Mr.
Binley: No; I am listening
intently. 6.45
pm
“Freezing
the threshold would suck thousands more people in, particularly if big
fiscal deficits, low interest rates, a weak pound and quantitative
easing unleash a period of high
inflation.” The
sudden, hasty introduction of the 50p rate is a huge blow to
Britain’s reputation for tax stability and reasonable tax
predictability.
On the
complexity of UK taxes, the measures introduced will increase the
differential between capital gains tax at 18 per cent. and income tax
at 50 per cent., fuelling interest in structuring investments to fall
within the CGT legislation rather than the income tax legislation. The
reasons given for CGT unification in 2007 were, as the argument went,
that the differential between the top rate of income tax, which was
then at 40 per cent., and the 10 per cent. CGT rate was causing all
sorts of people—mainly private equity—to dress up income
as capital gains. The Government argued that they needed to unite the
CGT rate as a way of preventing people from moving what was essentially
income into capital gains. The differential then was 30 per cent. and
under the proposals it will now be 32 per cent., so it remains to be
seen what on earth is the basis for the Government’s 50p rate,
as referenced to
CGT. I
mentioned earlier The Sunday Times report at the weekend,
“Five ways to turn income into capital gains”, which
says: “Converting
income into capital gains has become the holy grail of tax planning
following the government’s plan to increase the top rate of tax
to 50 per
cent.” Is
this really what the Government wanted? Grant Thornton accountants
said: “If
you are able to put your earnings into a business you can really take
advantage of the...CGT...rate—however, the ordinary
man on the street has limited opportunities
here.” Is
this really what the Government wanted? The ordinary man on the street
would not be able to avoid high rates of tax through CGT, whereas those
who can afford their own accountant
could. I
think that I will end there. [Hon. Members:
“Shame.”] All right, in that case I will talk about trust
dividends and pensions, because there seems to be some level of popular
demand. On trusts, I was interested to read the briefings provided by
the Low Incomes Tax Reform Group and the Disability Benefits
Consortium. This is an area of immense complexity, but I will try to do
justice to the serious concerns of those organisations about the trust
and dividend tax
rates. Clause
6 increases the trust rate and the dividend trust rate for
discretionary and accumulation trusts from 40 per cent. to 50 per cent.
and from 32.5 per cent. to 42.5 per cent. respectively. That point was
also raised by the hon. Member for Dundee, East. The 32.5 per cent. to
42.5 per cent. rates were originally prescribed in the Finance Act 2004
to counter the use of trusts for tax avoidance
purposes. In
the Finance Act 2005, provisions were introduced with the intention of
protecting vulnerable beneficiaries of trusts from the effects of those
high rates. The focus of that legislation was mainly disabled persons
and children with a deceased parent. So clause 6 has an important
impact on Britain’s tax code. Those provisions work currently by
allowing the trustees of trusts with a vulnerable beneficiary to deduct
from their tax liabilities at the appropriate trust rate, which we have
just discussed, the difference between it and what the tax would be if
computed at the rate that would be chargeable on the vulnerable
beneficiary as an individual. So it is designed to help vulnerable
individuals, but I have been told that the mechanism for computing
relief is too complicated and, from my brief examination of the
relevant parts of the clause and the schedule, I believe that that is
so. Also, the statutory definition of a disabled person for
those purposes is too narrow. Consequently, from April 2010
some small trusts for vulnerable individuals will be charged income tax
at 50 per cent. on trust
income. I
cannot imagine that that will be popular on the Government Benches. We
are talking about vulnerable individuals and disabled people being
charged income tax at 50 per cent. on the income of their trust, which
was set up specifically for them. None of that can be reclaimed on
behalf of the beneficiary. Under the Mental Health Act 1983, a disabled
person is defined as someone who is in receipt of attendance
allowance—the highest or middle care component of disability
living allowance—or someone who has a mental disorder that
prevents them from looking after their affairs. That definition is too
narrow, which means that a trust for people who are disabled, but whose
disability is of the wrong sort will be liable for the 50 per cent.
trust rate. Is the Minister satisfied with that result of his proposed
changes? Who
loses out? According to the Disability Benefits Consortium, the
beneficiaries who are likely to suffer from that unintended side effect
of clause 6 include the following: first, those with conditions such as
Down’s, bipolar disorder or severe autism; secondly, vulnerable
beneficiaries who do not come within the definition; thirdly, those
without the right combination of benefits; and, fourthly, those who are
entitled to the prescribed benefits, but who do not claim them. That
raises many issues for the Minister to deal with. It seems that the law
of unintended consequences has struck many times
over. I
may talk more about trusts and pensions when we debate the schedule in
due course, but I want to draw some conclusions purely in relation to
the 50p tax rate. First, like the right hon. Member for North Tyneside,
we think that the 50p tax rate is a crass political move, rather than a
considered and well thought through change to the UK tax code.
