived schemes that avoid tax by generating artificial losses. On stamp duty land tax, the same Bill permanently closes down schemes that avoid tax by adding extra stages to the sale of property from one party to another.

The changes to capital gains tax and stamp duty land tax in the Finance Bill have been introduced as a result of information received by Her Majesty's Revenue and Customs through the disclosure regime that was first introduced in 2004. That regime, which obliges the promoters of avoidance schemes to disclose them to HMRC, is allowing us to act against avoidance more swiftly and in a more targeted way. The capital gains tax and stamp duty land tax measures demonstrate that the regime is having a deterrent effect, with marketed schemes decreasing significantly. In addition to acting against contrived avoidance, we are tackling tax evasion. For example, HMRC has obtained details of hundreds of thousands of offshore account holders from a number of banks and expects to collect hundreds of millions of tax that had been evaded, as well as interest and penalties.

As well as delivering rising prosperity for all in what the IMF described in February as a

"decade-long record of strong and steady macroeconomic performance",

Britain is now benefiting from the longest period of sustained low inflation—certainly the longest in my lifetime. We have the second-highest GDP in the G7, instead of the lowest, as when we entered office, and growth that is not only strong—stronger this year than in the euro-area and in the United States—but sustained. As I said, we have experienced 59 quarters of uninterrupted growth—the longest period on record for any G7 country. Even if the UK's economy were to stop growing tomorrow, which of course we do not expect it to, it would take at least nine years for any other major economy to overtake that record. That macro-economic performance, that stability and that strength in our economy have delivered rising standards of living and rising prosperity right across Britain, and it is important to say that this is not a zero sum game. We do not have to make some people poorer to make others richer; we have shown that over the past 10 years. We want our good macro-economic performance to continue, and we want Britain's economy to continue to succeed. We are confident about the position that we are in, but of course we must not be complacent. There are challenges that we need to face, including that of globalisation.

As technological advances and falling transport costs break down the barriers to trade and economic integration, we have to be watchful, and we must ensure that the increasingly interconnected world economy continues to work well for Britain and our national interests. Capital and labour are increasingly mobile; that is particularly true of highly skilled individuals, who are increasingly in demand as the world moves towards a more skills-based economy. That presents some challenges, but also huge opportunities, and the UK is making the most of them. With skills increasingly at a premium, we will benefit from our hugely talented work force. That is partly the result of our high-quality education provision and training, but it is also because of the openness and internationalism that characterises the City: one quarter of London's senior managers in financial and business services come from abroad.

I will pause to reflect on the City for a moment, because its performance in recent years has been truly remarkable. London is now established as the world's leading global financial centre, and Britain has a trade surplus in financial services that is twice as large as any to be found elsewhere in the world; it totalled £26 billion last year. The wealth that the City generates is critical to our economy, and we have worked hard to maintain its competitiveness. We will continue to work hard to build on the City's leading position, and we will work with the City, including through the high-level group that the Prime Minister set up when he was Chancellor of the Exchequer. I encourage the hon. Member for Twickenham and his colleagues to reflect on the City's strong position when they consider the changes that he proposed today.

The hon. Gentleman spent a good deal of his speech talking about the rules affecting non-domiciled individuals. That is a complex area, but we are talking about a relatively small group—it is made up of some 112,000 people, according to the latest estimates. That group declares some £9.8 billion through the self-assessment process, but it is important to note that it contributes £3 billion in tax, and it behoves the hon. Gentleman to recognise that. That is a significant contribution, and it is not correct to perpetuate the idea that there is serial avoidance by that group.

It is not right to suggest that it is easy to gain non-domiciled status. A person's domicile is the country to which they are attached from birth to the age of 16. A person usually has the same domicile as their father, and at the age of 16, they may have a domicile of choice, often through the nationality of their father. It is not my understanding that someone could gain non-domiciled status on the back of a tenuous link—I think that that is the phrase that the hon. Gentleman used—with a country. If the hon. Gentleman writes to me with more details on that point, I will be interested to read what he says, but it is not easy to change status in the way that he suggests.

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Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

I would be grateful if the Chief Secretary to the Treasury clarified a point for me. My understanding is that it is possible to inherit non-domiciled status. If someone's parent was non-domiciled, they could claim non-domiciled status. That is what I inferred from his remarks. Is that the case?

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Photo of Andy Burnham Andy Burnham The Chief Secretary to the Treasury

I believe that it is the case, and if it is not, I will correct what I said. I was referring to a comment made by the hon. Member for Twickenham, in which he appeared to suggest that a person working in his office who had a Swiss grandfather could, on the back of that, achieve non-domiciled status for tax purposes. That is not my understanding, and it is not right to suggest that it is easy to gain that status. I hope that the hon. Gentleman will accept that we are talking about complex changes that would have an impact not only on the economic competitiveness of the country, but on other parts of the tax system.

It is important to avoid knee-jerk responses, to give careful consideration to any proposed changes, and to have consultation on any proposals. The tone of some of the hon. Gentleman's remarks suggested that this was a relatively easy target. He made great play of the 4p cut in income tax and seemed to set great store by it, but how much money would he raise to pay for that £18 billion spending commitment?

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer

If the hon. Gentleman has read the report, as he said that he had amused himself over the weekend by doing, he will have seen that the arithmetic is quite carefully set out and that it is balanced. We estimated that the cost of the 4p cut would be rather more than £18 billion—closer to £20 billion. Perhaps we were conservative, but it would be paid for partly by the capital gains tax taper relief, which is about £6 billion, partly by the environmental taxes, which he has fairly referred to and which we can debate, which are of roughly the same order of magnitude, with the balance to be paid for by restricting pension contribution tax relief to the standard rate. Those are the three components and if he has read the report, he will have seen that it balances.

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Photo of Andy Burnham Andy Burnham The Chief Secretary to the Treasury

I saw some press coverage of that arithmetic. As the hon. Gentleman knows, I have not been in the Treasury for long and he is well versed in these matters, but I suspect that in his heart of hearts he knows that these are optimistic policies, to say the least. That was the word that I heard civil servants use today to describe some of these plans. We all know what optimistic means in this context, and if the average family realised what burden would be loaded on to their petrol bill or their annual family holiday bill to make some of this tax burden even vaguely fundable, they would have some serious second thoughts about what the hon. Gentleman and his colleagues have in mind.

During the last few days there has been a significant debate on taxation as it affects families, particularly married couples. Not having a great deal to do at the weekend, I read through all the press cuttings, and it was interesting to see the different views beginning to emerge from the Conservative party following the publication of the document last week by Mr. Duncan Smith. The key proposal for a marriage tax break would take billions of pounds out of public services and support for all families and help married couples at the expense of other children. It was interesting to see how quickly some began to back off. Mr. Redwood characteristically had the courage to go on the record and he was quoted in The Times on Friday as saying:

"For the life of me, I cannot see why one should give a prize to people with no children, simply because they happen to be married."

One can only speculate as to the identity of the "modernising Tory MP" quoted in The Times on Friday as saying:

"This is straight back to the 'nasty party'. God knows why David has done it."

It is interesting to follow the ups and downs of the debates in the Tory party that seem to be ebbing and flowing outside the public view. But even more staggering when one reads the document published last week is that not only was there the cost of the marriage tax break, but on a conservative estimate, some £10.9 billion of spending commitments. How on earth all that adds up when one considers the policy of sharing the proceeds of growth is beyond me. I hope that the hon. Member for Runnymede and Weybridge will enlighten us this evening when he makes his remarks. We agree with two conclusions of the Conservative social policy group, however. In December 2006, it concluded:

"For the past 10 years, inflation has been low, the stop-go cycle has given way to continued economic growth and there has been full employment."

