Mr.
Browne: On that topic, has the hon. Gentleman given any
consideration to Arsene Wenger, the Arsenal football club
manager’s thoughts that this measure may drive away footballers
who are able to ply their trade in many markets? Those players give
great pleasure to people who watch premiership
football.
Mr.
Hands: The hon. Gentleman raises an interesting point. I
think that I am the only Conservative MP who has a premiership football
club in their constituency. In fact, I represent two—Fulham and
Chelsea. It would be remiss of me to comment on what arrangements
Arsenal may have made, but the impact of the 50p tax rate on Chelsea
football club could be significant. However, I do not want to stray
down that road, as there will be different views about the desirability
of all those highly paid footballers’ being in the
country.
Mr.
Todd: I draw the hon. Gentleman’s attention
to the remarks of the England manager who has been concerned at the
prevalence of foreign footballers within the premier league. There is
an issue to be balanced here.
The
Chairman: It may be an issue, but not for
clause 6.
Mr.
Hands: I thank the hon. Gentleman for that intervention.
Last year, the tradition was talking about cricket during the Finance
Bill; perhaps this year it will be football, even without the hon.
Member for Ealing, North (Stephen Pound), who last year almost always
pulled us back into the world of football.
To finish my
point, I believe that there will be moves to transfer activity from
higher earners to interesting but less remunerative activities and
charities. That might be an important side effect, but it is likely to
have a bad impact on tax
revenues. I
was interested in the Bischoff report that was released earlier this
month. The headline in the Daily Mail was, “Report warns
of tax threat to Square
Mile”.
Mr.
Hoban: It was a Treasury
report.
Mr.
Hands: As my hon. Friend says, it was a Treasury-sponsored
report. According to the Daily Mail, the report said
that “confusion
over Whitehall tax policy had put Britain’s reputation as a
destination for financial high fliers at risk last
year.” That
was before this year’s proposed rises. The article
continued: “Questions
about the ‘clarity and continuity’ of tax policies became
an issue in 2008, the report into the future of the UK’s
financial services sector
said.” The
report
stated: “This
may have raised issues about the UK’s attractiveness as a centre
for international financial services and indeed other
industries—beyond which its reputation as an attractive
investment destination might have been
questioned.”
Mr.
Field: My hon. Friend is making an interesting and
persuasive case. Does he share my concern that the making of tax
policy, whether here or abroad, focuses too much on overseas nationals?
Perhaps we should focus more on ensuring that those who benefit from
setting up businesses, employing people and making large
profits here have a long-term commitment to this
country.
Mr.
Hands: My hon. Friend makes an important point. In the
last couple of minutes, our discussion has perhaps been sidelined into
the subject of foreigners who are resident here, such as footballers.
His point is important and powerful. The question is not just one of
foreign nationals, as one can see from the City. To return
to the Bischoff report, huge numbers of people working in the City are
not foreign nationals but UK
subjects. If
my information is correct, the Chancellor co-chaired the group with the
former Citigroup chairman, Sir Win Bischoff. Doubtless, the Chancellor
was a little perturbed by the results of the report. Sir Win said that
the question of tax was “important”. He
added: “In
relation to developed countries, we want a competitive tax system and
one that is predictable and
stable.” That
relates to my earlier point about the importance of the UK tax code
being predictable and stable. That has been blown out of the water by
the events of the last two
years.
Mr.
Binley: My hon. Friend touches on the City. That area of
our economy seemed to receive great favour under the premierships of
Mr. Blair and his successor. How does my hon. Friend think
this Government intend to promote the City as an international centre,
while increasing taxes in this way? Does that not defeat the
object?
Mr.
Hands: My hon. Friend makes an important point, which
would be best answered by the Minister. Obviously, business cannot
return to how it was prior to 2007-08, but London must continue to be
an important and powerful financial services centre, not least because
we need to generate tax revenues. We need something to plug the
£175 billion deficit that I referred to earlier. Getting the
City back into a productive mode in which it produces those tax
revenues should be an important Government
policy. Returning
to the UK’s competitiveness, the Financial Secretary mentioned
briefly how the higher rates of tax in the UK stack up against those of
other G20 economies. A PricewaterhouseCoopers press release after the
Budget
stated: “From
next April, a year earlier than expected, the UK will rank 18th among
the G20 economies in terms of income tax and
social security rates for senior executives, based on current rates. The
change applies to both domestic and overseas high-earners working in
the
UK. This
increased tax take could accelerate the movement of high earners and
top performers in industries like finance and technology to other
established and growing economic hubs. Countries like Switzerland will
look increasingly attractive to some of the people in the key
industries needed to lead the UK out of the
recession.” We
have to worry about the competitive position of London as a City, too.
