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16 July 2007 : Column 97

Stewart Hosie (Dundee, East) (SNP): On capital gains tax, if I remember correctly, the personal allowance is £8,800. Where do the Liberal Democrats see that allowance going? Will it fall to £1,000, as was suggested last year when they published their previous document?

Dr. Cable: That is a fair question, and we have reconsidered the issue in the light of discussion with people in the investment industry. We did indeed propose a substantial reduction in the allowance, and we have rethought it. Our current proposals, which are set out in our report, make no suggestion of changing the level of allowances, for the simple reason that a large number of small investors would otherwise be caught. The hon. Gentleman asked a sharp question, and picked up on the fact that our proposals suggest a modest change.

Secondly, we propose some tightening up of the non-domicile rules. We do not want to abandon them, but we want to change the residency requirements, and to cut back on some of the provisions, particularly concerning capital gains tax. Thirdly, we want to tighten the rules applying to corporates buying property and escaping stamp duty. We want to clamp down on inheritance tax avoidance by extending the seven-year rule on gifts to 15 years.

Behind those policies are bigger ones, notably, as the Conservative Front-Bench spokesman intervened to say, abolishing council tax because in relation to income it is highly regressive, and much the most regressive of all forms of taxation. We want to scrap it entirely, and to replace it with a tax based on people’s ability to pay—their income. That would help to improve the overall equity of the tax and distribution system.

The Government have talked a great deal about progressive consensus and fairness. They have presided over a system of distribution of income and wealth that has not improved income and has deteriorated in terms of wealth. Taxation clearly has a part in correcting that, and I commend the motion to the House.

8.16 pm

The Chief Secretary to the Treasury (Andy Burnham): I beg to move, To leave out from “House” to the end of the Question, and to add instead thereof:

Let me begin with some facts that provide the essential context for this debate. In this financial year, the top 1 per cent. of earners—those with a pre-tax income of £117,000—will pay 22 per cent. of all income tax. The top 5 per cent. will pay 41 per cent., and the top 10 per cent. will pay 52 per cent. of all income tax gathered.

Several hon. Members rose

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Andy Burnham: I was about to say that to most normal people, if not Lib Dems, those figures would suggest that the income tax system in this country was both fair and progressive, but if they want to correct me I will gladly give way.

Madam Deputy Speaker (Sylvia Heal): I call Mr. Edward Davey.

Steve Webb: It is Steve Webb, Madam Deputy Speaker, although if I say something silly, it is my hon. Friend.

Madam Deputy Speaker: I am sorry. I call Steve Webb.

Steve Webb: Thank you, Madam Deputy Speaker. The Chief Secretary said that the richest 1 per cent. of income earners pay 22 per cent. of income tax, but that statistic is meaningless unless we know what proportion of income they have. Can he tell us what proportion of income the richest 1 per cent. have?

Andy Burnham: I do not know whether that is a question from the hon. Member for Kingston and Surbiton (Mr. Davey) or the hon. Member for Northavon (Steve Webb). The important point is that the top 1 per cent. pay 22 per cent. of all income tax, and they are people with a pre-tax income of £117,000.

Julia Goldsworthy rose—

Andy Burnham: I must make some progress, but I shall give way again.

Julia Goldsworthy: In welcoming the Chief Secretary to the Treasury, perhaps I could help him with some information. Is he aware that the richest 20 per cent. pay a lower proportion of their income in tax than the poorest 20 per cent.?

Andy Burnham: I shall come to some of the figures, but it is interesting that the minute I raise the subject of taxes, Liberal Democrat Members get excited and want to pick holes. That suggests that they are slightly sensitive about the subject. I did not hear the words “pips” or “squeak” during the contribution of the hon. Member for Twickenham (Dr. Cable), but I would not have been surprised if they had crept in at some point.

In this country, we have a system of taxation that is both progressive and fair, and it has underpinned an unprecedented period of economic growth in this country—59 consecutive quarters, to be precise—and unprecedented investment in our public services. Any proposals for change that could put that hard-won stability and prosperity at risk would need to be considered very carefully—particularly any proposals for more radical change. That is the problem with today’s debate. I think it was originally entitled “Fair taxation for the super-rich”.

Mr. Philip Hammond indicated assent.