Secondly, its significance is big and could be monumental in sending
out signals about doing business in the UK—this is first
increase in the highest rate of income tax since 1974.
Thirdly, we
doubt whether the Treasury has properly modelled the
impact—indeed, in terms of modelling the impact, there is no
differentiation between 50p and the phasing out of the allowances, as
we heard earlier. Also, the Treasury is using behavioural assumptions
about average taxpayers to suggest the behaviour of 300,000 highest
earners, which is clearly nonsense. Fourthly, there is a complete lack
of clarity on whether the change is permanent, which is what the Leader
of the House said, or temporary, as the Chancellor, the right hon.
Member for Airdrie and Shotts and other old stalwarts of Labour said on
Second Reading. It is vital for us to get clarification on the
matter.
Fifthly, the
changes are likely to have a perverse impact on pensions, dividends and
trusts. Disincentivising people to put money away in pensions will
retard the savings culture that we need to encourage and, after
12 years of a truly dreadful UK stock market performance, it
is perverse to make it less attractive to invest in UK equity—I
will talk about that when we debate the schedule. On trusts, the
biggest impact is, shockingly, likely to be on disabled people,
recipients of compensation from accidents and other vulnerable
persons.
Finally, the
50p tax rate has broken a clear Labour manifesto pledge, which I
believe was made by every single Labour Member who is a member of this
Committee.
Mr.
Jeremy Browne: It is a pleasure to follow an extremely
comprehensive contribution. I do not say that sarcastically; this is an
important policy development and it is right that it is scrutinised in
detail. The hon. Member for Hammersmith and Fulham performed a service
to the Committee by examining the proposal in the detail that he did.
However, I do not wish to speak at quite that length—not least
because I agree with some of the points made by the previous speaker
and I do not wish to repeat them just for the sake of
form. The
only thing I would say to the Conservative party is that, although the
intellectual case made by the hon. Gentleman—many other members
of the Committee also make such a case—seems reasonably
compelling and the Conservatives certainly believe it with great
fervour, they appear to lack the courage of their convictions. I have
heard Conservative MPs—including some who do not serve on this
Committee, for example, the right hon. Member for Wokingham
(Mr. Redwood)—say that this is an elaborate trap that
has been placed by the Government to lure the Conservatives into being
typecast as defenders of the rich and privileged. All Government
policies and taxes are a trap in the sense that they provide an
opportunity for differentiation between the governing party and those
parties not in Government. To refuse to engage with Government policy
merely because there is a risk that it will be contrasted unfavourably
with one’s own policy is to abandon all democratic politics and
give the electorate a diminished choice. The Conservative party, as the
largest Opposition party, have some duty to try to articulate choices
with regard to not only how they contribute to debate, but how they
frame votes and manifestos at the general
election. Turning
briefly to the proposal before us, I echo the point that it is a
betrayal of Labour’s 2005 general election manifesto
commitment—the quote has been given and I will not repeat it.
The manifesto on which the Labour party stood and won an unprecedented
third general election in 2005 emphatically did not state that they
would leave income tax rates the same unless economic circumstances
make it attractive for them to do otherwise. It was perfectly possible
for the Labour party to have put that caveat in their manifesto and to
have said that it was an aspiration to leave the top rate of tax as it
was at 40 per cent. but that they could not make a firm commitment or
an absolute promise to do so because they were not in a position in
2005 to know how the economy would be in 2009-10. It would have been
entirely honourable for the Labour party to put forward that position
at the general election, but it did not do so.
As the hon.
Member for Hammersmith and Fulham has said, the then leader of the
Labour party, apart from promising to serve as leader for the entire
duration of this Parliament if Labour won, also spoke disparagingly
about the concept of a 50p tax rate for people on higher earnings. He
made that case, which Labour Members at the time cheered with great
gusto and then made to the electorate in their constituencies. Who
knows, quite a few Labour Members here today might not be Members had
they, when speaking to the electorate in their constituencies, squared
with them and said, “We cannot give you a commitment to keep the
top rate at 40p.”
Perhaps many
of the exceedingly wealthy donors who have bankrolled the Labour party
over the years might not have been so generous with their
contributions,
which, after all, funded election addresses and propaganda put through
doors by Labour party candidates, had they known that what the Labour
party meant when it said that it would not raise the top rate of income
tax was that it would not be raised unless the Labour Government were
given an excuse to do so, which is a rather different
commitment. Mr.