We have talked a little about that, but it is worth examining in more
detail. The position is vital to restoring overall tax revenues in
the country. London needs to remain a premier—if not
the premier—international financial centre. I am not making a
call to go back to business as usual as it was prior to 2007; that is a
matter for a separate debate, but I am calling for the City of London
to be restored to being a tax-generating part of our
economy.
Mr.
Field: I hope to address one or two of those issues later,
but it should be stressed first and foremost that the City of London is
still a pretty substantial tax generator in several areas that have not
been badly affected by recent events, such as insurance. Will my hon.
Friend give some thought to whether, with a bit of 20:20 hindsight, we
have become a little over-reliant on financial services not only in the
City of London, but throughout the United Kingdom in recent years?
Given that it will take some time to adapt to other industries that
will be of importance, such as creative industries in all their facets,
perhaps we should focus on that, too, and not return to the situation
that has been so prevalent over the past 12 years when the Government
have prostrated themselves before global financial services with
non-domiciles and the like, to what might be the detriment of a
balanced
economy.
Mr.
Hands: My hon. Friend is absolutely right. Experience
shows that, during the nine years of this decade, as an economy we have
become too dependent on financial services. If I am not mistaken, four
fifths of all new jobs in the economy since 2000 have been created in
financial services. However, it is not exclusive to say that we need to
diversify and rebuild the City of London as a generator of tax
revenues. I appreciate my hon. Friend’s point about the
insurance sector, but we are not talking about the whole of the City of
London having suddenly stopped being in business. A huge tax generation
is already going on. It is possible to do both, and diversify and
rebuild the tax
base. The
Mayor of London made some interesting comments about the 50p tax rate,
but his comments that should have been given more attention were those
about the threat that the high rates of tax and regulation make to the
role of London. I was interested to read a piece written by Anthony
Browne, the head of policy in the Mayor’s office. He warned
that, after the Budget, the extra taxes could push higher earners to
other countries without bringing in revenue to the Treasury, which is
the matter before us here today. He
said: “Far
more than the rest of the UK, London has an internationally mobile
workforce, and its success depends on being a global magnet for talent
and business. Having a competitive tax regime is a key part of that,
but we will now have the highest income tax rate of any major economy
in Europe, or any global commercial centre. This new barrage of taxes
on high earners comes on top of the government’s assaults on
non-doms, which is also a largely London phenomenon. It sends out a
message that high earners
are not welcome, when they are not only welcome in London, but an
essential ingredient in London’s success. This isn’t
about defending the rich, but defending the economy. If high earners
either stop coming here, start leaving, or simply work less, it would
be a real setback for the London economy. The government will have
achieved a real double-whammy—it will have failed to raise much
extra revenue, and at the same time strangled the economy. The
government must not kill the goose that lays the golden
egg.” Lindsay
Roy (Glenrothes) (Lab): It is a pleasure to serve under
your chairmanship, Mr. Atkinson. Is the hon. Gentleman
hinting that the 50 per cent. tax regime might tempt some of the 19
millionaires in the shadow Cabinet to leave the
country?
Mr.
Hands: I am not sure of the basis to that question, but I
am sure that it is not relevant to the discussion. It has taken the
hon. Gentleman some considerable time to come around to asking that
question, which he clearly read from a piece of paper. We are five or
six hours into the debate, and it says something that it took him that
long to pluck up the courage to ask
it. 6.30
pm
Mr.
Field: Does my hon. Friend agree that it would be the
prospect of another five years of ruinous Labour government, rather
than a 50 per cent. tax, that would send however many millionaires we
have in the shadow Cabinet from these
shores?
Mr.
Hands: My hon. Friend makes an interesting speculative
point, but I would probably be best advised not to go down that
road. London
generates 17 per cent. of UK GDP; there are four times as many high
earners in London as in the rest of the country, and 145,000 Londoners
will be hit by the changes. It is not only the Mayor’s office,
but respected commentators such as Tony Travers who have been talking
about the importance of London to the economy and how the Government
should not kill off London by putting on too high a rate of tax. In the
Evening Standard of 23 April—the day after the
Budget—he
said: “Now
the bad news: that continued economic strength means that Londoners
will pay for yesterday’s Budget. The Chancellor’s dash
for indebtedness will in time lead to higher taxes...First,
because the capital and its region are home to many of the
country’s highest earners. A 50p top tax rate...will raise
far more from the London area than elsewhere. Some people will see this
result as fair, others not. But whatever the equity of the change, it
will fall disproportionately on London’s
taxpayers...Second, the vast growth of government debt will lead
to higher taxes for many years to come. Research has shown that London
and the South-East ‘export’ tax to the rest of the UK.
