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Mr. Cranston: Can the hon. Gentleman explain why the United States does not have our imputation system, and in what way the United Kingdom system is more advantageous than that in the United States? Can he also explain how the neutrality aspect differs as between higher-rate taxpayers, basic-rate taxpayers and pension funds that are tax-exempt?
Mr. Davies: The hon. Gentleman has asked me a series of questions, many of which are irrelevant to the issue that we are discussing. I think, Mr. Deputy Speaker, that you would rapidly halt me if I embarked on a disquisition about the American tax system. We are talking about the British tax system. As for the question of equity between basic-rate and higher-rate taxpayers--[Interruption.] I am endeavouring to answer the hon. Gentleman's questions. Labour Members obviously do not want me to answer their questions, but I shall answer them anyway, whether they want me to or not.
The equity between higher-rate and basic-rate taxpayers under an imputation system is entirely preserved. The basic-rate taxpayer incurs no further tax liability on his dividend, but the higher-rate taxpayer must account to the Inland Revenue for the difference between the standard rate and his own marginal rate--or the difference between the dividend tax credit rate and the higher marginal rate. That is perfectly simple. Equity is preserved, and the principle of double taxation is avoided.
If the clause is passed, however, double taxation will become a principle in our tax system. That is a retrogressive and damaging step, and the whole country should be in no doubt about what is happening.
The measure will affect not only institutional pension funds--which, rightly, we have been discussing today, and about which I shall say a little more shortly--but individuals. It produces another anomaly, in that individuals will be subject to double taxation. Individual taxpayers who should not be paying tax at all, because their incomes have not reached the taxable threshold, will now do so, under legislation introduced--amazingly--by a Labour Government.
The Labour party used to be proud of concepts of social justice, and proud of being committed to giving the less well-off a fair deal. What will happen now is that a little old widow with her half a dozen privatisation shares who previously could reclaim dividend tax credit and so not pay tax will no longer be able to do so. She will be subject to an invidious and new form of taxation, to which she or anyone below the tax threshold is currently not subject. That is extremely unfair. As well as destroying the neutrality of the system and introducing a distortion, the measure will cause pain and financial loss to those who least deserve to suffer.
Mr. Peter Brooke (Cities of London and Westminster):
Has it been my hon. Friend's experience, as it has been mine, that pensioner constituents who have been alerted to the change at this late stage in the passage of the Bill are beginning to write in to say that they had not appreciated the situation? Can he contemplate, as I can, the number of letters we will receive after the Bill has become law?
Mr. Davies:
I am going to give my right hon. Friend an honest answer, because we all try to give honest answers in this place. The honest answer, which I know is not the one he was hoping to hear, is no. There is a simple reason for that, and the reason is twofold. First--I know they will not mind my saying this--my constituents in Lincolnshire are probably not quite as financially sophisticated as my right hon. Friend's constituents in the Cities of London and Westminster. One would expect the City of London to contain exceptionally financially sophisticated people.
Secondly--I do not know whether or not this is a compliment, but it can be taken either way--the remarkable success of the Mandelson propaganda machine has been that it has still not become entirely apparent to the general public what will be the effect of the Budget, not only in the field we are discussing now but in many others. If the Labour Government want to regard that as a positive achievement, they can.
It is a remarkable achievement of propaganda that, in terms of the broad public perception of the initial debates on the Budget, the Government have managed to get away with saying that they have found a pot of gold that no one knew about--that magic holy grail, for which Chancellors of the Exchequer have looking for centuries, if not millennia, but have never found. It is the equivalent of the philosopher's stone--the tax that is not a tax at all; a source of money that can be tapped without doing damage to anyone else. The abolition of the dividend tax
credit has been presented to the public as though no one would suffer from the extraction of £4 billion or £5 billion a year from those who currently benefit from the dividend tax credit--institutions such as pension funds as well as individuals.
My right hon. Friend the Member for Cities of London and Westminster (Mr. Brooke) is correct. As Abraham Lincoln said:
When people realise how they have been defrauded, not only by the tax, but by the way in which the tax has been presented, which compounds the offence, they will be extremely angry. We shall receive thousands of letters full of anguish and distress--not that we will be able to do much for the correspondents, many of whom will express sincere regret at having voted the wrong way on 1 May, not realising what costs would flow from that unfortunate and, in many cases, hasty decision.
That is just one aspect, and I have not by any means finished my strictures in support of the amendment to the Government's appalling clause. I have tried to show that, far from removing distortions from the tax system, the Bill is introducing for the first time some very onerous and unpleasant distortions into our tax system.
The other point which the hon. Member for Dudley, North made was also wrong. He said that the abolition of dividend tax credit would increase the retention rate of profits by companies. That, too, comes out of the Mandelson propaganda machine all too frequently, and it is complete and utter nonsense.
There are only two ways in which a company can be responsibly managed in terms of the distribution and level of profits. The first is the classic method taught in business schools around the world, which is to retain for investment such profits as can be invested in projects whose prospective yield will be equal to or higher than the average cost of capital of the company concerned. That rule has a certain mathematical rigour. It is not always easy to estimate profits from potential investment projects, but that is the science of investment appraisal, and it is what professional managers are supposed to do.
The second approach is also responsible. It supposes that company directors exist in a fiduciary capacity on behalf of their shareholders, and should therefore do whatever is in their shareholders' interests. If some other principle overrides the one that I have just outlined, they should be prepared to allow that to happen, at least in a certain measure. Where a large number of their shareholders--in this case, institutional pension funds--say to the company directors, "We absolutely depend on the maintenance of our dividend cash flows, our own beneficiaries are pensioners who depend on that, and we look to you as directors of our company to ensure that we are, as far as possible, protected from what the Government are doing", the directors may responsibly say
that they need to maintain their distribution rate at a slightly higher level than would result from the objective application of the principle that I have set out.
Mr. Cranston:
Can the hon. Gentleman explain why the ratio of dividends to GDP is higher in this country than in the United States?
Mr. Davies:
It is probably a function of the structure of industry in the two countries. An awful lot of mistakes are made, such as comparing stock market performance, because the structure of industry in certain countries is not taken into account. In some industries, a higher pay-out ratio is clearly appropriate, because the opportunities for investment that achieve the criterion that I have just set out--yielding the same return as the average cost of the capital of a company--are less strong than in other sectors of the economy. However, I do not think for a moment that differential pay-out ratios have anything to do with the existence or otherwise of an imputation tax.
4.30 pm
"you cannot fool all the people all of the time."
I do not think the British people can be fooled for long, and I am certain that the people of Lincolnshire cannot be fooled for long, so to those who are manipulating that remarkable propaganda machine I say that the truth will come back and hit them--reality always wins in the end, and the truth will be victorious.
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