We certainly endorse those conclusions.

All the actions that the Government take will go to continuing to improve the competitiveness of our economy, coupled with reforms that will continue to increase fairness in the tax system. We will continue to make those changes because we need to recognise the realities of a modern, global economy, with the increasing mobility of labour. The Chancellor has made it clear that on many of the issues that the hon. Member for Twickenham has raised this evening, such as taper relief or the residence and domicile rules, we will not make changes without thinking them through. We will not have the knee-jerk reactions that some call for these days. Changes to the tax system must be properly considered and carefully thought through in the context of what is best for the economy overall, and that is what we will do.

This issue is about striking the right balance—a careful balance between competitiveness and fairness. It is about recognising that we do not have to penalise the rich or make them poorer to make everyone else better off, although we expect them to play by the rules. We have shown that we will take action to ensure that they pay their fair share of tax. This Labour Government have shown over the past decade that we can strike the right balance for Britain, and raise prosperity for everyone while providing the most support to those people who most need it. The incomes of the poorest households have grown faster than those of the richest, and we have increased fairness in our society by cutting child and pensioner poverty.

On the back of a tax announcement last week, the Liberal Democrats have moved this evening a motion that on any reading does not enhance the position of people earning the least in our society. On that specific point, I challenged the Liberal Democrats to come forward with measures that would, as the hon. Member for Twickenham said at the beginning of his remarks, close the gap in wealth and income and produce a fairer distribution of wealth. The loading of taxes on to petrol and aviation would have a major regressive effect and hit hardest those families on the lowest incomes. The 4p cut in income tax would benefit the highest earners in society, not those in the lowest decile. The local income tax would load taxation on to the working population, and move it away from people who do not work. One must consider the combination of all those factors when analysing the package that has been put forward.

By contrast, we have undertaken a comprehensive programme of tax system reform, which has increased fairness by closing tax loopholes. We have tackled tax avoidance and provided support for workers, families and pensioners, cut child and pensioner poverty and struck the right balance between fairness and competitiveness. By striking that balance and making tax changes only after thinking through their impact, rather than seeking short-term headlines to assuage fears about by-election performances, we have shown that by making the right decisions and thinking them through properly, we can deliver macro-economic stability, success and rising prosperity for the whole country. I urge the House to vote against the Liberal Democrat motion, and I commend the Government's amendment to the House.

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Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury 8:49 pm, 16th July 2007

I thank the Chief Secretary for his kind words of welcome, which I reciprocate. I look forward to a constructive debate with him over the coming months and possibly even years.

I do not want to spoil the Liberals' day, but perhaps I can deal with the Chief Secretary's comments about marriage—he will be pleased to hear that the position of shadow Chief Secretary is no different from that of Chief Secretary. He knows that the excellent and exhaustive report produced by my right hon. Friend Mr. Duncan Smith is just that—it is a report to the Conservative party with a series of sometimes expensive recommendations that we will consider very carefully. With the benefit of our "Stand up, Speak up" campaign to consult the people of Britain on those issues and many others, we will, in due course, introduce carefully costed proposals, which the Chief Secretary will be able to analyse and which we will be happy to debate with him.

Few areas are as politically charged as personal taxation, and there are few areas where the temptation to play to the gallery is stronger. There is a great scope for cruel deception in this area. Static models can be served up for popular consumption suggesting that there are easy wins for hard-pressed taxpayers by raising taxes on the undeserving rich. Dr. Cable, by his background and his training, should understand better than most the pitfalls of pursuing that route. In that area above all others, there is an overpowering need for mature debate and for ensuring that the economic head rules the political heart.

Sadly, despite the measured tone of his remarks, the hon. Member for Twickenham appears to have succumbed to the temptation to cash in on a popular media feeding frenzy. As the Chief Secretary has noted, the Liberal Democrat motion focuses on the taxation of the wealthy. It follows suspiciously closely the publication last week of a Liberal Democrat document, which proposes a cut in the basic rate of tax. That risks the accusation of shamelessly playing the politics-of-envy card.

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Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

While we are on the theme of shifting the policy perspective allegedly in response to potential publicity, which of the following comments by the shadow Chancellor does the hon. Gentleman agree with? At a dinner at Claridges on 12 March, the shadow Chancellor told the British Venture Capital Association:

"The importance of your contribution to our economy is, I believe, rightly reflected in the tax treatment that you receive".

In the middle of June, however, he said that his party would support plans to raise taxes for private equity amid growing criticism that many millionaires are paying a far lower rate of tax than other workers.

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Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

If the hon. Lady will contain herself, I will specifically address the private equity question in due course in responding to the remarks of the hon. Member for Twickenham.

I sympathise with some of the underlying concerns set out by the hon. Member for Twickenham. He expressed his position in language that was rather more moderate than the wording of the motion, but a vendetta against wealth creators is completely the wrong approach to solving the problems of income inequality. Strikingly, the motion displays a lack of vision or ambition to boost the life chances of those who are being left behind, just as the Government amendment manifests a disturbing complacency about the state of Britain.

Tackling income inequality by attacking wealth creators risks reducing inequality at the price of general impoverishment. The Chief Secretary stated that this is not a zero sum game, and Abraham Lincoln made the same point in less modern language 150 years ago: "You do not make the poor richer by making the rich poorer." The signal that we need to send is that we will encourage those who have the skills that Britain needs to move our economy up the value curve in a globalising market, and we should not send them the signal that they are unwelcome here.

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Photo of Steve Webb Steve Webb Liberal Democrat, Northavon

The hon. Gentleman condemns the Liberal Democrat motion and the Government amendment, but he has not tabled one himself. Does he have no views on the fair taxation of the wealthy that he wants to share with the House?

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Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

If the hon. Gentleman listens carefully, he will hear my views over the coming 10 or 15 minutes.

The original title of the Lib Dem motion was "Taxation of the Super-Rich", which has now been changed to "Taxation of the Wealthy". That leads one to speculate on whether, if the debate had been delayed by another week or so, it would have become "Taxation of the Moderately Well-Off". Evidently even the Lib Dems have recoiled at the absurdity of describing as "super-rich" people whose incomes leave them still eligible for tax credits. One of the Sunday newspapers pointed out that while £46,000 a year for a single earner household may be a very comfortable income in many parts of the country, it is hardly David Beckham territory.

I note, too, that there is no proposal in the Liberal Democrats' tax document to reintroduce the 10p income tax band, despite their attack on its removal in the Budget. They seem keen to leave out of their calculations their long-term aspiration to increase the income tax threshold to £10,000, at a cost of £30 billion. The truth is that someone on a very low income, just falling into income tax, will still be worse off under the Liberal Democrats' income tax proposals than they would have been before the Prime Minister's Budget stealth taxes abolished the 10p rate.

The question that we need to ask ourselves, first in response to the Liberal Democrats' paper last week, and then to their motion today, is whether their plans add up. They cost them at £22.2 billion, or £52.2 billion if we include the £10,000 threshold. Leaving aside for a moment the question of whether the replacement of council tax with a local income tax would be fiscally neutral, as they claim, how do they plan to pay for their cuts, and do those plans add up? The Chief Secretary focused on the broader picture. I want to look more specifically at three areas where the Liberal Democrats propose to raise taxes in order to pay for their proposed cut in the basic rate of income tax by addressing what they call the tax treatment of the rich, with new taxes on capital gains, a clampdown on non-domiciled residence, and a new tax on pension contributions. The latter has not been mentioned in any detail so far, and I would like to talk about it first.