That is, taxes raised in and around the capital exceed the amount spent
by government within the area—by up to £20 billion a
year. For many years, this pattern has allowed public services to be
provided in other regions to a higher standard than their own taxpayers
could otherwise
afford.”
Stewart
Hosie: May I bring the hon. Gentleman back to the
financial sector generally, rather than just the City of London,
although he is doing a stoic job of defending it? For a moment, I
thought that he was the Member for London First. This is about receipts
from the financial sector and revenue yield. We know that the five-year
forecast for the revenue yield from financial services and housing is
down, but even in five years’ time it will not be back to its
2007 position, so what
does he think needs to happen with the tax rates to stimulate growth and
return to the yields we had before the recession
started?
Mr.
Hands: The hon. Gentleman raises an interesting point,
which comes to the nub of the matter. I do not know whether his
five-year figure about housing and finance yields returning is right,
although I do not disbelieve it, but that is part of the problem. It is
important that our tax revenues are increased as quickly as they
reasonably can be, so I hope that the five-year figure is wrong. On his
general point about where we will raise the taxes, we are going to have
to see what happens to public finances over the next year, unless the
Government wish to call a general election before
then. On
financial centres and which had the highest tax rates, I cannot
remember exactly what the Financial Secretary said about that, but I
was interested to read an article in the Financial Times of
Thursday 7 May, entitled, “City of London will be the most
highly-taxed financial centre in the world.” The article
considered the different percentages of their own income that people
are able to keep. Dubai, unsurprisingly—I do not think we could
ever compete with Dubai—allows people who work there to keep 95
per cent. of their income. That amount falls to 85 per cent. in Hong
Kong, 82 per cent. in Singapore, 80 per cent. in Guernsey, 68 per cent.
in Zurich and 62 per cent. in Tokyo. Crucially, the current amount in
London is 61 per cent., which is higher than New York, Frankfurt or
Paris, but the effect of the change will be that higher rate earners in
London will keep only 50 per cent. of their taxable pay. Having been
more competitive than New York, Frankfurt and Paris, it is now less
competitive than all three of those important financial centres. It is
worth remembering that someone who earns £250,000—some on
the Government Benches decry people earning such levels—pays
£125,000 per annum in tax, which, according to
www.mysalary.co.uk, pays the salaries of about six nurses. It is
important to retain these higher rate taxpayers as far as we reasonably
can. I
want to talk about the political reasons behind the 50p tax rate. As we
know, the Prime Minister loves creating his beloved dividing lines.
Exploring the negative impact that the new rate might have on our
future tax revenues, our economic competitiveness and so on leads one
to conclude that it was a political gesture. Labour has reversed into a
core-vote strategy. I was very interested to be in the Chamber when the
right hon. Member for North Tyneside made his speech.
Unusually, I do not have to qualify which speech, because he has
made only one in the past year—according
to his www.theyworkforyou.com entry. However, he obviously saved his
first speech in 13 months for a big occasion. He
said: “I
am told that when the
proposal— the
50p tax
rate— “was
put to the various focus groups that political parties use nowadays, it
received broad support as a popular
measure”. He
also said
that “focus
groups are not always right...It has to be right that when we need
to raise revenue, we should focus on those with more money, rather than
less, but to raise significant amounts of money, which is what we need
to do given the present financial circumstances, we need a broad tax
base. The 50p rate for those earning more than £150,000 will
apply to some 350,000 taxpayers in this country. They simply do not
provide the broad base to
raise the revenue that will be needed in our present
circumstances...That leads one to consider why the 50p rate was
introduced in the first place. When one looks at the fact that it is
being brought forward to April 2010, probably just a few weeks away
from a general election, and when one considers that it targets a very
small number of taxpayers, the only sensible conclusion to draw is that
the 50p-rate proposal has more to do with political positioning and
tactical manoeuvring than a principled, strategic approach to taxation
and the raising of
revenue. He
talked about “cynical political reasons” and
continued: “that
simply will not work in our interests.”—[Official
Report, 27 April 2009; Vol. 491, c.
615-616.] He
also raised the important question of whether the changes are intended
to be permanent or
temporary. Ten
years ago, the Prime Minister, as Chancellor, set out his three
principles for the UK tax system. The three words were incredibly
revealing—simplicity, fairness and competitiveness. In the past
two years, he has busted all three of those principles. As we discussed
this morning, “simplicity” has been completely broken by
the 11 marginal tax rates. “Fairness” was destroyed by
last year’s 10p fiasco, and the 50p tax rate has put UK
“competitiveness” in severe danger. That is not to
mention the breaking of the Labour manifesto pledge mentioned earlier.
