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Mr. Hammond: The hon. Gentleman is missing the point: at the moment, any contribution that an employer makes to a pension fund does not give rise to a tax charge for the benefit in kind for the employee. Under his proposals, some contributions would have to be attributed to higher-rate-paying employees, who would then suffer a tax charge.
Steve Webb: The point of our proposals is indeed to raise additional revenue from those who currently benefit from higher rate tax relief. That is not a problem; that is where we get the money from. Higher rate tax payers are benefiting disproportionately. The hon. Gentleman implied that that would damage pension saving. He and I, however, both get higher rate pension tax relief. Were we suddenly to get standard rate pension tax relief, does he think that we would do less pension saving? Surely that would not be the result. We are simply saying that a disproportionate amount of total pension tax relief goes to people such as him and me, and that source of revenue could be used to make the tax system as a whole fairer.
Throughout the debate, there has been a suggestion that if we change anything people will flee the country, the City will tumble and we will lose money. The hon. Member for Runnymede and Weybridge is right: we do need to think about the dynamics. The second that we produce a costing based on an assumption about changed behaviour, however, we get ridiculed for making it up. The only figures available are those given to us by the Treasury, and those are based on a static assumption. If the Treasury gives us written answers based on its best guess of the change in behaviour, we will use them. It does not do that, however, so we must take the static assumption as the basis for our proposals, which are meticulously costed, as is characteristic of my hon. Friend the Member for Twickenham (Dr. Cable).
Throughout the debate, it has been assumed that we somehow have the optimal tax system, which has been arrived at through Finance Acts, evolution and the response to short-term political pressures. When the new Chancellor next changes the system, he will justify it on the grounds that he is moving to a new optimal system. Whenever the Government change the system, they tell us that they have realised that the previous system was not optimal and needs to be changed. All we are saying is that we have not got the balance right. Yes, we need to recognise the role of incentives: characteristically, my hon. Friend the Member for Twickenham was not talking about envy or having a problem with people who have high incomes; he was saying that the balance was not right. I would have thought that any progressive party would raise that issue. It falls to the Liberal Democrats, as the only progressive party left in the House, to raise the issue of the fairness of the overall tax system.
As my hon. Friend the Member for Twickenham said, wealth inequality has worsened in recent years. The Chief Secretary said proudly that the richest 1 per cent. pay 22 per cent. of tax, but that is a statement of
the blindingly obvious: they pay huge amounts of tax because they have huge amounts of income. The richest 1 per cent. are not just like the rest of us only a bit more so; they are totally different. They have completely different sources of income and wealth, and therefore need a particular tax regime. My hon. Friend has today put on the agenda some proposals that will make that system fairer at the margins. The Conservative Front-Bench spokesman suggested that the billions of pounds that we talk about in our costings are disproportionate, but they are marginal relative to the amount of tax paid. The total tax take is between £400 billion and £500 billion. We are talking about incremental changes. A £6 billion tax on the wealthy represents perhaps 1 per cent. of the total tax take. Such sums are not huge relative to the wealth of the people whom we are talking about.
I am tempted to go on, Madam Deputy Speaker, but I know that other Members are seeking to catch your eye. A debate of this sort is long overdue, and I am delighted that my hon. Friends on the Front Bench have sought it today.
Stewart Hosie (Dundee, East) (SNP): Before I deal with the Liberal Democrat motion, I want to say a word or two about the Chief Secretarys performance on the Government amendment. He spoke of growth over 59 quarters, tax credits and City competitiveness. The amendment refers to encouragement to save, and the Chief Secretary also mentioned jobs.
It is worth pointing out that those 59 quarters of unbroken economic growth did not take place in Scotland, where there have been a number of zero-growth quarters, a number in which growth has been negative, and a full-blown manufacturing recession on Labours watch. As for tax credits, the Chief Secretary will be aware that the most recently published figures showed £5.5 billion of unclaimed tax credits that were due or liable to be claimed. The system has not been universally successful.
City competitiveness is not simply about the City of London; it is about the banking and finance sector more generally, and the 126,000 jobs in that sector in Scotland. The Chief Secretary will be awareor if he is not, he should bethat the move in recent legislation to retain risk-based, principles-based, light-touch regulation was supported by all parties. As for encouragement to save, I believe that the savings ratio is half what it was in 1997; and as for jobs, more than 1 million manufacturing jobs have been lost since Labour came to power, 90,000 of them in Scotland. I am glad that the hon. Member for Dundee, West (Mr. McGovern) is present. We have lost 1,100 jobs in our city in the last 12 months, mainly in manufacturing production and distribution, so the picture is not universally rosy.
