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Mr. Atkinson, I certainly prefer to discuss schedule 2 separately. I have some technical points to make that are specific to it. If it is possible to have a separate debate, I should be grateful.
I am happy to take your guidance, Mr. Atkinson, and comment on both the clause and the schedule, but I shall also be happy to have a separate conversation about the schedule when we reach that stage.
Clause 6 introduces schedule 2, which provides for the additional rate of tax from 2010-11. The rate will be set at 50 per cent. in 2010-11 and apply to those with taxable incomes above £150,000 a year. As you will recall, it was announced in the pre-Budget report in November that we would be introducing a 45 per cent. rate in April 2011. However, the global downturn has been worse than predicted and, as a result, more consolidation is required. That is why the additional rate has been brought forward and raised by five percentage points to 50 per cent.
In view of the Budgets optimistic projections for growth in the next few years, on what basis did the Treasury feel it necessary to change its proposal for a 45p tax rate? After all, if Government figures are to be believed, we shall have growth racing away at 3.5 per cent. within the next year or so. On the basis of that figure very little obvious change has been made in relation to public expenditure, so why the radical change on taxation?
Because, as I said, expectations for the world economy have gone backwardsin an adverse directionto a significant extent since November of last year. The International Monetary Fund has revised its forecasts two or three times in that perioddownwards in all casesso what we needed to do was what we put in place in the Budget: a trajectory that we could deliver on, getting us back to balance by a later point than we said in November, by 2017 rather 2015. The measure is an important contribution to that.
Several hon. Membersrose
I have a rich choice of interventions to select fromI shall take the hon. Member for Cities of London and Westminster first.
A choice made only in ascending order, obviously, which I fully understand.
Those concerns have been expressed to me. Do we have an assurance from the Financial Secretary that there will be no further downward projections regarding the world economy? Is the matter now set in stone? The position has deteriorated appallingly since last Novemberor so he would tell us. Is he now entirely clear that the figures are final, and we shall have no further downward projections in the months and years to come?
All I can say to the hon. Gentleman is that the projection at the time of the Budget was the best available, given the data at that point. I wish I could tell the Committee with absolute confidence what will be happening in the next one, two or three years, but in reality we are not in that happy position.
The logic of the Financial Secretarys argument is that he cannot confirm the figure for the top rate. If the growth forecasts are worse than predicted, the logic is that he will come back and say, Well, it is 60 or 70 per cent. Perhaps we shall go back to the days of 98 per cent., or even the negative of 101 per cent., which we had under a Labour Government.
The question before the Committee is whether it is right to raise the level to 50 per cent., as in the clause and schedule. My case to the Committee is that it most certainly is right. I am conscious that, and pleased that, the hon. Gentlemans party has not dissented from that view, and I want to set out the basis for that being the right decision.
The Financial Secretary is being most generous in giving way. One of the most important things is surely the stability and predictability of the UK tax system. In that regard, what kind of message does he think it shows that the 45p tax rate has been abolished before it has even been introduced?
The hon. Gentleman will, I think, have noticed that there has been unprecedented turbulence in the world economy over the past few months. I hope that that has not passed him by. Policy needs to change in the light of circumstances. We have moved swiftly and boldlythat is absolutely the right thing to doto maintain the stability of the British economy and to put the public finances on the right trajectory for balance.
The point that many of us are struggling to understand herewe all understand that the global economic situation, and particularly the situation in the UK, worsened between the pre-Budget report and the Budgetis that there is a world of difference between those sweeping, global pictures that the Financial Secretary has painted and the specifics of the difference between the pre-Budget report and the Budget. What we would like to understand is how he has got from one to the other.
That is the very stuff of politicsto take the grand sweep, to see what is going on in the world and to decide what one will do in response. I shall set out the basis of what I want to put to the Committee. As I said, I am pleased that the Conservative party has not dissented from the view that this is an important measure, contributing to the consolidation that is now required. We have certainly looked carefully at the likely impact, on both individuals and the economy, as a consequence of the 50 per cent. rate.
What I can say to the Committee is that the UK will remain a competitive place for businessthat, of course, is absolutely essentialwith a tax burden that compares well internationally. The UK tax to gross domestic product ratio, 37.1 per cent., continues to rank below the EU15 average. UK top rates, taking into account social security contributions as well, will continue to fall into the range of that of other G7 countries. Overall, the UK tax regime remains very competitive, with, of course, the lowest corporation tax rate in the G7 and a capital gains tax rate below that in the US and Germany, for example. I welcome the international surveys consistently showing that the UK has a business-friendly environment and a competitive tax system. The World Banks study of 181 countries, Doing Business 2009, placed the UK sixth in the world and second in the EU for ease of doing business.
The Financial Secretary is talking about the competitive tax rate. May I bring him back to the clause for a moment? Subsection (4)(b) states: for 32.5% substitute 42.5%. If I have read the Red Book correctly, table A3, annotation 2, states:
The rates applicable to dividends are 10 per cent for dividend income up to the basic rate limit and 32.5 per cent above that.
As I understand it, that figure is now going from 32.5 to 42.5 per cent.a rise of more than 30 per cent. Does the Financial Secretary think it right that basic rate taxpayers who have dividend income above the basic rate threshold should beif I have understood this correctlysubject to an increase from 32.5 to 42.5 per cent.?
I shall come to the implications for some of the other rates in a moment. The point I am making is about the 50 per cent. rate on income above £150,000, but there are some knock-on consequences, which I will spell out in a moment.
In answer to the hon. Gentlemans question, yes, this measure is consistent with the competitiveness of the UK as a place for investment in business, consistent with fairness, and consistent with the consolidation that is needed over the next few years. The measure will raise more than £6 billion in its first three years. That estimate takes into account, as all our estimates do, behavioural consequences of the change, about which we had some discussion this morning. As I also mentioned this morning, the assumptions that underpin our view of the yield coming from this measure were confirmed by the Institute for Fiscal Studies in its post-Budget briefing as not unreasonable.
Some have suggested that the behaviour impacts are such that we should not make that change. I do not agree with that, because without this measure, focused on those with the very highest incomes, funding would need to be found elsewhere. Our choice has been to look, in this clause, to those who are in the best position, who are most able to afford to pay, and whose incomes have risen a good deal faster than the average over the last decade.
I am a little surprised that the Financial Secretary mentioned the Institute for Fiscal Studies, because it also predicted that the tax would generate almost nothing. I am wondering whether the definition of almost nothing and agreement with the Financial Secretary coincide. This causes me concern, and I am also concerned that the Chancellor said that there was no science to choosing the 50 per cent. tax rate. I want to be absolutely sure that this is a revenue-raising measure. Will the Financial Secretary give me a total assurance that that is the case and that it will not in fact diminish revenues, which is a possibility?
I simply refer the hon. Gentleman to the post-Budget presentation by the IFS, which I have in front of me. The IFS says on one of its slides:
How much will the 50% rate raise? HM Treasury says £2.4 bn.
A little further down, it says:
Governments assumptions not unreasonable.
That was my point, and it is certainly my view that the measure will raise a substantial amount for the Exchequer and make an important contribution to the consolidation that is required.
Let me move on to the question put by the hon. Member for Dundee, East about some of the consequences or knock-on effects of the change. The rate of tax due on dividends over the same income threshold is raised, as he said, to 42.5 per cent. The clause also raises the trust rate to 50 per cent. and the dividend trust rate to 42.5 per cent., to ensure that there is no incentive for somebody to put money into a trust simply to reduce tax liability.
On dividend income, let me be clear: dividend income over £150,000 will be subject to the 42.5 per cent. rate; a rate of 32.5 per cent. will continue to apply up to that amount. In other words, basic rate taxpayers, about whom the hon. Gentleman is particularly concerned, in receipt of dividends will not be affected.
Another consequence of the 50 per cent. tax rate is the impact on special rates of tax in the pensions tax rules. Those rules operate on the basis that individuals receive tax relief at their top tax rate on pension savings up to prescribed limits. If those saving limits are exceeded, tax charges are applied to recover tax relief on contributions. The clause puts in place powers to vary the rates for those special pensions tax charges in regulations, a point that is mentioned in the letter that has been circulated this afternoon.
We have thought very carefully about how the further money required for fiscal consolidation should be raised. We are clear that it is right to require those who benefited most in the last decade and who are in the best position to pay to contribute more. That is the basis for the clause. I will now give way to the hon. Gentleman.
The Financial Secretary really is being very generous in giving way. Can he just tell us how he thinks he will present to the electors of East Ham at some point within the next 13 months the fact that he has broken his own general election manifesto pledge from 2005? Perhaps he thinks otherwise, but the manifesto said clearly:
We will not raise the basic or top rates of income tax in the next Parliament.