The Lib Dems propose to scrap higher rate relief on contributions to pensions. In many ways, that epitomises their whole document—ill advised, ill timed and technically flawed. It would be hugely damaging to pension savings, it would not work, and it would not deliver the increase in tax revenue that they suggest. That means that there is already a great hole in their numbers. I think that they are saying that the proposal will contribute £7.5 billion to their funding challenge, but they do not seem to be quite sure what the number is. The document that they published last August, which also proposed abolishing the higher rate pension contribution relief, said that that would produce £4.3 billion, but the document they published last week says that exactly the same policy would produce £7.5 billion. That is a piece of Lib Dem economics for us to analyse. Whichever way, the savings ratio has slumped to an almost 50-year low—just 2.1 per cent. compared with 10 per cent. in 1997. Against that backdrop, and against that of a cross-party consensus that long-term saving for retirement needs to be encouraged, it seems deeply irresponsible to propose anything that would reduce pension saving still further.

There is an even more fundamental objection to the Lib Dem proposal—that it cannot be done. When Lord Turner's Pensions Commission considered the possibility of scrapping higher rate tax relief on pension contributions, he concluded that as long as defined benefit pensions remain a significant part of our provision, in both the public and private sectors, it was not practical to abolish higher rate relief, because when an employer pays contributions into a defined benefit scheme he does not need to attribute them to individual scheme members. None of those contributions generates tax liabilities for an individual member of the scheme, so they simply go in as a contribution by the employer.

Under the Lib Dems' proposals, every single employer contribution would have to be apportioned and a tax liability assessed for each member of the scheme. Even if that could be done, a greater problem would arise, where an employer makes up scheme deficits at the behest of the pensions regulator. In some cases, companies are putting in hundreds of millions of pounds to make up deficits in their pension schemes. Are the Lib Dems proposing that employees, who might be blissfully unaware that such contributions are being made to make good the deficit, should suddenly be landed with a tax bill for the contribution that had been paid on their behalf? The consequences of that are all too easy to predict.

The problem in the public sector is even worse. There is no fund, so there are no deficits, just a totally unfunded obligation that independent actuaries estimate at up to £1 trillion. How are public sector pension promises to be valued, and how is the cost of meeting them to be defined? Some public sector schemes already have notional employer contributions at a level of 27 or 28 per cent. of the total salary bill. If the calculation at individual level could effectively be made, NHS professionals, police officers, school headmasters, civil servants and others would be subject to a significant new tax charge on the contribution that the employer has made. That would shrink disposable incomes, and have a very understandable effect on long-term saving patterns. The proposal will not work technically, and if it did, it would have devastating consequences.

There is a big hole in the sums concerning the pension tax proposal, but what about capital gains tax changes? They risk resembling a cynical exploitation of the sense of outrage that has been whipped up by the media and the unions concerning the taxation of carried interests in private equity funds. In my party, we recognise the need for fairness in the tax system to maintain public confidence, and the Government's amendment gets it right in its reference to the need for balance. Responsible politicians must be prepared to explain the dynamic effects of tax changes that may otherwise appear superficially attractive when presented in a static model. Ignoring the behavioural changes that can be expected to flow from a given tax change is to deceive as to the likely overall consequences. We must all be willing to argue the case for what is best for Britain's economy, jobs and prosperity in the long term, even where that might mean resisting the temptation to change the tax treatment of a superficially tempting and politically vulnerable target.

Let me be clear: there is a case for looking carefully at the tax treatment of private equity. That is why the Conservative party has established a proper review of private equity and venture capital, including taxation treatment, which is being carried out for us by the European School of Management. Our objective in doing so is not to demonise an important industry, but to ensure that the tax treatment provided is appropriate to maintain the UK's competitiveness as an environment for globally important business.

No one should be under any illusion that the delivery of a tax-competitive environment is some act of altruism directed at the operators of whatever business appears to benefit. It is, rather, an act of the utmost self-interest, and our objective, which I assume the Government share, will be to set the tax regime at exactly the point that optimises investment, maintains international competitiveness and maximises the return to the UK economy as a whole.

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Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

I agree with the hon. Gentleman that there needs to be a point of principle rather than simply targeting or scapegoating a specific group. May I take it from his comments that the Conservative party will institute a review rather than, as the shadow Chancellor said a few weeks ago, support plans to raise taxes for private equity? Will he confirm that that policy will not go ahead and that there will be another policy review instead?

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

The policy review is already under way. The European School of Management has undertaken to produce a report on the overall climate for private equity and venture capital in the UK, including the tax treatment of the sector.

Perhaps it will help the hon. Lady if I tell her that the shadow Chancellor has set out four tests which any reforms of the tax system must pass. First, they must not damage the competitiveness of the UK economy or the health of our financial services industry. We want Europe's private equity business to be based here in Britain, providing jobs and prosperity for British people. Secondly, we should reward those who take genuine risks. Thirdly, the tax system should focus on rewarding long-term investment and, fourthly, any reforms should be part of our broad project to make the tax system simpler and fairer.

Leading figures in the industry have made it clear that, if something looks like income, it would be peculiar not to tax it as income, but if it looks like genuine risk taking and entrepreneurship, we should do everything we can to encourage it. One of the dangers, which the Chief Secretary mentioned, is that the original purpose of taper relief may get lost. It is a question of throwing out babies with bathwater.

Taper relief was introduced as an alternative to indexation to protect inflationary gains from inappropriate taxation and as an incentive to entrepreneurship and risk taking. We must ensure that changes that are proposed or discussed do not lose sight of that original incentive. The proposals that the Liberal Democrats included in the paper that they published last week would hit not only private equity houses but small-scale entrepreneurs and genuine venture capitalists who fund British start-ups. The abolition of taper relief and the reduction in the annual allowance to £1,000 would have that effect. The hon. Member for Twickenham—I am glad that he is back in his place—said that that was not clear, but let us examine the figures.

When the Liberal Democrats published their paper last August, they said that the benefit to the Exchequer of scrapping taper relief would be £4.5 billion and that that of reducing capital gains tax allowance to £1,000 would be £1.7 billion. That is £6.2 billion altogether. However, in the paper that they published last week, they said that the benefit of scrapping taper relief—the hon. Member for Twickenham claims that that does not include the reduction of the allowance to £1,000—would be £6 billion. That is £200 million less than last August's figures, which suggests that the tallied up benefit includes the reduction in the allowance.

Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer

The data on which we based those numbers came straight from the Treasury in answer to a parliamentary question and reflect the fact that the Treasury's estimate of the yield from the tax relief on taper has greatly increased in the past 12 months. The figures are consistent—the Institute for Fiscal Studies was invited to review them and considers that they add up.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

If we are to understand that in the course of eight months the estimated yield from scrapping taper relief has increased from £4.5 billion to £6 billion, it makes me wonder on what I can rely in the overall equation that the Liberal Democrats have calculated. [Hon. Members: "They are the Treasury's figures."] We are, therefore, to work on the understanding that the Liberal Democrats have decided this July to keep the £8,800 annual allowance, which, last August, they intended to scrap. Fine. That is perfectly clear and I am grateful for that clarification.

Let me say something else to the Lib Dems about their proposals on capital gains tax. I do not know what the hon. Gentleman's purpose was in publishing those figures last week, but no serious political party that has any expectation of shouldering the burden of government would ever announce such changes to the capital gains tax system in advance. If there was the slightest danger of the Lib Dem proposals being implemented, those who held assets that were pregnant with capital gains tax liability would be able to dispose of them ahead of any such changes. It would therefore be grossly irresponsible, as well as completely self-defeating, to announce a tax change of that type in advance.