Andy Burnham: The hon. Member for Runnymede and Weybridge (Mr. Hammond)—I welcome him to his new Front-Bench role—nods in agreement. Those
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words have strangely disappeared from the title of today’s debate. The point is that tax is complicated, as the hon. Member for Twickenham (Dr. Cable) made clear. Any changes to taxation need to be informed by a balanced view across the whole economy and considered in the round. By taking one issue in isolation, as the hon. Gentleman did, he and his colleagues are seeking to suggest that there are easy answers and easy targets. That is the politics of the student union. Coupled with last week’s optimistic proposals for income tax giveaways, it can be concluded that the timing of today’s debate suggests a certain nervousness about upcoming by-elections on Thursday.

Over the past 10 years, the Government have had a record to be proud of in increasing fairness in our tax system and society. We have made the tax system fairer by closing loopholes and clamping down on tax avoidance to ensure that everyone pays the right amount at the right time and pays their fair share. We have reformed the tax and benefits system to help to create a fairer society, providing more support for work, families and pensioners and cutting child and pensioner poverty, both of which were rising in 1997. In developing our tax policy, we have recognised that the surest foundation for a fair society is stable macro-economic performance that delivers jobs, growth and opportunity for all.

Under this Government, Britain is better off. Household net wealth is the highest that it has ever been, up 65 per cent. from 1997. There are 1.8 million more home owners than 10 years ago and the average household is £1,000 a year better off because of our changes to the tax and benefits system. From April next year, we will cut the basic rate of income tax to its lowest rate for more than 75 years. It is not the super-rich who are benefiting from the changes but those in the lowest income decile, who have seen the greatest percentage increase in their net income as a result of our tax and benefit changes. Between 1979 and 1997, the poorest 20 per cent. of households saw their income grow by less than 1 per cent. a year in real terms, while the richest 20 per cent. saw theirs grow by more than three times as much. Since 1997, the poorest 20 per cent. of households have seen their income grow by 2.2 per cent. a year—faster than that of the richest 20 per cent. So the Government have halted the dramatic rise in household income inequality that the country saw in the ’80s and early ’90s.

The Institute for Fiscal Studies has found that without the Government’s reforms to the tax and benefits system, income inequality would have continued to rise sharply. In 1997, the UK had the highest child poverty rate in Europe. Since then, we have reduced child poverty faster than anywhere in Europe, with 600,000 children lifted out of relative poverty. The number of children in absolute poverty has been halved. To build on those achievements, this year’s reforming Budget went further with plans to simplify the tax system, to provide help for pensioners and support for families, and to make work pay. As a result, four in five households will see no change or will be better off. Increases in child tax credit will help lower to middle income families and help the
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Government to take a further 200,000 children out of relative poverty. Some 580,000 pensioners will be lifted out of income tax altogether.

I have spent time setting out that record because it provides the context for the consideration of the issues that the hon. Member for Twickenham has brought to us today. He began his remarks by calling for “a greater attention to the distribution of income and wealth”—if I quote him correctly. It is interesting that the hon. Gentleman called such a debate when I believe that he called the Government’s increases in the national minimum wage “dangerous”. That is a difficult position for him to hold when he begins a debate by preaching to this side of the House about the distribution of income and wealth.

Dr. Cable: Will the Chief Secretary give way?

Andy Burnham: I will give way, and I hope the hon. Gentleman will confirm that that was what he said.

Dr. Cable: It was not what I said. I and my party have voted for the minimum wage and—in Committee—for every increase. I said that it would be dangerous if the Government proceeded with increases in the minimum wage that were not aligned with the recommendations of the Low Pay Commission, which governs the minimum wage. The context is quite different. We are fully supportive of the minimum wage and the increases that have taken place. [Interruption.]

Andy Burnham: I will not apologise. Let us say that the hon. Gentleman is ambivalent, at the least. I recall hearing him or one of his colleagues calling for a regional minimum wage, and that is different from a national minimum wage, which this party introduced and to which we remain steadfastly committed. It is a different thing, and at the very least people who are watching this debate will conclude that there is a certain ambivalence on the part of the hon. Gentleman on that issue.

Today, the hon. Gentleman was noticeably silent on the tax proposals that he introduced last week. He made a long speech, going into all possible corners of the tax system, but did not dwell on the new package of proposals that he put forward last week. I read them, like the hon. Member for Runnymede and Weybridge—it is terrible that we have to spend our weekends reading Lib Dem tax documents, but such is life. But it was raining anyway and what else can one do on a wet Saturday? I want to challenge the hon. Member for Twickenham to tell me in simple terms what the proposals would do to “improve” the distribution of income or wealth in this country. May I ask him—

Dr. Cable rose—

Andy Burnham: The hon. Gentleman wants to intervene again, but he should let me ask the question first. Am I right to say that reducing stamp duty on properties worth up to £500,000 and raising the inheritance tax threshold to the same amount would not benefit everyone in this country and perhaps only a certain few?