The measure is rather popular among my constituents in East Ham. They look to the Government to take the right decisions for the future of our country. In extraordinary circumstances, of the sort that we have seen in the world economy in the past few months, it is right of the Government to put in place the measures that are needed to safeguard the economy, families and businesses, and to secure the consolidation that will be needed in the next few years. The measure is an important step towards doing that.
We have got to the heart of the matter. I am now going to talk at some length about the 50p tax rate and ancillary matters. I hope to cover quite a wide range of topics, including, first, the reactions to the proposed 50p rate and, secondly, a question that we have not really covered yet, which is whether the proposed 50p rate will be a temporary measure or permanent. Thirdly, I will examine whether the measure will raise the amount that it is claimed it will raise, and whether it might not be beyond the point of revenue maximisation. Fourthly, I will look at the UKs overall economic competitiveness. Fifthly, I will look at the political background and reasons for introducing the 50p tax rate and some of the other measures. I will also look at the complexity that the abolition of the 45p tax ratebefore it was even introducedwill add to the unpredictability of the UK tax code. Furthermore, I will discuss some of the more technical provisions relating to trust dividends and pensions before drawing some conclusions.
This is the first rise in the top rate of tax since 1974, after 35 years of it either being stable or reduced. It is worth reiterating that the Government estimate that the new 50p rate on earnings above £150,000 will raise £1.13 billion in 2010-11, rising to £2.52 billion in 2011-12. However, the new tax rates implementation is largely the result of political posturing. The change sends the wrong signal to entrepreneurs who are in the UK and to those who might be attracted to come here, and it will lead many to question the UKs economic competitiveness, especially in relation to its tax code. The proposal also adds to massive uncertainty about the UK tax system and is a reminder of the importance of predictability in that system. Moreover, it adds significantly to UK tax complexity, which, as we heard this morning, is already a developing theme in our deliberations on the Bill. The 11 different marginal tax rates that have been created in recent years are incredibly complex.
Questions remain about whether the proposal will raise anything like the amount that has been suggested, and I am disturbed by the earlier evidence that, in the Treasurys assessment of what the measures will yield, it did not separate the phasing out of allowances on the one hand, and the introduction of the 50p tax rate on the other. There seems to be an assumption that those two factors will prompt the same behavioural reaction, but peoples reactions may well be very different. For example, somebody who currently earns £95,000 but may expect to earn £105,000 might go about not earning that extra £10,000, but doing something else; on the other hand, somebody who earns £250,000 might decide to relocate. It is fundamentally flawed to throw two kinds of consideration into the same estimate of revenue.
The ancillary changes to pension and dividend rates act as a severe disincentive to save and they send the wrong message on savingmy hon. Friend the Member for South-West Hertfordshire spoke earlier about the importance of our savings culture. Also, the change to the trust rates might have a perverse impact on many who are not well off and are about to suffer undue hardship as a result of the Governments measures.
Reactions to the 50p tax rate announcement were very interesting. We will turn to focus groups in due course.
Our pledge is clear: we do not think that it is the right thing to do, but we are not pledged to reverse it. It will have to take its place in the queue of other tax measures that we will look at. Our priority will be to lower the tax burden on those on a medium income, so reversing the 0.5 per cent. rise in national insurance contributions for those earning more than £19,000 will be our priority. But that does not prevent anybody from raising a number of questions about the 50p tax rate.
Is not the other reason that we cannot make promises and mislead people that we do not know what mess this Government will get us in to? Is not that the truth of the matter?
My hon. Friend is absolutely right. Public finances are in an appalling and worsening state. The Financial Secretary has already spoken about why he had to scrap his own 45p tax rate, which he launched only a few months ago. To then have the nerve to say that we should state what our first Budget might look like, a full year in advance of when we might be elected, shows real cheek.
There was large-scale condemnation of the move to a 50p tax rate. I mentioned focus groups, which, interestingly, cropped up in Second Reading when the right hon. Member for North Tyneside (Mr. Byers) referred to them. I will come back to examine some points that he made.
Even those who one might expect to be natural supporters of the 50p rate tempered their praise. For example, an editorial in The Guardian, which one might have expected to support itI think that, broadly, it didcommented that the measure was
a commendable attempt to share the pain, which sounds fair enough from the Governments point of view,
but it will not do much to plug the yawning gap in the public finances, seeing as it was not combined with measures on property or capital.
Leave aside the breaking of the New Labour covenant on tax rates, it is plain stupid to make a change that brings in less revenue, not more. If you need more revenue you have to be honest and acknowledge that it must come from higher basic rate income tax and higher VAT.
Similarly, The Economist observed that the changes
will irritate the 1-2% of taxpayers affected; but it will hardly solve the problem. That will require broader, more painful measures in the medium term.
Moving on to those who are a little more outright in their condemnation, The Times, in its editorial, said:
The decision to raise the top rate of tax to 50 per cent will punish some bankers, but will simply send others scurrying to Geneva.
The vast majority of the 350,000 people earning more than £150,000 will, of course, stay in the UK. They will not complain. They will call their accountants. A higher rate of tax is likely to generate much less revenue than the Treasury hopes, and much more avoidance.
I have almost finished quoting the newspapers, but it is important to gauge the reaction to the biggest change to our tax code on the top rate in 35 years. The Financial Times editorial said:
A fair tax system must be progressive.
We saw earlier how the 11 new marginal tax rates are eroding the progressive nature of our tax system. The editorial continued:
But the more a country raises money from a small number of rich people, the fewer of them it will find it has. Raising serious revenue requires a broad tax base, not an assault on a small minority of high earners.
But these rises are not about raising money.
Higher taxes may be politically attractive in the short term, but I think this could be a real hindrance to the next wave of UK entrepreneurs and international companies looking to invest in the UK.
My hon. Friend is giving some excellent examples of the folly of the Governments policy. The Financial Secretary let it out of the bag; there is no financial reason; it is being done because it is popular in his constituency. This is a dog whistling campaign to get the Labour party core vote out, so it is not decimated at the next election.
My hon. Friend gets to the heart of the matter, which is why I asked whether the Financial Secretary was going to campaign on this issue nationwide believing that higher taxes will be popular and will make people more likely to vote Labour. The history of the Labour party in the past 15 years suggests that the opposite is the case.
Thank you for that guidance, Mr. Atkinson. I was going to mention Tony Blair because it is important to reference manifesto pledges. I have signed up to receive the e-mails and funny bulletins from the Tony Blair Faith Foundation and about his middle east activities. I have not seen anything in those e-mails about the 50p tax rate, but I am led to believe that he has condemned it quite strongly in private conversations with leading people in the Labour party. I think he said that it would be a terrible mistake.
I shall also talk a little about how in the last Parliament one political party was pledged to introduce a 50p top rate of taxthe Liberal Democrats. I was going to mention some of what the then Prime Minister, Mr. Blair, said to attack the 50p top rate of tax. It will make uncomfortable listening for some Labour Members.
I am still looking at the reactions to the 50p top rate of tax. Richard Lambert, the director general of the CBI, said that he had spoken to some business people who were considering relocating as a result of the new measures, which he described as highly unwelcome.
Perhaps the most interesting reaction was from a gentleman who was until quite recently a member of the Government. Lord Jones of Birmingham, the former Business Minister, was one of the Prime Ministers personal appointments. He resigned earlier this yearperhaps he had more foresight than some and could see what was coming down the road. Referring to the new 50p higher rate of tax he said:
I thought New Labour was about empowering people, not a command economy mentality and the politics of revenge.
He also said:
The greatest criticism was that there was no vision. The overriding thing was a feeling of disappointment. I was hoping to see leadership.
I believe that Ministers were led astray by the focus groups.
I want to ask the hon. Gentleman about the imprint of the fence on his bottom on this subject. He is making a powerful speech attacking this measure, but I have yet to hear him say either that he will oppose the clause or that he would seek to reverse the measure at a future date. I would welcome an explanation of his posture, uncomfortable as it seems.
I repeat what I said earlier, although I thought I had made it absolutely clear. We do not believe that this is the right thing to do, but we cannot pledge to reverse it. It will be difficult to say what the public finances will look like in 12 or 13 months time, or hopefully less. The Exchequer Secretary chuckles, but I was interested to read her reaction in a debate on a statutory instrument in January. When my predecessor, my hon. Friend the Member for Putney (Justine Greening), asked her what was coming up in the Budget, the hon. Lady replied that it would be irresponsible of the Government to say what might be in the Budget three months in advance. It is a bit rich for Labour Members to ask us to set policy a year or perhaps longer in advance.