Similarly, the swipe at non-domiciled residents—people who have little if any political clout, unless they are donors to the Labour party—lands a blow on an easy target, but the evidence does not support it. The Chief Secretary is looking rather shocked, but he will know that there is a case for constantly reviewing tax treatment of that sort, albeit not in a threatening or aggressive way, but simply to ensure that it produces an overall net benefit to UK plc, not just to the individuals concerned. As the hon. Member for Twickenham pointed out, the Government's review seems to have been spectacularly ineffective, even by their standards. I have to tell the Chief Secretary that when his party's largest single donation of the year has come from a non-dom, suspicions about the management of that review are bound to arise, and he will have to deal with that.

However, the Government's manifest failure to conduct a quite proper review of the issue effectively and efficiently does not excuse the Lib Dems' announcement of a policy without researching the consequences. They claim that the proposal would increase the tax take, but at stake is £3 billion-worth of direct tax—the amount estimated to be paid by non-doms on income generated in this country or repatriated to the UK—as well as, potentially, a much bigger hit on the UK economy, as I am sure everyone would recognise, if a shake-out of the non-dom rules causes the relocation of control of significant operations from the UK to places outside it, as many in the City fear.

I am afraid that the Lib Dem numbers just do not add up. [Hon. Members: "They do.] They do not. The Lib Dems claim that the IFS has validated them, but we talked to the IFS to see what it had done. What it did was merely check the arithmetic on the basis of a static model. The IFS has confirmed that it would expect the dynamic effects—the behavioural changes that those tax changes would produce—to work against the Lib Dems. A few minutes of not particularly in-depth analysis blows a significant hole in the model, leaving, I am afraid, the hon. Member for Twickenham clutching a £22.2 billion spending commitment, with precious little of his hopelessly speculative tax-raising agenda left to cover it.

Before I sit down, it is worth noting for the record that if the Lib Dems' numbers come from cloud cuckoo land, whoever wrote the Government amendment seems to be living on a different planet altogether. Try telling the thousands of families let down by the tax credits system or a business struggling to cope with the longest tax code in the world that the Government have undertaken a "comprehensive...reform" of the tax system; and tell it to the fairies that those reforms have "encouraged saving", when our savings ratio is at its lowest for 47 years. Try telling the wealth creators and risk takers in small business the length and breadth of Britain that the Government have "rewarded enterprise", when they have just raised the small companies tax rate and when they increased taxes on businesses by a total of £1 billion in the 2007 Budget.

The Liberal Democrats' tax-cutting pledge is an unfunded spending commitment. The motion before us is intended to convey the impression that squeezing the wealthy—or the super rich, depending on which day it is—can pay for their proposed largesse, whereas the truth is that the measures targeted at that group will not produce anything like the sums required. As the documents produced by the hon. Member for Twickenham show, even on his own flawed assumptions, households with incomes of £46,000 upwards will be losers—

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

Single-income households with incomes of £46,000 upwards will be losers. I have a great deal of respect for the hon. Gentleman when he is in analytical mode. He has correctly identified some of the issues, and the Government's failure to tackle them, but in playing the squeeze-the-rich card rather than focusing on the urgent actions needed to allow those at the bottom of the income scale to participate in our rising prosperity, he has let the temptation to pander to popular prejudice triumph over a cool, professional analysis of what is in Britain's best interests and what will deliver long-term, sustainable social justice.

Photo of Steve Webb Steve Webb Liberal Democrat, Northavon 9:15 pm, 16th July 2007

I congratulate the Chief Secretary to the Treasury on his promotion to the Cabinet. It was my pleasure to shadow him and Jane Kennedy when they were at the Department of Health while that was my responsibility, and I wish them well in their work at the Treasury.

I had planned to expatiate on Liberal views on redistribution, to ask how one can propose freedom then take money from a group of people, and to discuss what the limits on that might be. However, as the Chief Secretary has been given such duff material to work with, I thought that I ought to respond to some of his points about the Liberal Democrats' tax proposals.

The right hon. Gentleman seemed to be looking in two directions at once. He said two things about our plans. First, he said that our local income tax plans were evil because they would place a terrible burden on middle and higher incomes. He then said that our national tax plans were evil because they would give a disproportionate amount of money to the very same people. In other words, he was saying that cutting the basic rate of income tax by 4p would be dreadful because higher earners would gain, but putting local income tax up by 4p would be dreadful because higher income earners would have to pay more, and that was not fair. He cannot hold those two positions simultaneously. The Chief Secretary is a thoughtful man, and I am sure that he knows in his heart of hearts that he was given a bit of a duff text to start off with.

The Institute for Fiscal Studies, for which I worked for nine years, has often been cited in the debate. It has a view of how we should assess the distributional impact of tax plans: it says that we should look at the whole package, and not pick just one bit out. The whole package includes a national basic rate cut of 4p, and a local income tax of broadly equivalent measure to take the place of the council tax. So if the national income tax cut and the local income tax offset each other, the change would be nil.

The distributional impact of our tax policy would be to scrap the council tax—which is effectively a poll tax, especially for pensioners and the low waged—and to tax more the very wealthy, those who gain from higher rate tax relief and those who buy large gas guzzlers or are frequent fliers. Those categories of people are all predominantly wealthy. The principal beneficiaries would be those on modest incomes who are hit hardest by the council tax. That is what I call fair.

Photo of Andy Burnham Andy Burnham The Chief Secretary to the Treasury

I admire the hon. Gentleman's ability to rewrite the Liberal Democrats' tax plans on his feet at that speed. It was very impressive. May I explain to him what I was saying? The analysis of the 4p cut in income tax shows that those in the top income deciles would benefit disproportionately from the plan. My point was that, for lower earners, a combination of that change, coupled with a local income tax, which would transfer the burden to those in work and away from those out of work, and environmental measures such as higher petrol taxes and taxes on flights—whatever he says, lots of working families take one, two or even three flights a year—would leave middle to lower-income families in work worse off. If he can disprove that now, I would be grateful.

Photo of Steve Webb Steve Webb Liberal Democrat, Northavon

I am very happy to do that. I shall run through the elements in the package. Let us suppose, for the sake of argument and for ease of estimate, that the local income tax rate in a particular local authority is 4p. A reduction of 4p in the national basic rate of income tax would therefore equate to 4p going on to local income tax in a local authority area. The net effect of that has to be zero. I am sure that the Minister would accept that. The net effect of the national basic rate coming down by 4p and the local income tax going up 4p has to be nil. That change has nil effect.

We then need to take into account the effect of closing pension tax relief, which is by definition only available to higher rate taxpayers who must be better off; getting rid of the capital gains tax taper relief, which overwhelmingly benefits the better off; scrapping the council tax, which is a very regressive tax whose abolition will help the poor; and then imposing environmental taxes on people who buy large gas guzzlers, who tend to be better off, and on the most frequent flyers who on average tend to be the better off—all those are progressive changes. It is impossible to understand how the effect of that whole package can be anything other than progressive—the Institute for Fiscal Studies has demonstrated that the only group who lose out is the top decile.

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

On replacing council tax with local income tax, there is no doubt that for many people in work but on low incomes, the council tax represents more than 4 per cent. of their income.

Photo of Steve Webb Steve Webb Liberal Democrat, Northavon

My hon. Friend is absolutely right. If we reflect on the low paid or indeed pensioners on very modest incomes, the burden of the council tax is one of the most severe that they face.