Russell Brown (Dumfries and Galloway) (Lab): May I ask the
hon. Gentleman a simple question? How many letters or items of
correspondence has he had from any of his constituents complaining
about the increase from the 40p rate to the 50p rate, because I have
not had
one? Mr.
Jeremy Browne: I have had very few. Indeed,
I am not sure that I have had any, but my point is about the ability to
break the promises made in a party manifesto on which a candidate stood
at the general election. The honour or otherwise of holding to
one’s commitments to the electorate cannot be measured by the
number of letters one receives. Had the hon. Gentleman received 50
letters, would he feel a degree of guilt about not abiding by the
Labour party commitment? Had he received 100 letters, would he feel
totally ashamed? Had he received 150, would he resign as a member of
the Committee, and had he received 200, would he resign as a Member of
Parliament? The idea that the number of letters one receives is the
measure by which one can judge whether it is appropriate to break
one’s promises seems to me to be an entirely new concept, and
one I suspect the electorate are less enthusiastic about than
he
is.
Mr.
Russell Brown: Surely the hon. Gentleman, along with the
rest of the Committee and all Members of the House, recognises that the
current economic climate, which we are dealing with here, is vastly
different from what we went into in
2005—unprecedented. 7
pm
Mr.
Jeremy Browne: The situation is indeed different from that
in 2005, which is why the Labour party would have been well advised to
say, “Our commitment as a party is not to increase the top rate
of income tax if the current benign economic circumstances continue for
the duration of the forthcoming Parliament”—but that is
not what it said. The Labour party, under the leadership of Tony Blair,
said that it would not increase the top rate of income tax during this
Parliament. The Labour party has broken that promise—unless an
election is called before the policy can be implemented. One could
then, technically, argue that the policy was not reneged
upon.
Mr.
Todd: Surely the hon. Gentleman must accept that the
current economic circumstances are unique within probably three or four
generations. No reasonable person could have predicted the outcome back
in 2005. To maintain a commitment in the defiance of the facts surely
does not make
sense.
Mr.
Jeremy Browne: I have gone over the ground and heard the
excuses. We have come to the conclusion that all Labour party promises
in future ought to be seen with an invisible asterisk next to them:
“This is what we promise you at the election”, but with
an invisible
asterisk leading down to some more invisible type at the bottom of the
page, stating, “Unless we can see a change of circumstances
sufficiently great to justify doing the precise opposite of what we
promised when we put ourselves before you and asked for your
vote.” That is what has
happened. The
hon. Member for South Derbyshire may well think that the national
interest is best served by the Labour party reneging on its manifesto
promise. I think the national interest would be served by the Labour
party reneging on a huge number of its promises—I can think of
few of its promises that do serve the national interest. However, if
that is what the hon. Gentleman thinks, that is what he should say,
explicitly. At the moment the Labour party has hidden behind the claim
that it has not broken the promise at all. I would argue that it has,
although it may make the point that it was desirable to do
so. Mr.
David Gauke (South-West Hertfordshire) (Con): The hon.
Gentleman may be being a little unfair on this point. I did a radio
interview with the Financial Secretary on LBC on the night of the
Budget, and he confirmed that the measure was a breach of the manifesto
pledge.
Mr.
Jeremy Browne: In that case I apologise if I have not
given full credit to the Government for admitting their own failings.
It is right for us to recognise that
point. The
first point that we can reasonably dwell upon, which I have done, is
the broken promise from the 2005 election manifesto. The second point,
also touched upon by the hon. Member for Hammersmith and Fulham, was
the chaotic manner in which the Government sought to bring in what they
now call not a higher rate but an additional rate of taxation. There is
a lower rate and a higher rate, and one could be forgiven for thinking
that the higher rate was as high as it got, but then there is an
additional rate on top of that. Some people pay a marginal rate
significantly higher than not just the higher rate, but the additional
rate. What
has been so strikingly chaotic about the Government’s approach?
They made a promise that the 40p rate would be stuck to for
the lifetime of the Parliament. They came up with a whole new tax
rate—45p—but made sure that the manifesto commitment was
not breached by only putting that 45p rate into effect after the last
possible date for a general election. However, before the 45p had been
put into effect, the Government came up with a new 50p rate, to be put
into effect before the possible end of this Parliament. It is entirely
reasonable, when looking at the Government, to find it hard to conclude
what they are going to do next. That is damaging for confidence and for
anyone planning to set up a business or create wealth in some other way
in this
country. The
other point, examined in detail by the hon. Member for Hammersmith and
Fulham, is that it is dubious whether the measure will raise the
revenue that has been claimed for it. Many people estimate that the
yield will be about one third of what it would be if there was no
behavioural change, so the total revenue that the Government are going
to raise as a consequence of the 50p tax rate pales almost into
insignificance compared with the £175 billion of public
borrowing—almost £0.5 billion every
day—that we are currently suffering.
