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Telecommunications Masts (Railways)

Mrs. Calton accordingly presented a Bill to restrict the permitted development rights of railway or light railway undertakings in respect of telecommunications mast: And the same was read the First time; and ordered to be read a Second time on Friday 20 June, and to be printed [Bill 107].

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Orders of the Day

Finance Bill

(Clauses Nos. 1, 4, 5, 9, 14, 22, 42, 56, 57, 124, 130 to 135, 138, 139, 148 and 184 and Schedules Nos. 5, 6, 19 and 25, and any new Clauses and Schedules tabled by Friday 9th May 2003 relating to excise duty on spirits or R&D tax credits for oil exploration).

Considered in Committee [second day].

[Sir Alan Haselhurst in the Chair]

Clause 130

Charge and Rates for 2003–04

Question proposed, That the clause stand part of the Bill.

12.41 pm

Mr. Howard Flight (Arundel and South Downs): As hon. Members know, the clause simply sets the basic rates of income tax for this year at 10 per cent., 22 per cent. and 40 per cent. We have already pointed out that the Government appear to be confused by their tax system. They misquoted the basic rate at 20 per cent. in the explanatory notes, when automatic indexation increases in the tax bands of 2 per cent. accompany the rates. However, we wish to speak about the clause because of the failure to deal with personal allowances and inflation: yet another stealth tax especially hits lower and middle-income earners.

When compared with our competitor countries, Britain has the lowest levels at which people start to pay tax. They will be even lower in real terms as a result of the fall in the real value of personal allowances, which have decreased from 60 per cent. of average income in 1950 to 24 per cent. today. Someone who earns only £15,000 a year—25 per cent. below average earnings—will pay tax of 22.5 per cent. of income as a result of combined income and national insurance tax liabilities of £3,388. If such an individual has, for example, two children, depending on the income of the spouse, whether they can complete the form and whether the Government can handle the administration, they may get back all or more in child tax credit and qualify for working tax credit.

Why tax people on such modest incomes in the first place? Why do a Labour Government make the rate at which taxation starts even lower in real terms? It is difficult not to conclude that the Government's concealed objective is to make people feel dependent on them for their tax credits to offset the ridiculously low rates at which taxation starts.

Mr. John Redwood (Wokingham): Has my hon. Friend also noticed that in the Bill the rate for those earning a slightly higher income and above is 40 per cent.? However, we know that the Government want to levy tax at 41 per cent., which they are doing by a backdoor means of changing the rules on national insurance. Would not it be more honest to set the rate at 41 per cent. and thus accept that the Government have broken their promise to the British people not to raise income tax rates?

Mr. Flight: I thank my right hon. Friend for his comments. The Government have already learned from

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the local election results that the British electorate are not stupid and that they know perfectly well that they now pay income tax at a rate of 41 per cent. if they qualify for higher rate taxes.

12.45 pm

The immediate effect of the stealth tax of freezing personal allowances will yield about £500 million per annum directly, but the knock-on effect will push more people into the higher tax rate. Data received in response to questions put by my hon. Friend the Member for Eddisbury (Mr. O'Brien) show that, according to the Government's own figures, there will be a 23 per cent. increase between 2002–03 and 2004–05 in the number of people with incomes over £34,515, rising from 3.9 million to 4.8 million. Not all those people will pay higher rate tax, because some will be pensioners, but that is nevertheless a good rough and ready measure of the extent to which the Government's income tax policies are pushing policemen, teachers, soldiers and nurses into higher rate tax brackets, as well as starting to tax them at a lower real income.

We regard this stealth tax as particularly devious and wrong. The Conservatives wish to reform and simplify the tax system when we are elected at the next election, and to take large numbers of people out of paying tax on such ridiculously low incomes.