Photo of Andy Burnham Andy Burnham The Chief Secretary to the Treasury

As usual, the Liberals pick an easy target like the gas guzzlers or big SUVs and make them the whole focus of their tax policy, but is the hon. Gentleman suggesting that tax cuts on this scale could be delivered without substantially raising tax on petrol? Is he saying that everything can be loaded on to drivers of large four-wheel drive vehicles?

Photo of Steve Webb Steve Webb Liberal Democrat, Northavon

The right hon. Gentleman said that he had spent the weekend reading our tax plans, but having heard what he just said, I am not sure that he could have done so. Our environmental package is based first on the taxation of flights. We want to tax emissions more heavily— [Interruption.] I will, indeed, answer the question. Some additional revenue comes from taxing half-empty flights. In other words, at the moment, air passenger duty is applied per passenger, but we propose to tax flights based on their emissions. Let me explain what that means.

The Chief Secretary mentioned his constituents who go on holiday, but many of them go on packed easyJet flights on which the air passenger duty is great because every place is used. What we propose, however, is heavier taxes on half-empty planes that are producing relatively more emissions. We should base the tax on emissions, not on individuals. We can therefore secure additional revenue in a more environmentally effective way from air passenger duty and further revenue from taxing air freight—another environmental bag from which revenue can be derived. We also want a more progressive system of environmental taxation on larger cars. Taxes should be levied on people who choose to buy larger, less fuel-efficient cars. That amounts to about a third of the total tax package.

My current role is to write my party's manifesto for the next election and I have to tell the Chief Secretary that the criticism that the Liberal Democrat policy is not detailed enough is simply not one that I recognise. It is absolutely clear from what I have said that our package is a progressive one.

Let me say a few words about restricting pension tax relief to the standard rate, which the Conservative spokesman, Mr. Hammond, mentioned. To give him his due, in the midst of a rather banal run-through of the shadow Chancellor's four great principles, such as "tax changes should not be bad for the economy"—that must have taken a long time to write on the back of his envelope—the hon. Gentleman made some serious points about restricting the pension relief to the standard rate. He argued that that would somehow contribute to the pensions crisis. Excuse me, but it seems to me that the pensions crisis is not about higher rate taxpayers not saving enough—that is not where the pension saving gap is—but about women, part-timers and people on low and modest incomes who are not saving enough. How can restricting pension tax relief to the standard rate rather than the higher rate have any impact on the pensions crisis? There is simply no connection between the two. The pensions crisis relates to people on low and modest incomes not saving enough, but this tax change hits only the wealthiest. As the former shadow work and pensions spokesman, the hon. Gentleman will know that the very wealthiest gain disproportionately to a huge extent from pension tax relief.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

Those comments are rather strange against a background of a record low savings ratio, but will the hon. Gentleman deal with the more substantive point that the idea of abolishing the higher rate pension tax relief is technically flawed?

Photo of Steve Webb Steve Webb Liberal Democrat, Northavon

That point was raised by the Turner commission, but the hon. Gentleman has to accept the fact that pension tax relief must be allowed at some rate, so there is no reason why we should not set the rate at which it should be allowed. The whole system must be geared up to administer pension tax relief and we can set the rate at which it is allowed. If we set it lower than the higher rate, that has a simplification element: instead of different employees getting different rates of tax relief, they all get identical rates of tax relief.

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Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

The hon. Gentleman is missing the point: at the moment, any contribution that an employer makes to a pension fund does not give rise to a tax charge for the benefit in kind for the employee. Under his proposals, some contributions would have to be attributed to higher-rate-paying employees, who would then suffer a tax charge.

Photo of Steve Webb Steve Webb Liberal Democrat, Northavon

The point of our proposals is indeed to raise additional revenue from those who currently benefit from higher rate tax relief. That is not a problem; that is where we get the money from. Higher rate tax payers are benefiting disproportionately. The hon. Gentleman implied that that would damage pension saving. He and I, however, both get higher rate pension tax relief. Were we suddenly to get standard rate pension tax relief, does he think that we would do less pension saving? Surely that would not be the result. We are simply saying that a disproportionate amount of total pension tax relief goes to people such as him and me, and that source of revenue could be used to make the tax system as a whole fairer.

Photo of Steve Webb Steve Webb Liberal Democrat, Northavon

Tempting though it is to give way to the hon. Gentleman, I have already given way to him twice. In addition, I know that Stewart Hosie wants to speak.

Throughout the debate, there has been a suggestion that if we change anything people will flee the country, the City will tumble and we will lose money. The hon. Member for Runnymede and Weybridge is right: we do need to think about the dynamics. The second that we produce a costing based on an assumption about changed behaviour, however, we get ridiculed for making it up. The only figures available are those given to us by the Treasury, and those are based on a static assumption. If the Treasury gives us written answers based on its best guess of the change in behaviour, we will use them. It does not do that, however, so we must take the static assumption as the basis for our proposals, which are meticulously costed, as is characteristic of my hon. Friend Dr. Cable.

Throughout the debate, it has been assumed that we somehow have the optimal tax system, which has been arrived at through Finance Acts, evolution and the response to short-term political pressures. When the new Chancellor next changes the system, he will justify it on the grounds that he is moving to a new optimal system. Whenever the Government change the system, they tell us that they have realised that the previous system was not optimal and needs to be changed. All we are saying is that we have not got the balance right. Yes, we need to recognise the role of incentives: characteristically, my hon. Friend the Member for Twickenham was not talking about envy or having a problem with people who have high incomes; he was saying that the balance was not right. I would have thought that any progressive party would raise that issue. It falls to the Liberal Democrats, as the only progressive party left in the House, to raise the issue of the fairness of the overall tax system.

As my hon. Friend the Member for Twickenham said, wealth inequality has worsened in recent years. The Chief Secretary said proudly that the richest 1 per cent. pay 22 per cent. of tax, but that is a statement of the blindingly obvious: they pay huge amounts of tax because they have huge amounts of income. The richest 1 per cent. are not just like the rest of us only a bit more so; they are totally different. They have completely different sources of income and wealth, and therefore need a particular tax regime. My hon. Friend has today put on the agenda some proposals that will make that system fairer at the margins. The Conservative Front-Bench spokesman suggested that the billions of pounds that we talk about in our costings are disproportionate, but they are marginal relative to the amount of tax paid. The total tax take is between £400 billion and £500 billion. We are talking about incremental changes. A £6 billion tax on the wealthy represents perhaps 1 per cent. of the total tax take. Such sums are not huge relative to the wealth of the people whom we are talking about.

I am tempted to go on, Madam Deputy Speaker, but I know that other Members are seeking to catch your eye. A debate of this sort is long overdue, and I am delighted that my hon. Friends on the Front Bench have sought it today.

Photo of Stewart Hosie Stewart Hosie Shadow Spokesperson (Women), Shadow Spokesperson (Home Affairs), Shadow Spokesperson (Treasury) 9:29 pm, 16th July 2007

Before I deal with the Liberal Democrat motion, I want to say a word or two about the Chief Secretary's performance on the Government amendment. He spoke of growth over 59 quarters, tax credits and City competitiveness. The amendment refers to encouragement to save, and the Chief Secretary also mentioned jobs.

It is worth pointing out that those 59 quarters of unbroken economic growth did not take place in Scotland, where there have been a number of zero-growth quarters, a number in which growth has been negative, and a full-blown manufacturing recession on Labour's watch. As for tax credits, the Chief Secretary will be aware that the most recently published figures showed £5.5 billion of unclaimed tax credits that were due or liable to be claimed. The system has not been universally successful.