I certainly look forward to receiving a leaflet through my door explaining that particular position. Can I suggest to the hon. Gentleman that there are two issues to confront here? The first is revenue raising, and I largely agree with the thrust of the argument about the relatively small sum the measure will raise. My right hon. Friend the Financial Secretary made that point himself. However, there is also the message of equity in a state and country at large that is facing an economic crisis and the need to share the burdens. There is an argument for saying that those who are best off should pay more in those circumstances.
The hon. Gentleman makes two interesting points. First, on revenue raising, I shall talk about whether the measure will in fact raise the sums that we all agree are really quite small when seen in the wider context of our huge budget deficit.
In normal circumstances, the Committee would adjourn only for Divisions, but in view of the importance of what such a statement might contain, I shall seek further advice.
Before the multiple Divisions, I was in the middle of responding to an intervention from the hon. Member for South Derbyshire, who is obviously still involved in one of those Divisionsno, he is returning as I speak. The first point that he raised was about how much revenue the 50p tax rate would raise. His second point was about equity and whether it is fair. Equity is a tempting argument, but the problem is that it is predicated on those higher rate taxpayers staying exactly where they are. There is not much point in having a more equitable tax arrangement if the people at whom it is directed change their behaviour, move out of the country, start putting more of their cash into something else, work less or get more involved in charitable activities.
If the 50p tax rate is so equitable, why did the Government not introduce it earlier? If it is equitable from the Governments perspective now, surely that was also the case in 1997. The reality is that the Government are scrabbling around, trying to find a way to fill the gap, and soaking the rich is too politically tempting, at least for the Government under the current Prime Minister.
In any case, the world has changed a great deal since 1997. We have become more globalised and the tax code has become more complex, which will generally make it easier to avoid paying tax. It is also much easier for people to locate elsewhere. With modern communications and the ability to travel very quickly, it is much easier to do business outside the UK. I hear what the hon. Gentleman says about equity, but we have to ask ourselves why, if the 50p tax rate is equitable now, it was not equitable in 1997.
I shall now explore whether the measure, at least in the Governments eyes, is to be temporary or permanent. The interview with the Chancellor in the Daily Mail on 23 April was fascinating. He said that he would have to ask people on higher earnings
to contribute a bit more while we resolve this situation.
Suddenly, that introduced huge uncertainty about the timing. I think that we were led to believe that the measure might be permanent, but suddenly the Chancellor was saying that it applied only
while we resolve this situation.
Does the hon. Gentleman think that the Chancellor had in mind the period until the economy returns to growth, which he predicts will be at the turn of the year, or the period until 2031, when public borrowing will be back to the 40 per cent. that the Prime Minister previously set as the maximum level?
The hon. Gentleman raises a very interesting question: quite what is meant by this situation? That might have referred to the banking crisis and the ongoing immediate financial crisis. Perhaps the Chancellor was not referring to the economy; perhaps he was not referring to budget deficits and overall levels of indebtedness. However, his comment introduced enormous uncertainty into the equation, not least because the Leader of the House, I think on the same day, implied that the change was to be made permanent. What will define this new term of resolving the situation? How long does the Financial Secretary expect the measure to be in place? If it is abolished, will tax allowances be reintroduced for higher rate taxpayers? Are the two things inextricably linked in his mind, or might some separation come about in the Governments thinking?
There may be a hypothetical element to those questions, but they are important. For example, the behavioural response of higher rate taxpayers to a temporary surcharge on higher earners could be rather different from their response to a permanent system of higher taxes, which would mark a clear break with the established consensus on top marginal rates of tax. Tax predictability is important, and we need the Financial Secretary to shed some light on it.
The area of greatest controversy, which was mentioned in earlier interventions, is whether the 50p tax rate will raise all that the Treasury says it will. It is worth taking a quick look at the 45p tax ratea rate that was abolished before it was introduced. In the pre-Budget report, we saw the reality that it is taxes on the many rather than on the rich that will fill the hole. The PBR estimated that introducing the 45 per cent. rate and raising the tax rate on trusts to 45 per cent. would raise £670 million in 2011-12, but that restricting the personal allowance for individuals with incomes of more than £100,000 would raise £1.32 billion in the same year.
By contrast, the PBR said that increasing the rates of national insurance by half a percentage point on employees, employers and the self-employed would have raised an estimated £5.4 billion in 2011-12. That increase in national insurance contributions would have raised eight times the revenue that would have been raised by the 45p tax rate, and five times the amount that was going to be raised by phasing out the allowances. With the 50p tax rate, that ratio is obviously tighter, but a much larger amount of tax is still being raised from the many than from the few. The real losers under this Budget and the Governments approach in general are those being paid more than £19,000, who will have to cough up more on their national insurances contributions.
The words of the Institute of Chartered Accountants in England and Wales were instructive. It says:
Whilst higher taxes for higher earners may be politically popular, the actual amounts they raise are relatively small and will make hardly a dent in the UKs overdraft.
The hon. Gentleman raises an important question. It has been posed before. As I shall say later, the jury is still out on whether the 50p tax rate will raise significant tax revenues; and, if so, how much it will raise. I shall also say a little about the modelling done by the Treasury and by the Institute for Fiscal Studies, to which the Financial Secretary referred earlier.
First, I return to the comments of the ICAEW. It said:
the Red Book anticipates that these measures will bring in only about £3bn, not a huge sum when compared to overall government spending of £671bn forecast for 2009/10 and receipts of £496bn.
That means a Budget deficit of £175 billion, but the 50p tax rate will raise only £3 billion of thatit will plug only a small part of that hole.
In the IFS post-Budget briefingI think that the Financial Secretary is flicking through a copy as I speakRobert Chote, its director, put the changes to income tax on the wealthy into context. I am not sure whether the Financial Secretary and I will end up quoting the same paragraphs, but this is what Mr. Chote said in his post-Budget briefing:
Much attention has focused on the income tax increases on the rich, which the Treasury hopes will raise £7 billion a year. Even if this estimate is correct, the gain will partly be offset by losses of VAT and other indirect tax revenues buried in other Budget forecasting changes.
We should also bear in mind that increases in fuel duty and National Insurance will raise a roughly similar amountand from a much broader range of families.
He went on:
And all the tax increases announced to date will in total raise only about 10 per cent. of the money the Treasury is looking for by 2017-18. So the main burden of the looming tighteningat least over the next few yearsis likely to fall on the users of public services.
That is a slightly different flavour from that given earlier by the Financial Secretary.
Interestingly, in a presentation on the Budget changes to direct taxes and benefits, another officer of the IFS, Stuart Adam, noted:
Huge uncertainty about how much people will reduce their taxable income in response, observing that they might
work less, retire earlier, emigrate, contribute more to pension or charity, convert income to capital gains, incorporate, invest in tax avoidance.
That is a huge menu of available options, many of which will immediately look quite attractive. Moreover, the Treasurys estimate that the 50p tax rate would raise £2.4 billion ignored any effect on consumer spending and the consequent fall in indirect tax revenue. Not just the IFS, but one of the Governments favourite commentators, the Centre for Economics and Business Research, was perhaps even more condemnatory than the IFS in its press release:
Government will lose £800 million from tax hikes on the rich. Budget tax increases on those earning over £100,000 will reduce government revenues by £800 million and hit the City of London; 25,000 to go into tax exile.
Prior to the pre-Budget report in November, the CEBR estimated in its document, entitled Would a 45 per cent. tax rate raise any revenue at all?, that the likely 45 per cent. tax rate on income over £150,000 a year would cost the economy 35,000 jobs and, over a 10-year period, cost the country £2 billion in revenues. That was the word from the CEBR, which is normally quite favourable to the Government.
The Treasury Committee was also rather doubtful about some of the claims made for the amount that might be raised. It said, admittedly more neutrally:
We believe that there are considerable uncertainties over the yield to be raised by the 50 per cent. top rate of income tax.
The Treasury, I note, did not deny a report in TheSunday Telegraph on 26 April about its internal modelling, which I will come to in more detail in due course. The internal modelling suggested that 69 per cent. of those affected would dodge some of the new tax. The report states that the Budget made
cautious assumptions about any impact on tax revenue through behavioural changes.
If the Treasury really does have private estimates that more than half the new top-rate taxpayers will seek to avoid the tax, we call on it to publish them so that we can all see what impact this may have.
That leads me to my next area, which is whether we have reached the revenue maximisation point with the top rate of tax. It is worth, therefore, looking at some of the history of top tax rates in the UK. Back in the 1980s, just before the 1988 Budget, the top 1 per cent. of earners paid 14 per cent. of all the income tax paid in this country. By 1997it took some time to work through fullythat had risen from 14 to 21 per cent. A major reason for that was that the top rate was cut from 60 to 40 per cent.