My point is that that is not a universal picture. I am entirely aware of employment levels: I can look at the statistics each month when they are published. I am sure the hon. Gentleman knows that many of the jobs we have lostlong-term skilled, well-paid jobs in
manufacturing production and distributioncannot be automatically or simply replaced by some of the jobs we have brought into the city since.
wealthy individuals who are non-domiciled for tax purposes,
to stamp duty and inheritance tax, and so on and so forth. The trouble with many of the suggested solutions to some of those problems is that they are based on Reducing the Burden, a document published recently and following on from Fairer, Simpler, Greener, published in September last year. I am not convinced that that package will reduce the burden of taxation on low and middle-income households. Indeed, I suspect that the pension savings of low and middle-income earners will be reduced further, that their travel costs will rise, and that there will be no fundamental change in the impact of indirect taxation on the lowest quintile of earners compared to the highest.
The Liberal Democrats advanced a good many proposals in Fairer, Simpler, Greener. They proposed to scrap the 10p starting rate, to reduce the 22 per cent. rate to 20 per cent., and to increase personal allowances. The 40 per cent. rate was intended to remain, but would apply only to earnings of £50,000 or more. The Government have announced many changes, some of which will not come into force until next year or 2009. We need to compare the Fairer, Simpler, Greener and Reducing the Burden proposals with the current allowances and tax levels. Although the amended Liberal Democrat policy would allow earners to retain a higher proportion of their income than higher earners, we believe that that would quickly be eaten up by the impact of green and other taxes that would be particularly detrimental for lower earners.
I mentioned pensions. This is an important point. The Liberal Democrats intend to apply tax relief on pension contributions at the lower rate of tax only, which would be reduced from 22 to 16 per cent. under their proposals. Although they are correct to point out that half the current pension tax relief goes to the top 10 per cent. of earners, they have no plans to reinvest those moneys in a better citizens pension for everyone. They intend to use the £4.3 billion of savings or extra tax to fill the gaping hole that will appear in the public finances.
The Liberal Democrats propose a number of changes in environmental taxes, including the tax on vehicle excise duty, which a number of Members have mentioned. To increase VED on band E vehicles such as some Vectras and Mondeos from £150 to £850 would be disproportionate in terms of their fuel economy and CO2 emissions. Further, it would put sensible and modest family cars such as the Renault Espace on the same level of taxation as a two-seater sports car such as a Mazda MX-5. I am unsure whether that is appropriate, and it would penalise people on low and middle incomes who need a family car.
On aviation, even without a tax on aviation fuel the current regime hits short flights more heavily than long-haul flights. As there are usually alternatives to short-haul flights, that might be fair; but there is no alternative on long-haul routes. However, the £3 billion
in additional revenue that the Liberal Democrats want to take out of the industry will simply be passed on in higher ticket and cargo rates, and charges on freight flights might have an inflationary impact, which has not been discussed.
It is difficult to predict exactly how behaviour might change, but it is unlikely that the proposals will meet the desired environmental and fiscal objectives set out in the Liberal documents. Because of environmental change, it is highly unlikely that an extra £8.1 billion will be raised from environmental taxationeither that will be the case, or the Liberals anticipate that there will not be the behavioural change necessary to fill the gap in their figures.
I am pleased that the proposals on personal capital gains tax have gone. That would have been entirely disproportionate, and very punitive to people who have saved modest amounts of capital, perhaps in shares or share options given as bonuses, or in shares purchased through already taxed income over a lifetime of work. However, I am unsure that removing the taper relief on corporate capital gains tax will be without consequences either. People might choose to hold on to assets which they otherwise might have made liquid at an earlier stage, and that in turn might have a detrimental impact on investmentparticularly cash investments.
There will be no lessening in inequality in terms of indirect taxation. At present, the lowest quintile pays 26.5 per cent. of their income in indirect taxation compared with 14.1 per cent. for those at the top, and we are not convinced that the Liberal Democrats proposals will produce any significant change. They have mentioned that they intend to fill some of the gap through a general anti-avoidance rule, but there is not a huge amount of clarity on that, and certainly in the most recent document there were no numbers on what that GAAR would bring in.
Our assessment in terms of the revenue yield is that £4.1 billion would be lost from ending the 10 per cent. rate, £5.1 billion would be lost from raising the national insurance contributions threshold, £6.7 billion from cutting the basic rate to 20 per cent.and an extra £10 billion from reducing it to 16 per cent.£5.4 billion from increasing the upper rate threshold and another £1.6 billion from cutting corporation tax by 1 per cent. The cost would be some £22 billion, or £32 billion if the 16 per cent. basic rate were introduced.