There will be
£173 billion of public borrowing next year and £140
billion the year after, assuming the rather heroic growth rates
forecast for the economy as a whole, a forecast which seems not to be
shared by many commentators. The Chancellor is unlikely to be in place
to see whether his predictions come true, but I fear—it is not
in the national interest for this to be the case—that he may be
shown to be rather optimistic. The Government are borrowing more money
this year and next year than the total Budget in the first year that
the Prime Minister was Chancellor—total public spending then was
less than two years’ borrowing today. Against that backdrop, the
amount of revenue raised by a 50p tax rate, even if there were no
behavioural change, would be fairly modest. However, if two thirds of
the revenue drains away as a result of behavioural change, the central
argument for the 50p rate, which is that the extra revenue is necessary
and justified because of the scale of the Budget deficit, would seem to
be unjustified.
As the hon.
Member for Hammersmith and Fulham also said, tax avoidance will be
further incentivised by the greater differential between the rate of
capital gains tax and the top rate of income tax. Of course, there was
a big incentive when the top rate of income tax was more than double
the CGT rate, but now that the top rate is 10 per cent. higher, I
assume that large numbers of people will avoid paying it not by
relocating to another country—although that may happen with some
star footballers and others whose labour is demanded internationally,
and who can travel easily from one employer to another—but by
choosing to receive their pay in forms that attract lower rates of
taxation. Morally, that may not be particularly impressive, but people
are given a greater incentive to do it, entirely legally. The
Government are to some extent colluding in that process by further
incentivising those people.
I have two
final points. The Financial Secretary said in his opening remarks that
it was only right that the people who benefited from economic growth
should pay more now that the economy is shrinking. That is not the
economic case for the extra, 50p rate, which, I maintain, is far from
attractive or compelling, but what Labour MPs regard as the moral
case—I think it was called the “ethical”
case—for the 50p tax rate. The case is that when times are good,
some people make a lot of money and therefore, when times are bad, they
should be asked to contribute more. I have two things to say to that.
First, those who are earning the most money already contribute a much
bigger percentage of the total national income tax take than their
numbers would otherwise indicate. One could argue that they should
contribute more or that they should contribute less, but it is
misleading to suggest that the top 1 or 2 per cent. of earners are not
contributing in a substantial and meaningful way to the public
finances; they most certainly
are. Secondly,
one should not necessarily assume that people who will be earning in
excess of £150,000 from next year onwards benefited during the
period of economic growth. Someone could set up a company, having spent
the last 10 years in low-paid employment, and the company could be so
successful at capturing the mood of the country and attracting lots of
customers that they were able to create lots of jobs and expand. If by
about this time next year they managed to be on a salary that was in
excess of £150,000, they would be hit
by that 50 per cent. rate, despite never having benefited at a higher
level of income during the time when the economy was growing. Others may
have been earning huge amounts of money, by my modest standards, for
years and years but have now stopped working. They may have retired.
They may have spent their money on an enormous house, or perhaps a
series of enormous houses and all kinds of other rewards because of
their years of success in the benign economic circumstances and have
now decided to stop working. They will not be taxed on the basis that
they were able to buy a very expensive house because they made so much
money when the economy was growing for the last 10 or 15 years. They
may be taxed in other forms, but not on their income. Those people will
have paid a 40p tax rate when the economy was thriving and they will
not pay the 50p rate because they will not be paying income tax, or not
necessarily at that level when the proposal is introduced. So I do not
accept that the ethical point automatically applies in this case as
Labour Members appear to
suggest. Finally,
it is reasonable to ask what the rationale is for 50 as opposed to any
other figure. The Chancellor himself admitted—I think it was in
the Treasury Committee—that there was no rationale and that the
figure was plucked out of the air. That is a surprise because a lot of
economic modelling and forecasting seeks to work out the point at which
the revenue to the Exchequer is maximised. One would have thought that
those considerations would have come into play when the Chancellor and
other Treasury Ministers were deciding what was an appropriate rate at
which to set this higher level of taxation.
My suspicion
is that 50p was picked for the obvious reason that it is half and that
there is a sense, probably in the Government and maybe in other
political quarters too, that a line is crossed at the point where the
Government take more of a person’s income than they are left to
spend for themselves. Therefore the 50p is a sort of self-imposed moral
line in the sand which MPs and other politicians, probably of all
parties but perhaps in the Labour party as much as any, feel is as far
as it is acceptable to go before it becomes unreasonable for the state
to take that much private
income.
| 
