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Mr. Christopher Leslie (Shipley): Do the hon. Gentleman's comments about people on the lowest income mean that he will now support the working families tax credit?

Mr. Davies: The hon. Gentleman has been well schooled by new Labour. The technique that he has learned is this: if one is asked an awkward question, if one is confronted with unpleasant reality, and if it is suggested that one's Government have betrayed the very principles on which the Labour party has thrived for most of this century, one changes the subject. The hon. Gentleman has tried unconvincingly to do so.

I shall next consider people who are slightly up the income scale. What is the position of savers who have an income from saving, from bank deposits, building societies, bonds and gilts, or wherever, which takes them just above the income tax threshold? They do not benefit from the new lower tax rate of 10 per cent. They therefore find themselves at a disadvantage. For reasons incomprehensible, and certainly indefensible either in terms of justice or economic rationality, such savers are taxed at 20 per cent.--not at 10 per cent., as for the first £1,500 earned income band of taxable income.

What has actually occurred? I shall briefly go through the range of rates, because the public have not yet focused on what has happened. Until last year, under the regime inherited from previous Conservative Administrations, there were only three income tax rates in this country. They were applied simply according to the taxpayer's income. They were progressive: the basic rate of tax was 23 per cent.; the lower rate was 20 per cent.; and the higher rate was 40 per cent. People paid at the relevant marginal rate according to their income. The system was fair, rational and comprehensible, and was widely accepted.

10.30 pm

What have the Government done during their two years in power? They have replaced those three rates--that simple and rational system--by eight different categories of liability for income tax and by five, soon to be six, different rates. They did so according to no principle at all, so that what has emerged is a dog's breakfast. There is a 10 per cent. lower rate of income tax on the first £1,500 of earnings from employment or self-employment. That does not apply to savings income from bank or building society deposits, bonds, gilts and so on. There is a 10 per cent. basic rate on dividends--not a lower rate--which takes that tax rate on dividend income up to more than £32,000. That is an extremely low rate. Anyone who receives dividend income up to more than £32,000--taking into account the personal allowance, which, I think, is now £4,335--does not have to make any further payments to the Revenue; that person does not have to account for any further tax.

Then, there is a 20 per cent. basic rate on other savings income, so that, although dividends are taxed at 10 per cent, bank deposits are taxed at 20 per cent. Where is the rhyme or reason in that? What about incomefrom earnings from employment or self-employment?

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The basic rate is 23 per cent.--not 20 per cent. as for savings--for income within the range of the basic rate; that is up to £32,000 for people aged below 65, and slightly more than that for those aged over 65.

I have already referred to the new 32.5 per cent. higher rate on dividends; there is a 40 per cent. higher rate on other savings income, and on income deriving from employment or self-employment. Soon, there will be an eighth category and a sixth rate: a 44 per cent. marginal rate for those with children, when the child tax credit comes in.

The system is a complete shambles, based on no conceivable principle. Is it to be defended as being fair to the poor and slightly more unpleasant for the wealthier? No, not at all. As I have shown in my example, the people who suffer most--with a 20 per cent. reduction in their income overnight--are the poorest in the country, who have a savings income from dividends. On the other hand, higher rate taxpayers are protected; if they have dividend income, they are subject to a special 32.5 per cent. rate. One could not possibly say that the new system is a workers tax, as has been argued by new Labour, and that people receive better tax treatment if their income is from employment or self-employment rather than from savings. The reverse is true. People with higher earnings from employment and self-employment will pay tax at a margin of 40 per cent., whereas, if their income derives from dividends, the rate is 32.5 per cent. There is no rhyme or reason in that.

I take two examples from different ends of the range. First, let us take a person whose total income is £6,000. If that income derives from United Kingdom dividends, they get £6,000; that is fine. If that income derives from bank interest, they will pay 20 per cent. tax above the threshold, and their income will be £5,711. If they have earned income, they will pay 10 per cent. for the first band of £1,500 above the personal allowance, and they will get £5,855. If their income were from foreign dividends, they would get the same amount, because a rate of 10 per cent. would apply. If they have--

Mr. Geraint Davies: Will the hon. Gentleman give way?

Mr. Davies: Not at this stage.

Therefore, we have a series of five different possibilities--income from UK dividends; income from bank interest; income from earnings; income from foreign dividends; or income from PEPs and ISAs, in which case there will be a tax credit of 10 per cent., so the person will end up with £6,600. The income tax rate depends, not on how much one earns, but on the source of income.