Returning to our friend the IFS, it has produced a sophisticated version of this sort of modelling, which some might call the Laffer curve, perhaps using too simplistic a view of the IFS model. The IFS has done some study on taxable income elasticity. It put this proposition to us, saying
suppose the marginal tax rate was originally 50 per cent. and increased to 50.5 per cent. Then the net-of-tax rate would have fallen from 50 per cent. to 49.5 per cent., or a fall of 1 per cent..
If the elasticity were 0.46this is the figure the IFS has used, based on the last time the top rate of tax came down in the late 1980sit says that gross income would fall by 0.46 per cent. I am sorry: this is a slightly complicated argument, but it is important in trying to answer the question raised by the hon. Member for Taunton as to whether this measure will yield more tax intake.
The IFS is using its own model, which is admittedly based on some assumptions that are a little dated. However, they are still probably the most recent assumptions that anybody can make in assessing peoples behavioural change when they face different tax rates. The IFS then calculates that increasing the tax rate above 40 per cent. would result in the Government collecting less tax from the rich.
Her Majestys Revenue and Customs apparently uses in its own modelling a figure of 0.35 instead of the figure of 0.46 that the IFS uses. Nobody can say with any certainty which figure is right, but at least the IFS figure is based on an historical example. As I will explain in a moment, the Treasurys figure of 0.35 is based on far more questionable evidence.
Nevertheless, the Treasury uses the figure of 0.35. Using that figure and putting it back into the IFS model produces an optimum revenue-raising rate of 57.3 per cent. My understanding of the Treasury model, which I think is the same as the IFSs understanding of the Treasury model, is that the tax maximisation point is not a 50p top rate of tax, but a 57.3p top rate of tax. I would be grateful for a ministerial explanation of that. Perhaps he will agree to publish some of the findings of the Treasury model.
The IFS drew out of the Treasury the assumptions that it used when it was deciding what the 45 per cent. tax rate would draw from the very rich. It turns out that the Treasury had its own version of the Laffer curve, but the elasticity ratioin other words, the lengths to which the rich would go to avoid paying this taxwas put down as low as 0.35, as I have said. A rate of 1.0 means that the rich will avoid everything, whereas a rate of zero means that there will be no change in behaviour.
So, as I say, the Treasury figure was as low as 0.35, whereas the IFS figure was 0.46. That is where the crux of the argument liesin trying to predict likely behaviour. So far, the Treasury has either not come clean about its methodology or is perhaps deliberately obscuring some of its results with its assumption.
In other words, the Government think that there is far less proclivity to avoid tax by higher earners than the IFS does. However, I must stress that the IFS has conducted the study. It is the organisation that looked at historical rates and used some figures that might have some reasonable basis.
The Treasurys figure of 0.36 suggested that the tax maximisation point is around 55 per cent., or 57.3 per cent. for earnings over £150,000. I would be interested to hear from the Financial Secretary how the Treasury arrived at that figure of 0.36; it does not seem that the Treasury itself is willing to say. However, it does seem that the figure of 0.36 per cent. is just a tiny bit lower than the figure that one would get for the country as a whole.
So, there seems to be significant evidence that the Treasurys modelling is that a high earner is just as likely as somebody who is perhaps earning an average wage of £25,000 to try to avoid tax, yet all the experience and all the observation of the issue suggest to us that the opposite is true, and that a higher-rate earner is far more likely to try to avoid tax and will probably be more able to do so. They are likely to be in a profession that will be more easily transposed. Of course, they are also more likely to be able to afford better accountants, better tax advice and so on.
It seems to me that the Treasury has deployed the elasticity ratio for the average British worker and simply applied it at the same rate of 0.36 to those on £150,000 a year. The Treasury tries to justify that by saying that the rich would normally have an elasticity ratio of 0.4, but it has downgraded that figure to 0.35 because it has abolished the personal allowance, conveniently getting close to the rate for the general population.
However, the IFS curve suggests that the peak-yielding tax rate is about 42.5 per cent. It is fair to say that the IFS does not like to say things with any degree of absolute certainty under its model. All the time, it stresses how much uncertainty there is, and obviously there is a lot of uncertainty in these models. Within them, one is predicting the behaviour of a set of people, given various hypothetical changes that have not even happened yet.
According to the IFS model, if its figure of 0.46 is correct, the 50p tax rate will lose rather a lot of money, as anything over 42.5 per cent. starts to yield less for the Exchequer. Is the IFS being realistic? To be fair, it is saying, as I have already mentioned, that there are a large number of assumptions behind the model. Its assumptions are compiled thus:
Using information on how the income share of the richest 1 per cent. of adults changed during the 1980s, the last time marginal tax rates for the very rich were altered.
Are we in a situation similar to that of the 1980s? That is a relevant question. It is difficult to judge, but I think that there is evidence that avoidance is likely to be higher now than it was then, for the reasons that I have talked about, such as labour mobility, the ability to move where one is working and the ability to carry out ones work in the UK even though the work is based abroad. We have to be extremely careful due to the greater globalisation that we have seen over the past 20 years.
My hon. Friend is making a powerful and interesting argument, which has much merit. If a business person in this country was on a fairly high income and the top rate was 40 per cent., they might say, I do not care. I will pay that. But the more that goes up, the more they will think about the whole issue. That is the reality of the situation. It was recognised by Tony Blair, and that was part of the success of new Labour, but it has been abandoned here today.
My hon. Friend is absolutely right. It would be too simplistic to suggest that there is a specific point at which higher earners or entrepreneurs will say, I will remain in the UK or I will leave. There are all kinds of different stages, one of which might be to pay for better tax planning and better accounting, and for more similar services, as a way to avoid that higher tax rate. Therefore, great doubts exist as to whether the Treasury has got its guesstimates right. It is betting a lot, it seems, that the revenue maximisation point is a tax rate on top earners of around 56 per cent. The IFS suggests that it is 42.5 per cent.an enormous difference, which shows the great leap into the dark being taken by the Government.
On the same subject, the Institute of Chartered Accountants has argued that a detailed economic analysis should be made of the proposed change before any final decision is taken to proceed with the increase. I know that many others feel the samethat it would be better to have a proper study first.
I congratulate my hon. Friend on his speech. His point about the Governments analysis when introducing the measure adds great concern when one understands that the Chancellor has admitted that there was no science behind the Governments decision. Are they not an irresponsible Government, grasping for political purposes without knowing the impact, the effect or, indeed, the overall revenue return?
My hon. Friend is right. That has been characteristic of tax-making policy over the past two years. It has been based on a series of political whims and machinations, rather than proper study and assessment of the changes in tax rates.
We must bear it in mind that the Government have gained some merit in keeping various tax rates stable over some years before 2007, but now they are throwing away all those years of stability based on a series of whims, which, as my hon. Friend points out, are not based on any science. I have been looking at some of the so-called science involved in the modelling, and I think a lot of it is at best questionable.
On the question whether the measure will raise what the Government say it will raise, I doubt the Treasury modelling, relative to what the IFS is saying. Neither is likely to have exactly the right answer, as a huge number of assumptions are being used, but I feel that the IFS has a slightly more reputable basis for its modelling than the Treasury, although, of course, the Minister may tell us a little more about the Treasurys modelling in due course. The Treasury seems to use average human behaviourthat of the whole populationto predict the behaviour of the top 2 per cent. of top earners.
Secondly, the Treasury underestimates modern mobility and the ability of people today to avoid paying tax, compared with that 20 years ago. I am disturbed by the fact that in the Red Book figures and the assessment of the revenue raised, the Treasury has drawn no difference between the consideration of the 50p tax rate and the phasing out of the personal allowances. We need to model the two separately. In many cases, different people are involved and we are looking at different types of behaviour.
I will move on to the question of UK economic competitiveness. The impact of the measures on the UKs competitive position should not be underestimated. For a moment I will return to our old favourite the CEBR, which used to be the Governments favourite. On the changes it said:
Our provisional calculations suggest that if these were implemented, over 3 years there would be a loss in UK jobs building up to 140,000; a loss in GDP in the City of London of 3% and a loss in tax revenues for the government of £800 million a year. About 25,000 high end taxpayers would be likely to shift tax regimes, with the low tax cantons in Switzerland like Zug the likely largest gainers.
I have never been to Zug, so I do not have any first-hand experience of its attractions. However, it is perfectly possible that we might be jeopardising the UKs overall economic competitiveness by increasing temptation beyond a certain point for people to make that move. The CEBR goes further:
We can understand the tough choices that governments might have to make when they have to trade off the prospect of raising revenues against the potential damage that higher taxes might do to the economy. But the evidence here seems to be that the damage to the economy is so great that there is no trade off. The economy is worse and revenues are lower.
That is very important.
The ICAEW has similarly expressed concern about the combined impact of the various proposed changes to the income tax rulesthe 50p tax rate, the removal of personal allowances for those with income exceeding £100,000 and the pensions changeson the UK as a place to live, work and invest. As I have mentioned, a further effect could be that some existing high earners are driven to move abroad, and the changes could also drive away aspirational young people who want to find a better and more rewarding life elsewhere.