City competitiveness is not simply about the City of London; it is about the banking and finance sector more generally, and the 126,000 jobs in that sector in Scotland. The Chief Secretary will be aware—or if he is not, he should be—that the move in recent legislation to retain risk-based, principles-based, light-touch regulation was supported by all parties. As for encouragement to save, I believe that the savings ratio is half what it was in 1997; and as for jobs, more than 1 million manufacturing jobs have been lost since Labour came to power, 90,000 of them in Scotland. I am glad that Mr. McGovern is present. We have lost 1,100 jobs in our city in the last 12 months, mainly in manufacturing production and distribution, so the picture is not universally rosy.

Photo of Jim McGovern Jim McGovern PPS (Mr Pat McFadden, Minister of State), Department for Business, Enterprise & Regulatory Reform

I am sure the hon. Gentleman is aware that employment in Dundee is at an all-time high since records began. It is higher now than it has ever been.

Photo of Stewart Hosie Stewart Hosie Shadow Spokesperson (Women), Shadow Spokesperson (Home Affairs), Shadow Spokesperson (Treasury)

My point is that that is not a universal picture. I am entirely aware of employment levels: I can look at the statistics each month when they are published. I am sure the hon. Gentleman knows that many of the jobs we have lost—long-term skilled, well-paid jobs in manufacturing production and distribution—cannot be automatically or simply replaced by some of the jobs we have brought into the city since.

The Liberal Democrat motion identifies a number of key concerns, including the growing wealth gap, and demands the publication of inequality data. It refers to

"wealthy individuals who are non-domiciled for tax purposes", to stamp duty and inheritance tax, and so on and so forth. The trouble with many of the suggested solutions to some of those problems is that they are based on "Reducing the Burden", a document published recently and following on from "Fairer, Simpler, Greener", published in September last year. I am not convinced that that package will reduce the burden of taxation on low and middle-income households. Indeed, I suspect that the pension savings of low and middle-income earners will be reduced further, that their travel costs will rise, and that there will be no fundamental change in the impact of indirect taxation on the lowest quintile of earners compared to the highest.

The Liberal Democrats advanced a good many proposals in "Fairer, Simpler, Greener". They proposed to scrap the 10p starting rate, to reduce the 22 per cent. rate to 20 per cent., and to increase personal allowances. The 40 per cent. rate was intended to remain, but would apply only to earnings of £50,000 or more. The Government have announced many changes, some of which will not come into force until next year or 2009. We need to compare the "Fairer, Simpler, Greener" and "Reducing the Burden" proposals with the current allowances and tax levels. Although the amended Liberal Democrat policy would allow earners to retain a higher proportion of their income than higher earners, we believe that that would quickly be eaten up by the impact of "green" and other taxes that would be particularly detrimental for lower earners.

I mentioned pensions. This is an important point. The Liberal Democrats intend to apply tax relief on pension contributions at the lower rate of tax only, which would be reduced from 22 to 16 per cent. under their proposals. Although they are correct to point out that half the current pension tax relief goes to the top 10 per cent. of earners, they have no plans to reinvest those moneys in a better citizen's pension for everyone. They intend to use the £4.3 billion of savings or extra tax to fill the gaping hole that will appear in the public finances.

The Liberal Democrats propose a number of changes in environmental taxes, including the tax on vehicle excise duty, which a number of Members have mentioned. To increase VED on band E vehicles such as some Vectras and Mondeos from £150 to £850 would be disproportionate in terms of their fuel economy and CO2 emissions. Further, it would put sensible and modest family cars such as the Renault Espace on the same level of taxation as a two-seater sports car such as a Mazda MX-5. I am unsure whether that is appropriate, and it would penalise people on low and middle incomes who need a family car.

On aviation, even without a tax on aviation fuel the current regime hits short flights more heavily than long-haul flights. As there are usually alternatives to short-haul flights, that might be fair; but there is no alternative on long-haul routes. However, the £3 billion in additional revenue that the Liberal Democrats want to take out of the industry will simply be passed on in higher ticket and cargo rates, and charges on freight flights might have an inflationary impact, which has not been discussed.

It is difficult to predict exactly how behaviour might change, but it is unlikely that the proposals will meet the desired environmental and fiscal objectives set out in the Liberal documents. Because of environmental change, it is highly unlikely that an extra £8.1 billion will be raised from environmental taxation—either that will be the case, or the Liberals anticipate that there will not be the behavioural change necessary to fill the gap in their figures.

I am pleased that the proposals on personal capital gains tax have gone. That would have been entirely disproportionate, and very punitive to people who have saved modest amounts of capital, perhaps in shares or share options given as bonuses, or in shares purchased through already taxed income over a lifetime of work. However, I am unsure that removing the taper relief on corporate capital gains tax will be without consequences either. People might choose to hold on to assets which they otherwise might have made liquid at an earlier stage, and that in turn might have a detrimental impact on investment—particularly cash investments.

There will be no lessening in inequality in terms of indirect taxation. At present, the lowest quintile pays 26.5 per cent. of their income in indirect taxation compared with 14.1 per cent. for those at the top, and we are not convinced that the Liberal Democrats' proposals will produce any significant change. They have mentioned that they intend to fill some of the gap through a general anti-avoidance rule, but there is not a huge amount of clarity on that, and certainly in the most recent document there were no numbers on what that GAAR would bring in.

Our assessment in terms of the revenue yield is that £4.1 billion would be lost from ending the 10 per cent. rate, £5.1 billion would be lost from raising the national insurance contributions threshold, £6.7 billion from cutting the basic rate to 20 per cent.—and an extra £10 billion from reducing it to 16 per cent.—£5.4 billion from increasing the upper rate threshold and another £1.6 billion from cutting corporation tax by 1 per cent. The cost would be some £22 billion, or £32 billion if the 16 per cent. basic rate were introduced.

In terms of the revenues to compensate, I do not believe that capital gains tax will bring in the yield the Liberals suggest. Even if it doubled, it would produce a gain of only an extra £3.8 billion. There would be a gain in terms of the single rate pension contribution relief of £4.3 billion, but not one penny of that would be spent on providing a decent citizen's pension for everybody. There would also be a £1.4 billion gain from corporation tax relief changes. In terms of environmental taxes, the Liberal Democrats were not optimistic but downright heroic in their assumption of gaining more than £8 billion. I think that it would be closer to half of that because of behavioural change. There would be a £4.2 billion gain from increasing the national insurance upper earnings to £50,000. Therefore, there would be a total gain of £17 billion to 18 billion, which would leave a shortfall of some £15 billion.

Photo of Steve Webb Steve Webb Liberal Democrat, Northavon

The Government have already done what the hon. Gentleman is talking about.

Photo of Stewart Hosie Stewart Hosie Shadow Spokesperson (Women), Shadow Spokesperson (Home Affairs), Shadow Spokesperson (Treasury)

The hon. Gentleman says that the Government have done those things, but many of them will not kick in until next year or 2009, so they have not done them all.

In addition, according to page 8 of "Reducing the Burden" there will be a

"substantial increase in the starting threshold" for inheritance tax. The Liberal Democrats also intend to have a reform of stamp duty land tax. They say that they will pay for this through a general anti-avoidance regime which will

"strike out the tax benefit where the avoidance of tax is the main reason for a transaction."

However, that is very subjective, there is very little detail and there are no costings.