Secondly, let us take someone with a total income of £30,000. If their income derives from dividends, they are credited with having paid tax at 10 per cent. and have nothing more to pay. If it derives from bank interest, it is taxed at 20 per cent. beyond the personal allowance, and they will get £25,665. From self-employment or employment, they will get £24,293; from foreign dividends, £27,433. From PEPs or ISAs, they will get £33,000 because they will get a tax credit. There is no rhyme or reason in that.

This is a system that simply cannot remain viable. This is a system that has lost all touch with justice or good sense. This is a system that the Government have

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managed to introduce in merely two years. They have produced a shambles--an extremely damaging shambles--and they are in danger of undermining the fundamental support for taxation in this country, which has always been a feature of British life. If one produces something that is neither fair nor rational, one will not enjoy public respect; and that is the most devastating disservice to the cause of good taxation that any Government could possibly deliver.

Mr. Geraint Davies: It is a great pleasure to have the hon. Member for Grantham and Stamford (Mr. Davies), who bears my name, back on the Conservative Treasury team. He is very amusing when he makes his emotional outbursts, which bear no relation to reality. Strategically--to put this in context--the Government are trying to have a Budget that gets people back to work and supports families, while protecting the least poor with minimum income guarantees. The changes that are embraced in the Budget and will be entailed in what happens in the wider economy, should be seen in that context--enabling families to work, stopping child poverty, making work pay, and so on.

There has been a lot of ranting from the Conservative Benches about the so-called pathetically poor and the cruel nature of the new Labour Government, but we should view that in context. The crocodile tears that Conservative Members have been shedding come from those who made up a Government who introduced such things as the poll tax, which obviously hit the poor the worst, and VAT on fuel, which especially hit the pensioners that they claim to be concerned about. That Government introduced charges for eye tests and cut pensions in real terms. We had the pensions mis-selling crisis.

Also under that Government, about a million pensioners underclaimed their rights, and the Conservatives did nothing to encourage and enable people to claim their rights. There was a complicated system, which many people who did not have a very good education--because of the legacy of the lot opposite--did not understand. Essentially, we ended up with a lot of poor people who did not claim their benefits. These are the sort of things that the Government are doing something about.

Mr. Bercow: The hon. Gentleman is a good colleague of the Solicitor-General and I believe that he sat on the relevant Finance Bill Committee with him. Given the hon. Gentleman's reputation for intellectual curiosity, has he at no stage since the elevation of his hon. and learned Friend the Member for Dudley, North (Mr. Cranston) to the post of Solicitor-General asked him whether he has changed his mind about the Government's policy on the tax treatment of dividends for pensioners? Has he asked the hon. and learned Gentleman whether he is now a supporter of the Government's position or whether, continuing to believe in the position that he held as a Back Bencher, he has used his position within government to argue for a change of policy? Is the hon. Gentleman saying that the thought of consulting his hon. and learned Friend has not crossed his mind?

Mr. Davies: I thank the hon. Gentleman for that long-winded question. He would know, if he had bothered to be a member of the Committee to which he referred,

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that my hon. and learned Friend the Solicitor-General asked whether the Government would care to review their position. The then Paymaster General said, "We will have another look at it because we are very fair on the Government Benches." The Government took that look and came to the conclusion that they were pursuing the right policy.

It is necessary to separate social policy from economic policy. Without rehearsing all the arguments, Opposition Members should know that the changes were introduced to encourage more inward investment in companies and to get rid of tax distortions and excess pay-outs of dividends. The fact that there is a by-product for some non-taxpayers is known, but against that we have a strategy for eliminating poverty that is separate. It is horses for courses, and that is a rational approach.

When we consider the number of people who are concerned by the changes--if he had been up to speed I would have expected the hon. Member for Grantham and Stamford to refer to the 300,000 pensioners--we find that 220,000 pensioners are affected by less than £100. About 270,000 are affected by less than £200. After all, we are giving £100 to older people for their winter fuel benefit. We are talking about gainers and losers, and in the wider context there is the reduction of value added tax on fuel, the minimum income guarantee and the extra £21 billion that is going into the health service. We must consider the real impact that the Government are having on pensioners. It is no use considering a small change in a microscopic way. We must have a wider vision of what is happening, and within that broader context is the case that the Labour party is the pensioners' friend.

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