My constituency currently has a lot of French nationals who are essentially here because in their view, France charges too high a top rate of tax. It also has a large number of Polish citizens who are not here primarily for tax reasons, but if the tax regime becomes a lot tougher, especially with the increase in national insurance for those earning above £19,000, they may be tempted to go back.
On that topic, has the hon. Gentleman given any consideration to Arsene Wenger, the Arsenal football club managers thoughts that this measure may drive away footballers who are able to ply their trade in many markets? Those players give great pleasure to people who watch premiership football.
The hon. Gentleman raises an interesting point. I think that I am the only Conservative MP who has a premiership football club in their constituency. In fact, I represent twoFulham and Chelsea. It would be remiss of me to comment on what arrangements Arsenal may have made, but the impact of the 50p tax rate on Chelsea football club could be significant. However, I do not want to stray down that road, as there will be different views about the desirability of all those highly paid footballers being in the country.
I draw the hon. Gentlemans attention to the remarks of the England manager who has been concerned at the prevalence of foreign footballers within the premier league. There is an issue to be balanced here.
I thank the hon. Gentleman for that intervention. Last year, the tradition was talking about cricket during the Finance Bill; perhaps this year it will be football, even without the hon. Member for Ealing, North (Stephen Pound), who last year almost always pulled us back into the world of football.
To finish my point, I believe that there will be moves to transfer activity from higher earners to interesting but less remunerative activities and charities. That might be an important side effect, but it is likely to have a bad impact on tax revenues.
As my hon. Friend says, it was a Treasury-sponsored report. According to the Daily Mail, the report said that
confusion over Whitehall tax policy had put Britains reputation as a destination for financial high fliers at risk last year.
That was before this years proposed rises. The article continued:
Questions about the clarity and continuity of tax policies became an issue in 2008, the report into the future of the UKs financial services sector said.
The report stated:
This may have raised issues about the UKs attractiveness as a centre for international financial services and indeed other industriesbeyond which its reputation as an attractive investment destination might have been questioned.
My hon. Friend is making an interesting and persuasive case. Does he share my concern that the making of tax policy, whether here or abroad, focuses too much on overseas nationals? Perhaps we should focus more on ensuring that those who benefit from setting up businesses, employing people and making large profits here have a long-term commitment to this country.
My hon. Friend makes an important point. In the last couple of minutes, our discussion has perhaps been sidelined into the subject of foreigners who are resident here, such as footballers. His point is important and powerful. The question is not just one of foreign nationals, as one can see from the City. To return to the Bischoff report, huge numbers of people working in the City are not foreign nationals but UK subjects.
If my information is correct, the Chancellor co-chaired the group with the former Citigroup chairman, Sir Win Bischoff. Doubtless, the Chancellor was a little perturbed by the results of the report. Sir Win said that the question of tax was important. He added:
In relation to developed countries, we want a competitive tax system and one that is predictable and stable.
That relates to my earlier point about the importance of the UK tax code being predictable and stable. That has been blown out of the water by the events of the last two years.
My hon. Friend touches on the City. That area of our economy seemed to receive great favour under the premierships of Mr. Blair and his successor. How does my hon. Friend think this Government intend to promote the City as an international centre, while increasing taxes in this way? Does that not defeat the object?
My hon. Friend makes an important point, which would be best answered by the Minister. Obviously, business cannot return to how it was prior to 2007-08, but London must continue to be an important and powerful financial services centre, not least because we need to generate tax revenues. We need something to plug the £175 billion deficit that I referred to earlier. Getting the City back into a productive mode in which it produces those tax revenues should be an important Government policy.
Returning to the UKs competitiveness, the Financial Secretary mentioned briefly how the higher rates of tax in the UK stack up against those of other G20 economies. A PricewaterhouseCoopers press release after the Budget stated:
From next April, a year earlier than expected, the UK will rank 18th among the G20 economies in terms of income tax and social security rates for senior executives, based on current rates. The change applies to both domestic and overseas high-earners working in the UK.
This increased tax take could accelerate the movement of high earners and top performers in industries like finance and technology to other established and growing economic hubs. Countries like Switzerland will look increasingly attractive to some of the people in the key industries needed to lead the UK out of the recession.
We have to worry about the competitive position of London as a City, too. We have talked a little about that, but it is worth examining in more detail. The position is vital to restoring overall tax revenues in the country. London needs to remain a premierif not the premierinternational financial centre. I am not making a call to go back to business as usual as it was prior to 2007; that is a matter for a separate debate, but I am calling for the City of London to be restored to being a tax-generating part of our economy.
I hope to address one or two of those issues later, but it should be stressed first and foremost that the City of London is still a pretty substantial tax generator in several areas that have not been badly affected by recent events, such as insurance. Will my hon. Friend give some thought to whether, with a bit of 20:20 hindsight, we have become a little over-reliant on financial services not only in the City of London, but throughout the United Kingdom in recent years? Given that it will take some time to adapt to other industries that will be of importance, such as creative industries in all their facets, perhaps we should focus on that, too, and not return to the situation that has been so prevalent over the past 12 years when the Government have prostrated themselves before global financial services with non-domiciles and the like, to what might be the detriment of a balanced economy.
My hon. Friend is absolutely right. Experience shows that, during the nine years of this decade, as an economy we have become too dependent on financial services. If I am not mistaken, four fifths of all new jobs in the economy since 2000 have been created in financial services. However, it is not exclusive to say that we need to diversify and rebuild the City of London as a generator of tax revenues. I appreciate my hon. Friends point about the insurance sector, but we are not talking about the whole of the City of London having suddenly stopped being in business. A huge tax generation is already going on. It is possible to do both, and diversify and rebuild the tax base.
The Mayor of London made some interesting comments about the 50p tax rate, but his comments that should have been given more attention were those about the threat that the high rates of tax and regulation make to the role of London. I was interested to read a piece written by Anthony Browne, the head of policy in the Mayors office. He warned that, after the Budget, the extra taxes could push higher earners to other countries without bringing in revenue to the Treasury, which is the matter before us here today. He said:
Far more than the rest of the UK, London has an internationally mobile workforce, and its success depends on being a global magnet for talent and business. Having a competitive tax regime is a key part of that, but we will now have the highest income tax rate of any major economy in Europe, or any global commercial centre. This new barrage of taxes on high earners comes on top of the governments assaults on non-doms, which is also a largely London phenomenon. It sends out a message that high earners are not welcome, when they are not only welcome in London, but an essential ingredient in Londons success. This isnt about defending the rich, but defending the economy. If high earners either stop coming here, start leaving, or simply work less, it would be a real setback for the London economy. The government will have achieved a real double-whammyit will have failed to raise much extra revenue, and at the same time strangled the economy. The government must not kill the goose that lays the golden egg.
I am not sure of the basis to that question, but I am sure that it is not relevant to the discussion. It has taken the hon. Gentleman some considerable time to come around to asking that question, which he clearly read from a piece of paper. We are five or six hours into the debate, and it says something that it took him that long to pluck up the courage to ask it.
My hon. Friend makes an interesting speculative point, but I would probably be best advised not to go down that road.
London generates 17 per cent. of UK GDP; there are four times as many high earners in London as in the rest of the country, and 145,000 Londoners will be hit by the changes. It is not only the Mayors office, but respected commentators such as Tony Travers who have been talking about the importance of London to the economy and how the Government should not kill off London by putting on too high a rate of tax. In the Evening Standard of 23 Aprilthe day after the Budgethe said:
Now the bad news: that continued economic strength means that Londoners will pay for yesterdays Budget. The Chancellors dash for indebtedness will in time lead to higher taxes...First, because the capital and its region are home to many of the countrys highest earners. A 50p top tax rate...will raise far more from the London area than elsewhere. Some people will see this result as fair, others not. But whatever the equity of the change, it will fall disproportionately on Londons taxpayers...Second, the vast growth of government debt will lead to higher taxes for many years to come. Research has shown that London and the South-East export tax to the rest of the UK. That is, taxes raised in and around the capital exceed the amount spent by government within the areaby up to £20 billion a year. For many years, this pattern has allowed public services to be provided in other regions to a higher standard than their own taxpayers could otherwise afford.
May I bring the hon. Gentleman back to the financial sector generally, rather than just the City of London, although he is doing a stoic job of defending it? For a moment, I thought that he was the Member for London First. This is about receipts from the financial sector and revenue yield. We know that the five-year forecast for the revenue yield from financial services and housing is down, but even in five years time it will not be back to its 2007 position, so what does he think needs to happen with the tax rates to stimulate growth and return to the yields we had before the recession started?