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury 9:39 pm, 16th July 2007

I want to make one thing clear at the outset—the language in the title of our motion. Our original title was "Taxation of the Super-Rich" and we had no problem with that wording; it was the Table Office that had the problem. There has been no stepping back on our part, or fear about using such words.

Members have been much exercised about whether our proposals add up, but as we have said on many occasions, our analysis was informed by the Institute for Fiscal Studies, and we are basing our numbers on Government figures provided by the Treasury, so if Mr. Hammond or the Chief Secretary has a problem with the figures they should ask the Treasury where it may have gone wrong.

The reason our proposals are evolving is that, unlike the Conservative party, we actually produce policy proposals, so they occasionally need to be adapted to respond to Government decisions; for example, after their flattering imitation of our policies, such as adopting our proposal for a 2p cut in the basic rate of taxation. That necessarily causes us to reconsider our proposals. That is the premise on which we proceed.

It is fascinating to see so much interest in our suggestions. Our proposals last week related only to taxpayers, but there are of course wider poverty issues and I am sure the Chief Secretary and the hon. Member for Runnymede and Weybridge will be pleased to learn that they have another policy paper to look forward to this week when we publish our document on poverty and inequality. They can look forward to another weekend poring over Lib Dem policy documents. As my hon. Friend Steve Webb said, lack of policy is not one of our party's problems.

Stewart Hosie made an interesting comment about the differing regional impacts of the economic record set out by the Chief Secretary. In my constituency, child poverty is still a problem, not necessarily because of the tax and benefit system but because of other structural problems, such as high water bills. Until those wider structural problems are tackled there will continue to be hot spots. I have no doubt of the Prime Minister's sincerity about tackling such issues, but the problems will continue unless the structural issues are dealt with. Tax credits are a classic example. The intention was clearly honourable, but I have yet to hold an advice surgery without hearing from someone about a tax credit problem.

Those wider tax credit problems interact with the tax proposals that the then Chancellor made in his last Budget—to cut the basic rate of income tax by 2p and abolish the starting rate—because many people do not qualify for tax credits. The problem is not just that people do not claim, but people without children do not benefit as much and the under-25s are not entitled to claim working tax credit, where take-up is already poor. We need to make sure that the fairness the Government hope to promote actually comes about.

I planned to talk about the Lib Dem proposals, which Members on both sides of the House spent a lot of time discussing, but I am grateful to my hon. Friend the Member for Northavon for going into considerable detail about exactly where the money would come from. He made the important point that we should look at the overall balance of the taxation system.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

Steve Webb has already made it clear that the reason the Liberal Democrats looked at a static model is that those were the only figures available. They have balanced the books on a static model analysis, but do they recognise that the dynamic effects—the behavioural changes—will significantly reduce the amount of Exchequer receipts from the proposed changes?

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

The hon. Gentleman is right, but the change in behaviour will work in both directions, which I wanted to address in terms of the comment of the hon. Member for Dundee, East. He said that the environmental taxes will not bring in as much revenue as we are suggesting because behaviour will change. We very much hope that behaviour will change, but at present we are trying to deal with an exponential increase in emissions. We want to slow that increase. I should be pleasantly surprised if emissions started to fall immediately, but our whole aim at this stage is simply to reduce the increase because it has been rising so quickly.

I welcomed the tone of the comments of the hon. Member for Runnymede and Weybridge when he referred to his sympathy for the underlying concerns of the motion, but unfortunately he said nothing of what he felt about those underlying problems or about any Conservative proposals to deal with them. It is interesting that so much effort was expended on looking at our proposals when, clearly, the Conservatives have no proposals of their own. Rather than having giant holes in their policy, they have no policy at all.

Photo of Jeremy Browne Jeremy Browne Opposition Whip (Commons), Shadow Minister (Home Affairs)

It might have escaped my hon. Friend's attention, but the Conservative party does have one concrete proposal: significantly to increase the price of a pint of beer. Does she think that that will go down well with our constituents?

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

I am not sure what income groups that would impact most heavily on. Other policy ideas have been floated in relation to the taxation of private equity, but although the Conservatives might have had a policy for a week or two, that has now taken the form of yet another review group.

On another point about behavioural change, we have been deliberately very conservative about the revenue that we think our changes will bring in. The example that we give is our aspiration to raise the inheritance tax threshold by changing the length of time that is required before people qualify as having made a lifetime gift that is exempt from inheritance tax. We have not included that costing in our proposals, because we are not clear about the dynamic impact that that would have or how long it would take to kick in.

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

I have only a few minutes left and I want to say a bit more.

The Chief Secretary to the Treasury—I welcome him to his post—spoke at the outset about the amount of tax paid, rather than the proportion. We know that the poorest 20 per cent. of taxpayers pay more tax as a proportion of their income than the richest 20 per cent. My hon. Friend the Member for Northavon made that point. The Chief Secretary said that tax is complicated, but that complication is part of the problem. The unfairness is being generated in part by the fact that the complication is such that loopholes can be exploited. Those on middle incomes probably do not even know that those loopholes exist. They struggle with the basics of the tax system, because they are complicated enough. In fact, this country has the most complicated tax system in the world. It has even surpassed India's tax system in terms of the number of pages of guidance.

The Chief Secretary spoke pejoratively of tax giveaways but, as has been said, the Liberal Democrats are trying to emphasise that there is a genuine need to look at the balance of where the burdens in the tax system lie. If he really thinks that tax giveaways are such a terrible thing, does he hope to persuade the new Chancellor to go back on the previous Chancellor's pledge to reduce the basic rate of income tax by 2p in the pound? The Chief Secretary also spoke of concerns about annual holidays being under threat. Let us not forget that the current Prime Minister, when he was Chancellor, increased air passenger duty. That is more regressive, because it was retrospective as well. We are proposing a tax on flights, which encourages them to be used more efficiently, and also takes freight into account.

As a veteran of the Finance Bill—with the exception of my hon. Friend Dr. Cable, I think that I am only person present who served on the previous two Finance Bill Committees—I can say that we supported the Government on their anti-avoidance schemes and on sideways loss relief. I have fond memories of the debates on sideways loss relief, capital gains tax and stamp duty land tax avoidance measures. However, I hope that the Chief Secretary agrees that we need to go further.

The Liberal Democrats have been talking about the need to make the tax system fairer. The Prime Minister, during the 10 years that he was Chancellor, used similar language. In his last Budget, he said that he wanted

"to reward work, to ensure working families are better off and to make the tax system fairer".—[ Hansard, 21 March 2007; Vol. 458, c. 828.]

I cannot see the difference between a package of neutral proposals for a 4p cut in the rate of income tax and proposals for a 2p cut. Obviously, there is an issue about the amount, but the same groups of people would benefit. If a 2p cut benefits working families and makes the tax system fairer, surely a 4p cut would do exactly the same—but to twice the extent. We are trying to deal with issues such as inequalities of marketable wealth.

My hon. Friend the Member for Twickenham spoke in detail about issues such as inheritance tax, stamp duty land tax, and capital gains tax. There are real concerns in many areas. The avoidance of stamp duty land tax was mentioned. Not only does that have an impact on revenues—because special purpose vehicles are set up offshore—but it causes inflation in the housing market, particularly in London. Estate agents are talking about a secondary market at the very top end of the housing market in London—the very expensive end—where house price inflation is increasing massively because the houses are being bought by offshore companies, with no account taken of capital gains tax or stamp duty. We must look at the wider knock-on effects.