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Dr. Cable: The Chief Secretary asked me what effect the proposal would have on income distribution. Our analysis, which has been corroborated by the Institute for Fiscal Studies, is that it would benefit all income groups except for the top decile.

Andy Burnham: Let me give the hon. Gentleman my analysis, and that of the Treasury, of some of the proposals. Unless I am mistaken, he did not mention this once in his remarks, but the proposal is to cut 4p off the basic rate of income tax. Our calculation is that that would cost £18 billion in 2008-09—he agrees with that—and £19 billion in 2009-10. That is a lot of tax on petrol or flights. If he is suggesting that he can raise that amount by closing “tax loopholes”, it is a big claim to make.

Our analysis shows that Liberal Democrats’ policy would most benefit the highest earners. About one in five households in the bottom income decile would gain, whereas all households in the top income decile would gain. The average gain per household increases as one goes up the income scale, with households in the top decile gaining, on average, 50 times the amount of households in the bottom decile. Three quarters of the cost of that policy would be spent on the top four income deciles, with one quarter going to the top income decile alone. Less than 1 per cent. of the total cost would be spent on households in the bottom decile. True or false?

Julia Goldsworthy: Has the Chief Secretary compared the impact that he has just described with the impact of a 2p cut in the basic rate of income tax across the income distribution bands? What would be different?

Andy Burnham: I invited a response on the point that I was making. The debate was called by the Liberal Democrats and I began by laying out some of the Government’s policies. The figures that I have given for the Liberal Democrats’ policies are staggering for a party that has come to the House this evening talking about narrowing the income gap and lecturing the Government. I note that there has been no effort to repudiate my analysis.

We should think about the income distribution effects of the Liberal Democrats’ proposed changes and then about their proposal for a local income tax. In his report on local government finance, Sir Michael Lyons concluded that a local income tax was feasible, but he added that it would mean

In addition, green taxes would have to bear the brunt of achieving the huge savings that would be needed to deliver a 4p income tax cut. What on earth would that do to the taxes on travel faced by the average family? Would an annual holiday be put beyond the reach of the average family in my constituency? I believe that they would struggle if the cost of holidays were to increase significantly. The hon. Member for Twickenham was noticeably silent on all those points and I am amazed that he did not refer once to his party’s proposals in his speech.

Let me talk about some of the changes that the Government have made to tackle avoidance and to close loopholes. We have taken steps to make sure that
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everyone pays their fair share of taxes and we have acted in respect of each of the personal taxes. In response to contrived avoidance schemes to avoid income tax and national insurance contributions, usually marketed to a small number of individuals receiving substantial City bonuses, we made a clear statement in December 2004 that future schemes would be legislated against with effect from that date, not from the date of the legislation. We estimate that, had that statement not been made, more than £1.7 billion of tax and national insurance contributions would have been avoided through such schemes.

More recently, we have acted against abuses of sideways loss relief, with a fair and proportionate response that allows SLR to be used for legitimate business reasons but protects £760 million—three quarters of a billion pounds—in tax. We have also acted to prevent avoidance of inheritance tax by introducing pre-owned asset rules in 2004 that take a fair share of tax when someone gives away an asset but continues to benefit from it. On capital gains tax, this year’s Finance Bill, which is to be debated in another place tomorrow, introduces a targeted anti-avoidance rule designed to put an end to the contrived schemes that avoid tax by generating artificial losses. On stamp duty land tax, the same Bill permanently closes down schemes that avoid tax by adding extra stages to the sale of property from one party to another.

The changes to capital gains tax and stamp duty land tax in the Finance Bill have been introduced as a result of information received by Her Majesty’s Revenue and Customs through the disclosure regime that was first introduced in 2004. That regime, which obliges the promoters of avoidance schemes to disclose them to HMRC, is allowing us to act against avoidance more swiftly and in a more targeted way. The capital gains tax and stamp duty land tax measures demonstrate that the regime is having a deterrent effect, with marketed schemes decreasing significantly. In addition to acting against contrived avoidance, we are tackling tax evasion. For example, HMRC has obtained details of hundreds of thousands of offshore account holders from a number of banks and expects to collect hundreds of millions of tax that had been evaded, as well as interest and penalties.

As well as delivering rising prosperity for all in what the IMF described in February as a

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