The hon. Gentleman raises an interesting point, which comes to the nub of the matter. I do not know whether his five-year figure about housing and finance yields returning is right, although I do not disbelieve it, but that is part of the problem. It is important that our tax revenues are increased as quickly as they reasonably can be, so I hope that the five-year figure is wrong. On his general point about where we will raise the taxes, we are going to have to see what happens to public finances over the next year, unless the Government wish to call a general election before then.
On financial centres and which had the highest tax rates, I cannot remember exactly what the Financial Secretary said about that, but I was interested to read an article in the Financial Times of Thursday 7 May, entitled, City of London will be the most highly-taxed financial centre in the world. The article considered the different percentages of their own income that people are able to keep. Dubai, unsurprisinglyI do not think we could ever compete with Dubaiallows people who work there to keep 95 per cent. of their income. That amount falls to 85 per cent. in Hong Kong, 82 per cent. in Singapore, 80 per cent. in Guernsey, 68 per cent. in Zurich and 62 per cent. in Tokyo. Crucially, the current amount in London is 61 per cent., which is higher than New York, Frankfurt or Paris, but the effect of the change will be that higher rate earners in London will keep only 50 per cent. of their taxable pay. Having been more competitive than New York, Frankfurt and Paris, it is now less competitive than all three of those important financial centres. It is worth remembering that someone who earns £250,000some on the Government Benches decry people earning such levelspays £125,000 per annum in tax, which, according to www.mysalary.co.uk, pays the salaries of about six nurses. It is important to retain these higher rate taxpayers as far as we reasonably can.
I want to talk about the political reasons behind the 50p tax rate. As we know, the Prime Minister loves creating his beloved dividing lines. Exploring the negative impact that the new rate might have on our future tax revenues, our economic competitiveness and so on leads one to conclude that it was a political gesture. Labour has reversed into a core-vote strategy. I was very interested to be in the Chamber when the right hon. Member for North Tyneside made his speech. Unusually, I do not have to qualify which speech, because he has made only one in the past yearaccording to his www.theyworkforyou.com entry. However, he obviously saved his first speech in 13 months for a big occasion. He said:
I am told that when the proposal the 50p tax rate
was put to the various focus groups that political parties use nowadays, it received broad support as a popular measure.
He also said that
focus groups are not always right...It has to be right that when we need to raise revenue, we should focus on those with more money, rather than less, but to raise significant amounts of money, which is what we need to do given the present financial circumstances, we need a broad tax base. The 50p rate for those earning more than £150,000 will apply to some 350,000 taxpayers in this country. They simply do not provide the broad base to raise the revenue that will be needed in our present circumstances...That leads one to consider why the 50p rate was introduced in the first place. When one looks at the fact that it is being brought forward to April 2010, probably just a few weeks away from a general election, and when one considers that it targets a very small number of taxpayers, the only sensible conclusion to draw is that the 50p-rate proposal has more to do with political positioning and tactical manoeuvring than a principled, strategic approach to taxation and the raising of revenue.
He talked about cynical political reasons and continued:
that simply will not work in our interests.[Official Report, 27 April 2009; Vol. 491, c. 615-616.]
He also raised the important question of whether the changes are intended to be permanent or temporary.
Ten years ago, the Prime Minister, as Chancellor, set out his three principles for the UK tax system. The three words were incredibly revealingsimplicity, fairness and competitiveness. In the past two years, he has busted all three of those principles. As we discussed this morning, simplicity has been completely broken by the 11 marginal tax rates. Fairness was destroyed by last years 10p fiasco, and the 50p tax rate has put UK competitiveness in severe danger. That is not to mention the breaking of the Labour manifesto pledge mentioned earlier. It is worth remembering exactly what Labour said in 2005:
Our economic record has finally laid to rest the view that Labour could not be trusted with the economy. We are winning the argument that economic dynamism and social justice must go hand in hand...Labour believes tax policy should continue to be governed by the health of the public finances, the requirement for public investment and the needs of families, business and the environment...We will not raise the basic or top rates of income tax in the next Parliament.
I shall compare that with the Liberal Democrats 2005 party political manifesto:
Our package of tough choices on spending, and fairer taxes, means that most people will be better off. There is only one proposed net tax rise (to 50 per cent. on the proportion of incomes over £100,000 a year, affecting just one per cent. of taxpayers).
They go on to list a menu of things that will be afforded by the tax rise.
I found that absolutely fascinating. We mentioned the figure of Tony Blair earlier. One of Tony Blairs favourite things to do during the 2001 to 2005 Parliament was attack Liberal Democrat questioners on their commitment to the 50p tax rate. In fact, I found 13 separate sessions of Prime Ministers questions in which the then Prime Minister did so. For example, in the last Prime Ministers questions before the general election, in answer to a question by the then leader of the Liberal Democrats, the right hon. Member for Ross, Skye and Lochaber (Mr. Kennedy), he said:
I do not think that his proposal to take that money out of general taxation by a 50 per cent. top rate of tax is something that will recommend itself to people. It is a proposal that in my view would not raise the money that he thinks it would raise.[Official Report, 6 April 2005; Vol. 432, c. 1413.]
That was the last Prime Ministers questions before Parliament was dissolved before the election. It was the election Prime Ministers questions. That was the election manifesto on which Labour fought in 2005. Before that, Tony Blair said to the then Liberal Democrat MP for Newbury, David Rendel, that increasing investment
by means of a 50 per cent. top rate tax...would not be good for the economy. Even if we raised the moneywhich we would not.[Official Report, 21 July 2004; Vol. 424, c. 327.]
It goes on ad infinitum; there are another 13. Tony Blair was quite sure that Labour was going into the election committed to not having a 50p tax rate and not raising the highest rate of income tax.
On the question of UK tax predictability, or rather unpredictability, a more subtle message is being taken by many out there that the UKs tax system is no longer as stable as it was. For example, the planned 45p rate is being altered five months after its announcement, before it has even been introduced. It would have been tempting to believe that the early announcements of new tax rates in the pre-Budget review were meant to help people plan and predict, but the reality is that they were put there for pure political advantage. An early announcement by this Government does not mean greater certainty. As I said, last November, the top tax rate was to be 45p from 2011, but by this April it had become 50p from 2010.
The countrys tax system is losing credibility, and the process by which tax changes are madenot in response to long-term economic challenges but in pursuit of short-term tactical political gainis causing immense damage to our international reputation and competitiveness. It all started with the pre-announcement of the abolition of the 10p rate and the reduction of the basic rate in the Prime Ministers last Budget as Chancellor in 2007. It accelerated with the disastrous pre-Budget report of October 2007, as we saw the first example of the now-familiar phenomenon of the Prime Minister trying to head off a catastrophic loss of confidence in him on his own Benches. It continued with the 2008 Budget, with last years pre-Budget report and now with the 2009 Budget.
We must ask ourselves whether the £150,000 tax point at which the higher rate is charged will remain constant. My reading is that the Treasury has no plans to increase or index the £150,000 level at which the new 50p rate will apply, which will mean that hundreds of thousands more people will be caught as wages rise. Other income taxes, of course, rise in line with inflation.
The Chancellor has estimated that about 300,000 people will face the new 50p rate when it is introduced next year. However, accountants calculate that over the next decade, about 750,000 peoplethat is more than twice as many as in the current situationwill end up paying the 50p tax rate unless the £150,000 limit is raised. Anyone currently earning about £100,000 will pay the new 50p rate by 2020 if they enjoy average wage increases. They will also lose valuable tax breaks on their pensions.
Freezing the threshold would suck thousands more people in, particularly if big fiscal deficits, low interest rates, a weak pound and quantitative easing unleash a period of high inflation.
The sudden, hasty introduction of the 50p rate is a huge blow to Britains reputation for tax stability and reasonable tax predictability.
On the complexity of UK taxes, the measures introduced will increase the differential between capital gains tax at 18 per cent. and income tax at 50 per cent., fuelling interest in structuring investments to fall within the CGT legislation rather than the income tax legislation. The reasons given for CGT unification in 2007 were, as the argument went, that the differential between the top rate of income tax, which was then at 40 per cent., and the 10 per cent. CGT rate was causing all sorts of peoplemainly private equityto dress up income as capital gains. The Government argued that they needed to unite the CGT rate as a way of preventing people from moving what was essentially income into capital gains. The differential then was 30 per cent. and under the proposals it will now be 32 per cent., so it remains to be seen what on earth is the basis for the Governments 50p rate, as referenced to CGT.
I mentioned earlier The Sunday Times report at the weekend, Five ways to turn income into capital gains, which says:
Converting income into capital gains has become the holy grail of tax planning following the governments plan to increase the top rate of tax to 50 per cent.