Listening to the debate, I asked myself what my constituents would think. They know what their personal burden of taxation is and that their council tax is increasing. Individuals in my constituency and across the country are struggling to afford a property, and when they do manage to buy one, they know that, with house prices increasing as they are, there is a very good chance that they will become liable for inheritance tax. Fear of inheritance tax is a massive concern for them. In contrast, there are some individuals who, provided that they can pay for the advice, minimise their tax contributions in a way that we do not feel is fair and balanced. We believe that there is a real need to reconsider such issues, even in relation to "non-doms".

We are more than happy to engage in a debate, but the Government need to give us the information that they are clearly holding and assessing first. That is what today's debate is all about. We do not think that there is anything wrong with the Government acknowledging the need to consider how balanced the tax system is. We have made our proposals. Unfortunately the Conservatives have not done the same. The Government have flattered us in the sincerest way by imitating our proposals from our last tax commission. I very much hope that the Chief Secretary will consider doing that again and look forward to seeing our proposals in next year's Budget.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury 9:51 pm, 16th July 2007

It is customary on these occasions to say that we have had an interesting debate and heard some interesting speeches, and I thank all those hon. Members who have spoken. The fairness of our taxation system is clearly an important topic. However, only one Liberal Democrat Back Bencher spoke in the debate—Steve Webb—and he is Front Bencher most of the time. We had 45 minutes from Dr. Cable in this debate, and those of us who were interested heard him speak for 45 minutes in the previous debate on corruption overseas. We have heard an hour and a half of talk from the hon. Gentleman—a whole football game of noise—but silence when we asked about his party's tax proposals. That is amazing.

Mr. Hammond made a hugely enjoyable speech, even when he was tweaking the Government's tail. Up until the last two or three minutes, I very much enjoyed his well argued demolition of the Liberal Democrats' proposals. I am grateful for his compliments, especially about our amendment, although he did make some criticisms, which I acknowledge. He regretted the lack of cool professional analysis from the Liberal Democrats, but I look forward to engaging with him in future when he brings forward the cool professional analysis that he demonstrated this evening.

We have increased the fairness of the tax system. The Liberal Democrats' motion talks about tax loopholes, but one of the ways in which we have increased fairness has been through targeted action to close loopholes and to tackle avoidance of income tax, national insurance, inheritance tax, capital gains tax and stamp duty land tax. We have also increased fairness by incentivising work through the national minimum wage and the working tax credits. I noted the comments made about tax credits, but that debate is for another time. By providing more support for those who need it most, especially families and pensioners, we have helped those who are at the most vulnerable end of the income spectrum. The introduction of child tax credit and pension credit in particular has helped us to cut both child and pensioner poverty, which increased under the previous Government.

I know that the Liberal Democrats' motion calls for the release of Office for National Statistics wealth inequality data since 2003, but it is HMRC, not the ONS, that is responsible for those data. Unfortunately, owing to data problems, the 2004 statistics were not released in October last year as scheduled; HMRC has subsequently been unable to obtain sound estimates and has therefore decided not to publish the data for 2004. That is clearly regrettable, but I am pleased to tell the House that the problem that affected the 2004 statistics has had no effect on statistics for later years and that the 2005 data will be published in October this year.

As a result of the economic success that the Government have delivered—let me remind the House that we have ensured low inflation, low interest rates, high employment, high gross domestic product and high and stable growth—there has been rising prosperity for all, as my right hon. Friend the Chief Secretary to the Treasury said. Household net wealth is higher than it has ever been. There are 1.8 million more home owners in Britain now than in 1997, and the average household is £1,000 a year better off because of our reforms to the tax and benefit systems. The Government have delivered a successful economy and rising prosperity, and all of Britain will benefit from that.

The hon. Member for Runnymede and Weybridge said that thousands had been let down by the tax credit system. We will debate that in detail on other occasions, but it needs to be put on record that the tax credit system supports 20 million people, including 6 million families and 10 million children. Take-up among families with an income of less than £10,000 is now at 97 per cent.; that is higher than the take-up for any other income-related financial support for in-work families. He also said that the savings ratio had slumped from 10 per cent. to 2.1 per cent., but that is not without a sting in the tail for him: a lower savings ratio is not surprising in a world with a stable economy and low unemployment. That is not how things were under the previous Administration.

We have taken a number of steps to extend savings and asset ownership, particularly on the part of those in most need of support; for example, we introduced the child trust fund, and replaced tax-exempt special savings accounts and personal equity plans with individual savings accounts. We need to ensure that we maintain that position, and that requires us to strike the right balance between fairness and competitiveness. My right hon. Friend the Chief Secretary to the Treasury spoke about the increased mobility of labour in the modern, globalised economy.

As usual, we are left with very little time to deal with the detailed points raised in this short debate. The Opposition motion refers to non-domiciled people; it would be easy to get the impression from some hon. Members who have spoken this evening that the country is full of non-domiciled people, none of whom pay any tax. In fact, we are talking about a relatively small number of people—about 112,000 of them, as my right hon. Friend said—who contribute about £3 billion in tax to the UK. None the less, as hon. Members will know, the rules on residence and domicile are under review. As Treasury Ministers have made clear on a number of occasions, and as I will reiterate tonight, any changes to the current system will need to be thoroughly thought through, and we will need carefully to balance the principles of ensuring fairness and promoting the UK's competitiveness. That is a balance that we have sought to strike throughout the tax system, and we will continue do so in future.

The hon. Member for Twickenham could not say that he would raise as much as a penny in extra taxes for his so-called reform of the residence and domicile rules. The motion suggests that the stamp duty land tax thresholds and inheritance tax nil-rate band should reflect house prices, but no previous Administration has ever linked tax thresholds to price movements of any one type of asset. The proposal could have perverse effects; for example, linking the inheritance tax nil-rate band to house prices could result in more estates paying the tax, if prices fell.

Tonight, we have heard a populist rallying call from the Liberal Democrats, aimed at tomorrow's newspapers and the by-elections in which they are competing. They think that everyone hates the wealthy, or the filthy rich, as they chose to call them. They think that that is a way to get votes, but I have to tell them that it is not the way to get the taxes in. As my right hon. Friend the Chief Secretary to the Treasury said, last Friday the title of this debate was "Fair taxation of the super-rich". By this morning, it was "Fair taxation of the wealthy". If this debate had been tabled for Thursday, by Tuesday it would have been "Fair taxation of the middling". By Wednesday it would have been "Fair taxation of the ain't doing so well"—

Photo of Paul Burstow Paul Burstow Shadow Chief Whip (Commons)

rose in his place and claimed to move, That the Question be now put.

Question, That the Question be now put, put and agreed to.

Question put accordingly, That the original words stand part of the Question:—

The House divided: Ayes 55, Noes 288.

Division number 185 Opposition Day — [17th allotted day] — Fair Taxation of the Wealthy

Aye: 55 MPs

No: 288 MPs

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Question accordingly negatived.

Question, That the proposed words be there added, put forthwith, pursuant to Standing Order No. 31 (Questions on amendments): —

The House divided: Ayes 274, Noes 61.

Division number 186 Opposition Day — [17th allotted day] — Fair Taxation of the Wealthy

Aye: 274 MPs

No: 61 MPs

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Question accordingly agreed to.

Mr. Speaker forthwith declared the main Question, as amended, to be agreed to.

Resolved,

That this House notes that since 1997, the Government has undertaken a comprehensive programme of reform to the tax system, which has encouraged saving and rewarded enterprise, reduced child poverty, supported hard-working families and provided security for all in old age, and welcomes the fact that these reforms strike the right balance between encouraging enterprise and investment, maintaining the UK's international competitiveness and delivering a modern and fair tax system, in which all pay their fair share of tax.