Norman Lamb (North Norfolk): I entirely endorse the comments of the Conservative spokesman on the impact of freezing personal allowances. It is a stealth tax that will have a significant impact on low-paid people. We wish to debate this clause because it is clearly central to the Government's Budget strategy and to the choices that the Government make about taxation. I understand that, under the procedures of the House, we cannot table amendments to the rates, so I shall make our points by speaking on the clause.

I want to start by reasserting the Liberal Democrats' belief in the principle of progressive taxation. After six years of a Labour Government, it seems extraordinary that the poorest 20 per cent. pay a higher proportion—41.7 per cent.—of their income in taxes, compared with the richest 20 per cent., who pay just 34.2 per cent. That is a regressive tax system, and we would like to see it adjusted.

Mr. George Osborne (Tatton): Will the hon. Gentleman help me to understand his remarks by telling me what the rates and bands of the Liberal Democrats' local income tax would be?

Norman Lamb: We simply want to propose an entirely revenue-neutral system that would replace council tax—which I shall come to later—with a local income tax. If the hon. Gentleman wishes to support the council tax, which is having a dramatic effect on low-paid people and pensioners on fixed incomes, I would like to see him do so.

One of the reasons that the rates in clause 130 remain the same as last year's rates is that the Government have orchestrated a £2 billion tax hike through the council tax. They have failed adequately to fund nationally agreed pay rises, pension increases, national insurance increases and new requirements on services imposed on

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local authorities. We support those requirements, but they have not been adequately funded. The result has been an average increase in council tax that is four times the rate of inflation. The impact of that on pensioners on fixed incomes is severe and cannot be supported. I would have thought that many Labour Members would see that such a regressive system needs to be reformed. The regressive nature of local taxation is even worse than that of national taxation. The poorest fifth of households pay 7.1 per cent. of their income in local taxes, compared with the richest fifth, who pay just 1.8 per cent.

Income tax is self-evidently based on the ability to pay. The Liberal Democrats' preference for a 50p rate for income over £100,000, which is in line with much of Europe and the state of New York—there is hardly evidence there that it leads to a brain drain—and which I suspect is supported privately by many Labour Members, could initially provide funding to cut council tax by £100 per household this year and get rid of the iniquities of tuition fees and top-up fees, which act as such a disincentive to students on poor incomes.

Mr. Flight: I thoroughly endorse the hon. Gentleman's comments on council tax. However, the US tax system has substantial allowances against income, including interest payments, so it is not entirely accurate to say that there is an effective 50 per cent. rate of income tax. The net effect on higher earners generally comes out at about 40 per cent.

Norman Lamb: I thank the hon. Gentleman for those comments; he may well be right. I am sure that he knows more about it than I do, so I am happy to accept his comments. None the less, the fact remains that the overall tax system in Britain is highly regressive and, with the impact of the increases in council tax, it is having a severe effect.

Mr. John Burnett (Torridge and West Devon): In years past, I have had opportunities to gauge the disparities or otherwise between the taxation levied by different states, so will my hon. Friend take it from me that the precedent in the United States, whether it be federal, state or city tax, is according to the ability to pay—an important principle that we should not forget?

Norman Lamb: Absolutely. That is in great distinction to the system that we have in Britain with a system of local taxes, which, self-evidently, is not based on ability to pay.

Mr. Redwood: How does the hon. Gentleman work out that someone on a higher income paying 40 per cent. income tax on practically all his income and then paying lots of other taxes out of net income, is on an effective tax rate of 31 per cent? That sounds like Liberal Democrat arithmetic.

Norman Lamb: As I understand it, the figures have all been properly assessed and are based on parliamentary answers, so they have been accepted as factual.

Mr. John Bercow (Buckingham): The hon. Gentleman's attempted response to my right hon.

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Friend the Member for Wokingham (Mr. Redwood) will not suffice. Simply to say that the facts have been checked but that he cannot trouble us with them now is not good enough. What assessment has the hon. Gentleman made of the probable impact of the level of income tax at the higher rate and the increase in national insurance charges on the prospects of recruitment and retention in the police force, the teaching profession and the NHS?

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