Is this really what the Government wanted? Grant Thornton accountants said:
If you are able to put your earnings into a business you can really take advantage of the...CGT...ratehowever, the ordinary man on the street has limited opportunities here.
Is this really what the Government wanted? The ordinary man on the street would not be able to avoid high rates of tax through CGT, whereas those who can afford their own accountant could.
I think that I will end there. [Hon. Members: Shame.] All right, in that case I will talk about trust dividends and pensions, because there seems to be some level of popular demand. On trusts, I was interested to read the briefings provided by the Low Incomes Tax Reform Group and the Disability Benefits Consortium. This is an area of immense complexity, but I will try to do justice to the serious concerns of those organisations about the trust and dividend tax rates.
Clause 6 increases the trust rate and the dividend trust rate for discretionary and accumulation trusts from 40 per cent. to 50 per cent. and from 32.5 per cent. to 42.5 per cent. respectively. That point was also raised by the hon. Member for Dundee, East. The 32.5 per cent. to 42.5 per cent. rates were originally prescribed in the Finance Act 2004 to counter the use of trusts for tax avoidance purposes.
In the Finance Act 2005, provisions were introduced with the intention of protecting vulnerable beneficiaries of trusts from the effects of those high rates. The focus of that legislation was mainly disabled persons and children with a deceased parent. So clause 6 has an important impact on Britains tax code. Those provisions work currently by allowing the trustees of trusts with a vulnerable beneficiary to deduct from their tax liabilities at the appropriate trust rate, which we have just discussed, the difference between it and what the tax would be if computed at the rate that would be chargeable on the vulnerable beneficiary as an individual. So it is designed to help vulnerable individuals, but I have been told that the mechanism for computing relief is too complicated and, from my brief examination of the relevant parts of the clause and the schedule, I believe that that is so. Also, the statutory definition of a disabled person for those purposes is too narrow. Consequently, from April 2010 some small trusts for vulnerable individuals will be charged income tax at 50 per cent. on trust income.
I cannot imagine that that will be popular on the Government Benches. We are talking about vulnerable individuals and disabled people being charged income tax at 50 per cent. on the income of their trust, which was set up specifically for them. None of that can be reclaimed on behalf of the beneficiary. Under the Mental Health Act 1983, a disabled person is defined as someone who is in receipt of attendance allowancethe highest or middle care component of disability living allowanceor someone who has a mental disorder that prevents them from looking after their affairs. That definition is too narrow, which means that a trust for people who are disabled, but whose disability is of the wrong sort will be liable for the 50 per cent. trust rate. Is the Minister satisfied with that result of his proposed changes?
Who loses out? According to the Disability Benefits Consortium, the beneficiaries who are likely to suffer from that unintended side effect of clause 6 include the following: first, those with conditions such as Downs, bipolar disorder or severe autism; secondly, vulnerable beneficiaries who do not come within the definition; thirdly, those without the right combination of benefits; and, fourthly, those who are entitled to the prescribed benefits, but who do not claim them. That raises many issues for the Minister to deal with. It seems that the law of unintended consequences has struck many times over.
I may talk more about trusts and pensions when we debate the schedule in due course, but I want to draw some conclusions purely in relation to the 50p tax rate. First, like the right hon. Member for North Tyneside, we think that the 50p tax rate is a crass political move, rather than a considered and well thought through change to the UK tax code. Secondly, its significance is big and could be monumental in sending out signals about doing business in the UKthis is first increase in the highest rate of income tax since 1974.
Thirdly, we doubt whether the Treasury has properly modelled the impactindeed, in terms of modelling the impact, there is no differentiation between 50p and the phasing out of the allowances, as we heard earlier. Also, the Treasury is using behavioural assumptions about average taxpayers to suggest the behaviour of 300,000 highest earners, which is clearly nonsense. Fourthly, there is a complete lack of clarity on whether the change is permanent, which is what the Leader of the House said, or temporary, as the Chancellor, the right hon. Member for Airdrie and Shotts and other old stalwarts of Labour said on Second Reading. It is vital for us to get clarification on the matter.
Fifthly, the changes are likely to have a perverse impact on pensions, dividends and trusts. Disincentivising people to put money away in pensions will retard the savings culture that we need to encourage and, after 12 years of a truly dreadful UK stock market performance, it is perverse to make it less attractive to invest in UK equityI will talk about that when we debate the schedule. On trusts, the biggest impact is, shockingly, likely to be on disabled people, recipients of compensation from accidents and other vulnerable persons.
Finally, the 50p tax rate has broken a clear Labour manifesto pledge, which I believe was made by every single Labour Member who is a member of this Committee.
It is a pleasure to follow an extremely comprehensive contribution. I do not say that sarcastically; this is an important policy development and it is right that it is scrutinised in detail. The hon. Member for Hammersmith and Fulham performed a service to the Committee by examining the proposal in the detail that he did. However, I do not wish to speak at quite that lengthnot least because I agree with some of the points made by the previous speaker and I do not wish to repeat them just for the sake of form.
The only thing I would say to the Conservative party is that, although the intellectual case made by the hon. Gentlemanmany other members of the Committee also make such a caseseems reasonably compelling and the Conservatives certainly believe it with great fervour, they appear to lack the courage of their convictions. I have heard Conservative MPsincluding some who do not serve on this Committee, for example, the right hon. Member for Wokingham (Mr. Redwood)say that this is an elaborate trap that has been placed by the Government to lure the Conservatives into being typecast as defenders of the rich and privileged. All Government policies and taxes are a trap in the sense that they provide an opportunity for differentiation between the governing party and those parties not in Government. To refuse to engage with Government policy merely because there is a risk that it will be contrasted unfavourably with ones own policy is to abandon all democratic politics and give the electorate a diminished choice. The Conservative party, as the largest Opposition party, have some duty to try to articulate choices with regard to not only how they contribute to debate, but how they frame votes and manifestos at the general election.
Turning briefly to the proposal before us, I echo the point that it is a betrayal of Labours 2005 general election manifesto commitmentthe quote has been given and I will not repeat it. The manifesto on which the Labour party stood and won an unprecedented third general election in 2005 emphatically did not state that they would leave income tax rates the same unless economic circumstances make it attractive for them to do otherwise. It was perfectly possible for the Labour party to have put that caveat in their manifesto and to have said that it was an aspiration to leave the top rate of tax as it was at 40 per cent. but that they could not make a firm commitment or an absolute promise to do so because they were not in a position in 2005 to know how the economy would be in 2009-10. It would have been entirely honourable for the Labour party to put forward that position at the general election, but it did not do so.
As the hon. Member for Hammersmith and Fulham has said, the then leader of the Labour party, apart from promising to serve as leader for the entire duration of this Parliament if Labour won, also spoke disparagingly about the concept of a 50p tax rate for people on higher earnings. He made that case, which Labour Members at the time cheered with great gusto and then made to the electorate in their constituencies. Who knows, quite a few Labour Members here today might not be Members had they, when speaking to the electorate in their constituencies, squared with them and said, We cannot give you a commitment to keep the top rate at 40p.
Perhaps many of the exceedingly wealthy donors who have bankrolled the Labour party over the years might not have been so generous with their contributions, which, after all, funded election addresses and propaganda put through doors by Labour party candidates, had they known that what the Labour party meant when it said that it would not raise the top rate of income tax was that it would not be raised unless the Labour Government were given an excuse to do so, which is a rather different commitment.
May I ask the hon. Gentleman a simple question? How many letters or items of correspondence has he had from any of his constituents complaining about the increase from the 40p rate to the 50p rate, because I have not had one?
I have had very few. Indeed, I am not sure that I have had any, but my point is about the ability to break the promises made in a party manifesto on which a candidate stood at the general election. The honour or otherwise of holding to ones commitments to the electorate cannot be measured by the number of letters one receives. Had the hon. Gentleman received 50 letters, would he feel a degree of guilt about not abiding by the Labour party commitment? Had he received 100 letters, would he feel totally ashamed? Had he received 150, would he resign as a member of the Committee, and had he received 200, would he resign as a Member of Parliament? The idea that the number of letters one receives is the measure by which one can judge whether it is appropriate to break ones promises seems to me to be an entirely new concept, and one I suspect the electorate are less enthusiastic about than he is.
The situation is indeed different from that in 2005, which is why the Labour party would have been well advised to say, Our commitment as a party is not to increase the top rate of income tax if the current benign economic circumstances continue for the duration of the forthcoming Parliamentbut that is not what it said. The Labour party, under the leadership of Tony Blair, said that it would not increase the top rate of income tax during this Parliament. The Labour party has broken that promiseunless an election is called before the policy can be implemented. One could then, technically, argue that the policy was not reneged upon.