In terms of the revenues to compensate, I do not believe that capital gains tax will bring in the yield the Liberals suggest. Even if it doubled, it would produce a gain of only an extra £3.8 billion. There would be a gain in terms of the single rate pension contribution relief of £4.3 billion, but not one penny of that would be spent on providing a decent citizens pension for everybody. There would also be a £1.4 billion gain from corporation tax relief changes. In terms of environmental taxes, the Liberal Democrats were not optimistic but downright heroic in their assumption of gaining more than £8 billion. I think that it would be closer to half of that because of behavioural change. There would be a £4.2 billion gain from increasing the national insurance upper earnings to £50,000. Therefore, there would be a total gain of £17 billion to 18 billion, which would leave a shortfall of some £15 billion.
substantial increase in the starting threshold
strike out the tax benefit where the avoidance of tax is the main reason for a transaction.
Julia Goldsworthy (Falmouth and Camborne) (LD): I want to make one thing clear at the outsetthe language in the title of our motion. Our original title was Taxation of the Super-Rich and we had no problem with that wording; it was the Table Office that had the problem. There has been no stepping back on our part, or fear about using such words.
Members have been much exercised about whether our proposals add up, but as we have said on many occasions, our analysis was informed by the Institute for Fiscal Studies, and we are basing our numbers on Government figures provided by the Treasury, so if the hon. Member for Runnymede and Weybridge (Mr. Hammond) or the Chief Secretary has a problem with the figures they should ask the Treasury where it may have gone wrong.
The reason our proposals are evolving is that, unlike the Conservative party, we actually produce policy proposals, so they occasionally need to be adapted to respond to Government decisions; for example, after their flattering imitation of our policies, such as adopting our proposal for a 2p cut in the basic rate of taxation. That necessarily causes us to reconsider our proposals. That is the premise on which we proceed.
It is fascinating to see so much interest in our suggestions. Our proposals last week related only to taxpayers, but there are of course wider poverty issues and I am sure the Chief Secretary and the hon. Member for Runnymede and Weybridge will be pleased to learn that they have another policy paper to look forward to this week when we publish our document on poverty and inequality. They can look forward to another weekend poring over Lib Dem policy documents. As my hon. Friend the Member for Northavon (Steve Webb) said, lack of policy is not one of our partys problems.
The hon. Member for Dundee, East (Stewart Hosie) made an interesting comment about the differing regional impacts of the economic record set out by the Chief Secretary. In my constituency, child poverty is still a problem, not necessarily because of the tax and benefit system but because of other structural problems, such as high water bills. Until those wider structural problems are tackled there will continue to
be hot spots. I have no doubt of the Prime Ministers sincerity about tackling such issues, but the problems will continue unless the structural issues are dealt with. Tax credits are a classic example. The intention was clearly honourable, but I have yet to hold an advice surgery without hearing from someone about a tax credit problem.
Those wider tax credit problems interact with the tax proposals that the then Chancellor made in his last Budgetto cut the basic rate of income tax by 2p and abolish the starting ratebecause many people do not qualify for tax credits. The problem is not just that people do not claim, but people without children do not benefit as much and the under-25s are not entitled to claim working tax credit, where take-up is already poor. We need to make sure that the fairness the Government hope to promote actually comes about.
I planned to talk about the Lib Dem proposals, which Members on both sides of the House spent a lot of time discussing, but I am grateful to my hon. Friend the Member for Northavon for going into considerable detail about exactly where the money would come from. He made the important point that we should look at the overall balance of the taxation system.
Mr. Philip Hammond: The hon. Member for Northavon (Steve Webb) has already made it clear that the reason the Liberal Democrats looked at a static model is that those were the only figures available. They have balanced the books on a static model analysis, but do they recognise that the dynamic effectsthe behavioural changeswill significantly reduce the amount of Exchequer receipts from the proposed changes?
Julia Goldsworthy: The hon. Gentleman is right, but the change in behaviour will work in both directions, which I wanted to address in terms of the comment of the hon. Member for Dundee, East. He said that the environmental taxes will not bring in as much revenue as we are suggesting because behaviour will change. We very much hope that behaviour will change, but at present we are trying to deal with an exponential increase in emissions. We want to slow that increase. I should be pleasantly surprised if emissions started to fall immediately, but our whole aim at this stage is simply to reduce the increase because it has been rising so quickly.
I welcomed the tone of the comments of the hon. Member for Runnymede and Weybridge when he referred to his sympathy for the underlying concerns of the motion, but unfortunately he said nothing of what he felt about those underlying problems or about any Conservative proposals to deal with them. It is interesting that so much effort was expended on looking at our proposals when, clearly, the Conservatives have no proposals of their own. Rather than having giant holes in their policy, they have no policy at all.
Mr. Jeremy Browne (Taunton) (LD): It might have escaped my hon. Friends attention, but the Conservative party does have one concrete proposal: significantly to increase the price of a pint of beer. Does she think that that will go down well with our constituents?
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