It is worth remembering exactly what Labour said in
2005: “Our
economic record has finally laid to rest the view that Labour could not
be trusted with the economy. We are winning the argument that economic
dynamism and social justice must go hand in hand...Labour believes
tax policy should continue to be governed by the health of the public
finances, the requirement for public investment and the needs of
families, business and the environment...We will not raise the
basic or top rates of income tax in the next
Parliament.” I
shall compare that with the Liberal Democrats’ 2005 party
political
manifesto: “Our
package of tough choices on spending, and fairer taxes, means that most
people will be better off. There is only one proposed net
tax rise (to 50 per cent. on the proportion of incomes over
£100,000 a year, affecting just one per cent. of
taxpayers)”. They
go on to list a menu of things that will be afforded by the tax
cut.
I found that
absolutely fascinating. We mentioned the figure of Tony Blair earlier.
One of Tony Blair’s favourite things to do during the 2001 to
2005 Parliament was attack Liberal Democrat questioners on their
commitment to the 50p tax rate. In fact, I found 13 separate
sessions of Prime Minister’s questions in which the then Prime
Minister did so. For example, in the last Prime Minister’s
questions before the general election, in answer to a question by the
then leader of the Liberal Democrats, the right hon. Member for Ross,
Skye and Lochaber (Mr. Kennedy), he
said: “I
do not think that his proposal to take that money out of general
taxation by a 50 per cent. top rate of tax is something that will
recommend itself to people. It is a proposal that in my view would not
raise the money that he thinks it would
raise.”—[Official Report, 6 April 2005; Vol. 432,
c.
1413.] That
was the last Prime Minister’s questions before Parliament was
dissolved before the election. It was the election Prime
Minister’s questions. That was the election manifesto on which
Labour fought in 2005. Before that, Tony Blair said to the then Liberal
Democrat MP for Newbury, David Rendel, that increasing
investment “by
means of a 50 per cent. top rate tax...would not be good for the
economy. Even if we raised the money—which we would
not”.—[Official Report, 21 July 2004; Vol. 424, c.
327.]
It goes on ad
infinitum; there are another 13. Tony Blair was quite sure that Labour
was going into the election committed to not having a 50p tax rate and
not raising the highest rate of income
tax. On
the question of UK tax predictability, or rather unpredictability, a
more subtle message is being taken by many out there that the
UK’s tax system is no longer as stable as it was. For example,
the planned 45p rate is being altered five months after its
announcement, before it has even been introduced. It would have been
tempting to believe that the early announcements of new tax rates in
the pre-Budget review were meant to help people plan and predict, but
the reality is that they were put there for pure political advantage.
An early announcement by this Government does not mean greater
certainty. As I said, last November, the top tax rate was to be 45p
from 2011, but by this April it had become 50p from 2010.
The
country’s tax system is losing credibility, and the process by
which tax changes are made—not in response to long-term economic
challenges but in pursuit of short-term tactical political
gain—is causing immense damage to our international reputation
and competitiveness. It all started with the pre-announcement of the
abolition of the 10p rate and the reduction of the basic rate in the
Prime Minister’s last Budget as Chancellor in 2007. It
accelerated with the disastrous pre-Budget report of October 2007, as
we saw the first example of the now-familiar phenomenon of the Prime
Minister trying to head off a catastrophic loss of confidence in him on
his own Benches. It continued with the 2008 Budget, with last
year’s pre-Budget report and now with the 2009
Budget. We
must ask ourselves whether the £150,000 tax point at which the
higher rate is charged will remain constant. My reading is that the
Treasury has no plans to increase or index the £150,000 level at
which the new 50p rate will apply, which will mean that hundreds of
thousands more people will be caught as wages rise. Other income taxes,
of course, rise in line with inflation.
The
Chancellor has estimated that about 300,000 people will face the new
50p rate when it is introduced next year. However, accountants
calculate that over the next decade, about 750,000 people—that
is more than twice as many as in the current situation—will end
up paying the 50p tax rate unless the £150,000 limit is raised.
Anyone currently earning about £100,000 will pay the new 50p
rate by 2020 if they enjoy average wage increases. They will also lose
valuable tax breaks on their
pensions. John
Ball at Watson Wyatt, a firm of actuaries— I am sorry; does my
hon. Friend the Member for Northampton, South wish to
intervene?
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