Surely the hon. Gentleman must accept that the current economic circumstances are unique within probably three or four generations. No reasonable person could have predicted the outcome back in 2005. To maintain a commitment in the defiance of the facts surely does not make sense.
I have gone over the ground and heard the excuses. We have come to the conclusion that all Labour party promises in future ought to be seen with an invisible asterisk next to them: This is what we promise you at the election, but with an invisible asterisk leading down to some more invisible type at the bottom of the page, stating, Unless we can see a change of circumstances sufficiently great to justify doing the precise opposite of what we promised when we put ourselves before you and asked for your vote. That is what has happened.
The hon. Member for South Derbyshire may well think that the national interest is best served by the Labour party reneging on its manifesto promise. I think the national interest would be served by the Labour party reneging on a huge number of its promisesI can think of few of its promises that do serve the national interest. However, if that is what the hon. Gentleman thinks, that is what he should say, explicitly. At the moment the Labour party has hidden behind the claim that it has not broken the promise at all. I would argue that it has, although it may make the point that it was desirable to do so.
In that case I apologise if I have not given full credit to the Government for admitting their own failings. It is right for us to recognise that point.
The first point that we can reasonably dwell upon, which I have done, is the broken promise from the 2005 election manifesto. The second point, also touched upon by the hon. Member for Hammersmith and Fulham, was the chaotic manner in which the Government sought to bring in what they now call not a higher rate but an additional rate of taxation. There is a lower rate and a higher rate, and one could be forgiven for thinking that the higher rate was as high as it got, but then there is an additional rate on top of that. Some people pay a marginal rate significantly higher than not just the higher rate, but the additional rate.
What has been so strikingly chaotic about the Governments approach? They made a promise that the 40p rate would be stuck to for the lifetime of the Parliament. They came up with a whole new tax rate45pbut made sure that the manifesto commitment was not breached by only putting that 45p rate into effect after the last possible date for a general election. However, before the 45p had been put into effect, the Government came up with a new 50p rate, to be put into effect before the possible end of this Parliament. It is entirely reasonable, when looking at the Government, to find it hard to conclude what they are going to do next. That is damaging for confidence and for anyone planning to set up a business or create wealth in some other way in this country.
The other point, examined in detail by the hon. Member for Hammersmith and Fulham, is that it is dubious whether the measure will raise the revenue that has been claimed for it. Many people estimate that the yield will be about one third of what it would be if there was no behavioural change, so the total revenue that the Government are going to raise as a consequence of the 50p tax rate pales almost into insignificance compared with the £175 billion of public borrowingalmost £0.5 billion every daythat we are currently suffering.
There will be £173 billion of public borrowing next year and £140 billion the year after, assuming the rather heroic growth rates forecast for the economy as a whole, a forecast which seems not to be shared by many commentators. The Chancellor is unlikely to be in place to see whether his predictions come true, but I fearit is not in the national interest for this to be the casethat he may be shown to be rather optimistic. The Government are borrowing more money this year and next year than the total Budget in the first year that the Prime Minister was Chancellortotal public spending then was less than two years borrowing today. Against that backdrop, the amount of revenue raised by a 50p tax rate, even if there were no behavioural change, would be fairly modest. However, if two thirds of the revenue drains away as a result of behavioural change, the central argument for the 50p rate, which is that the extra revenue is necessary and justified because of the scale of the Budget deficit, would seem to be unjustified.
As the hon. Member for Hammersmith and Fulham also said, tax avoidance will be further incentivised by the greater differential between the rate of capital gains tax and the top rate of income tax. Of course, there was a big incentive when the top rate of income tax was more than double the CGT rate, but now that the top rate is 10 per cent. higher, I assume that large numbers of people will avoid paying it not by relocating to another countryalthough that may happen with some star footballers and others whose labour is demanded internationally, and who can travel easily from one employer to anotherbut by choosing to receive their pay in forms that attract lower rates of taxation. Morally, that may not be particularly impressive, but people are given a greater incentive to do it, entirely legally. The Government are to some extent colluding in that process by further incentivising those people.
I have two final points. The Financial Secretary said in his opening remarks that it was only right that the people who benefited from economic growth should pay more now that the economy is shrinking. That is not the economic case for the extra, 50p rate, which, I maintain, is far from attractive or compelling, but what Labour MPs regard as the moral caseI think it was called the ethical casefor the 50p tax rate. The case is that when times are good, some people make a lot of money and therefore, when times are bad, they should be asked to contribute more. I have two things to say to that. First, those who are earning the most money already contribute a much bigger percentage of the total national income tax take than their numbers would otherwise indicate. One could argue that they should contribute more or that they should contribute less, but it is misleading to suggest that the top 1 or 2 per cent. of earners are not contributing in a substantial and meaningful way to the public finances; they most certainly are.
Secondly, one should not necessarily assume that people who will be earning in excess of £150,000 from next year onwards benefited during the period of economic growth. Someone could set up a company, having spent the last 10 years in low-paid employment, and the company could be so successful at capturing the mood of the country and attracting lots of customers that they were able to create lots of jobs and expand. If by about this time next year they managed to be on a salary that was in excess of £150,000, they would be hit by that 50 per cent. rate, despite never having benefited at a higher level of income during the time when the economy was growing.
Others may have been earning huge amounts of money, by my modest standards, for years and years but have now stopped working. They may have retired. They may have spent their money on an enormous house, or perhaps a series of enormous houses and all kinds of other rewards because of their years of success in the benign economic circumstances and have now decided to stop working. They will not be taxed on the basis that they were able to buy a very expensive house because they made so much money when the economy was growing for the last 10 or 15 years. They may be taxed in other forms, but not on their income. Those people will have paid a 40p tax rate when the economy was thriving and they will not pay the 50p rate because they will not be paying income tax, or not necessarily at that level when the proposal is introduced. So I do not accept that the ethical point automatically applies in this case as Labour Members appear to suggest.
Finally, it is reasonable to ask what the rationale is for 50 as opposed to any other figure. The Chancellor himself admittedI think it was in the Treasury Committeethat there was no rationale and that the figure was plucked out of the air. That is a surprise because a lot of economic modelling and forecasting seeks to work out the point at which the revenue to the Exchequer is maximised. One would have thought that those considerations would have come into play when the Chancellor and other Treasury Ministers were deciding what was an appropriate rate at which to set this higher level of taxation.
My suspicion is that 50p was picked for the obvious reason that it is half and that there is a sense, probably in the Government and maybe in other political quarters too, that a line is crossed at the point where the Government take more of a persons income than they are left to spend for themselves. Therefore the 50p is a sort of self-imposed moral line in the sand which MPs and other politicians, probably of all parties but perhaps in the Labour party as much as any, feel is as far as it is acceptable to go before it becomes unreasonable for the state to take that much private income.
How does the hon. Gentleman feel, as a Liberal Democrat, about the fact that the 50p tax rate is the rate on which he was elected in 2005 and which his party pledged to introduce?
I was extremely pleased to win my seat in 2005, but I do not know whether that was one of the reasons for it. I will allow other members of the Committee to speculate on how that came to pass. I am afraid to say that the Liberal Democrats did not win the last general election. We are the only party to have increased our number of seats at all of the last three elections, but we did not win the last general election and were therefore not in a position to implement our proposals. To be fair, the Conservative party had manifesto commitments that it could not implement and which it has since abandoned during the course of this Parliament. It is rather different for the governing party because it is required to honour its manifesto because it won the election on the basis of that manifesto.
I saw merit in what Tony Blair said about the Liberal Democrat proposals. He was critical of the 50p tax rate. He said that it would be unfair in that it would penalise successful, high-earning people. Tony Blair is a politician whom I admire in some ways. I thought that he had a point. I do not want the Liberal Democrats to be a party that punishes people who are entrepreneurial and successful and wealth creating. Perhaps Tony Blair and the Labour party have a point. Perhaps it is a problem if the Liberal Democrats appear to be spiteful towards people who have earned large amounts of money and contribute to our economy.
I can let you in on private conversations held within my party, Mr. Atkinson. I was an enthusiast for the Liberal Democrats dropping the 50p tax rate policy, because I regarded it as neither economically nor politically compelling. I am delighted that my party came to that decision. It was assisted by Tony Blair and others who made extremely persuasive arguments, which Labour party members thought were good at the time, although they have now changed their minds.
That, then, is my position on such matters. It is a watershed moment and I know that a lot of Labour MPs feel uncomfortable that the project, which Tony Blair embarked on in 1994, has come to an end in this way. It will be an interesting period for historians to look back on. They will be able to put their finger on precisely when new Labour broke its covenant with the middle England electorate, which it set such store by wooing in the 1990s, and when it went back to being the Labour party of the 1970s and early 1980s, which I can just about remember. That will create all kinds of changes in our political system, but that is a debate for another day.