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Mr. Edward Davey: Will the hon. Lady give way?
Ms Kelly: I should like to make some progress first--time is limited.
The right hon. Member for Fylde (Mr. Jack) made a comparison with the United States, which I found somewhat surprising. There is a similar system there whereby pension funds take decisions on the basis of economic merits, not tax advantage. However, I disagree completely with his argument. Sir David Cooksey examined emerging companies in the United States and looked at the performance of companies since 1975. He found that the companies that had grown and thrived were those that had invested and not those that had paid out dividends. I think that the abolition of this measure will help companies by offering them higher long-term growth and ensuring that the tax system does not starve them of capital.
Mr. Jack:
How does the hon. Lady square her criticism of my remarks with the fact that there is a higher level of distributed profits in the United States than in the United Kingdom? Although less profit is retained within companies, the US has a much more sustained higher level of growth and lower unemployment than our economy. How does the hon. Lady explain that?
Ms Kelly:
The right hon. Gentleman has missed my point. The successful US companies that have grown and thrived are those that have invested in their companies and not those that have distributed their profits.
Mr. Edward Davey:
Does the hon. Lady believe that abolishing tax credit for pensioners will help to remove the distortion? Surely retaining the tax credit would not create a distortion.
Ms Kelly:
I shall address precisely how pensioner poverty should be tackled. My point is that there is a huge
The abolition of the dividend tax credit is only one strand of Labour's reform package. The Paymaster General set out the whole package that is designed to encourage investment, growth and employment, highlighting in particular the reductions in corporation tax to a level lower than that of our major competitors and the abolition of the advance corporation tax in its entirety, which was another major tax bias which distorted investment decisions.
I am aware that some non-taxpayers have been affected by the abolition of tax credits. However, the Opposition's argument that the tax credit should be restored or alleviated--the motion is quite difficult to understand--completely misunderstands the purpose of the tax system. Let us examine how the system is used and how it currently operates. I hope that hon. Members will forgive me if I become a little technical.
Under the previous system, the principal responsibility for paying tax on dividends rested with the company that paid dividends, rather than with the individual or the organisation that received them. If a company decided to pay out some of its profits in share dividends, it had to pay advance corporation tax on that money. Individual investors received a credit with their dividend payments that stated that advance corporation tax had been paid and gave them a credit with the Inland Revenue for the amount paid on their dividends. In fact, the advance corporation tax charge was set at exactly the amount that basic rate taxpayers would pay, thus ensuring that tax was not paid twice--a point recognised by the right hon. Member for Wells (Mr. Heathcoat-Amory).
However, the argument for individuals whose income falls below the tax threshold is completely different. They can claim the tax credit as a cash payment from the Inland Revenue, but, if the non-taxpayer is not liable to pay tax, there is no double taxation. The House of Commons Library states:
Mr. Robert Syms (Poole):
I apologise to the hon. Member for Dudley, South (Mr. Pearson). If I had listened a little longer before I intervened, I would have realised that he was making a courageous speech. I am so used to Labour Members defending the indefensible that I misinterpreted what was probably a difficult speech for the hon. Gentleman. He has no doubt received many letters on this topic and his contribution to the debate demonstrates his concern about the subject.
We have heard a great deal about reforming and improving tax systems, but there is no such thing as a perfect tax system--all distort to some extent. The key point about the change to advance corporation tax is that, at the end of the day, the Government will have an extra £5 billion a year in revenue to spend in other ways. It is surprising that every reform to make this country more efficient seems to generate additional tax for the Government, whether in corporation tax, ACT or another form of taxation. I am not sure that that will make business more efficient. It will lead the Government to spend more where they should not spend.
The key point about the reform is that, as when one tries to reform any tax system, there are winners and losers. Most Governments, irrespective of party, tend to be sensitive to the fact that there may be people who cannot afford to be losers. When my constituents started writing to me about the changes, many of them could not believe that the effects were what the Government intended. They wrote, "There must be a mistake. I am not particularly well off. I have a few shares. They generate a little income for me which makes a material difference to my life. Please, as a Member of Parliament, write to the Treasury and point that out."
This matter was debated during Budget debates and in Committee, and at one stage the Government acknowledged that they might want to reconsider it. The Opposition are surprised that the Government have not made modest proposals to deal with the problem. As we heard earlier, 300,000 non-taxpaying pensioners have each lost £75 a year and the cost of the measure to the Exchequer is about £25 million. However, the tax change means that the Government are collecting an additional £5 billion, so it does not seem to be unreasonable to address the pensioners' loss. Treasuries and Governments raise a lot of money and then give back a small amount to try to ensure that people who cannot afford the change receive a little help. We are discussing a measure that affects 300,000 non-taxpaying pensioners and 330,000 non-taxpayers who may be earning very little or who do not work but are not of pensionable age. They are losing an average of £75, so some people are losing much more.
Many people's personal financial position is conditioned to some extent by the historic position of their family. We are talking not about sharp, smart people who
pay a lot for advice on arranging their affairs, but about people, some of whom are in their 70s or 80s, who have perhaps inherited a few shares from their father, mother or aunt. Some people have written to me saying that they have an emotional attachment to their few shares because that is all they received from their family. They want to retain that investment; they do not want to be told that they have to sell the shares and consider alternatives.
As we heard in the intervention by my right hon. Friend the Member for Bromley and Chislehurst (Mr. Forth), when one sells shares, one pays a price, such as capital gains tax. One can put shares into individual savings accounts, which provide limited tax relief, but there are management charges. There is not an alternative for many people who want only to have a small investment with a small income and to live their lives in retirement with dignity.
The Government have done themselves no favours by not acknowledging that there is a problem and by making no move to deal with that problem. All Governments make a fetish of always getting their way--the previous Conservative Government did so on occasion--and in the end, people think that the Government are not listening. The Government are not listening to people's views on this matter. They have a large majority and there is no doubt that they will carry the vote tonight.
The measure will affect the lives of many of my constituents. I have received many letters about the proposal. I have a somewhat elderly constituency. Some of my constituents are very wealthy, but many are retired and are trying to live on their few investments. Some are asset rich in that they have houses and flats, but they need those to live in and do not particularly want to sell them. They try to make do with their small income.
The Government have done themselves no favours with this measure. I listened to the Paymaster General, who did not deal with any of the points raised by the debate. That is a great pity, because I might respect the Government if they honestly addressed the issues. The hon. Lady went round the houses and gave a litany of points about everything but the problem that the measure will create for pensioners, which is a great pity.
"By allowing non-taxpayers to cash in their credits--and giving non-taxpayers money to repay a tax they have not paid in the first place--the tax credit system is doing something for which it was never intended: supplementing the income of non-taxpayers."
It is hard to believe that the Opposition are suggesting reintroducing a tax bias to the system that distorts long-term investment decisions made by companies and pension funds, in order to help poor pensioners. The Daily Telegraph--not a natural Labour supporter--recognised that point clearly after the July 1997 Budget. It stated:
"The quality of life in retirement . . . depends on growth in the economy, reflected in the prices of shares where the contributor's money is invested. This is the point of the Brown budget that the pension funds would do well to grasp."
I suggest that the Opposition would do well to grasp it too. The best way to help pensioners surely is to assist them indirectly through better growth in the economy and directly, if necessary, by supplementing their income. That is what the Government are doing.
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