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Baroness Seccombe: My Lords, I add my thanks to my noble friend Lord Blackwell for initiating this important and fascinating debate. This is a strange debate for me to make a contribution. I have no expertise in the subject, and the only experience I can claim is many years of poring over the financial pages in the daily newspapers, where one can find conflicting ideas about the apparent health of our economy. I believe that one finds what one wants to believe and then sticks with it. That way it is much simpler. Sometimes you are right and sometimes you are wrong. The position is probably similar for the heavyweight journalists who put their minds to these problems.

As I am speaking from the Back Benches, these are my views and not necessarily those of my Front Bench. My only reason for speaking at all is that I feel so strongly that a certain group of people has been treated very harshly by this Government.

In the 1980s, the Labour Party fought tooth and nail to frustrate the Conservative government led by my noble friend Lady Thatcher in their quest to give people the chance of owning their own home. Thousands of people availed themselves of the opportunity and proudly improved their property. With their new front doors and windows, it was obvious from the very beginning which were the houses that had been purchased. Instead of the drabness and awful uniformity of local authority housing—which was nearly always in need of repair, as I know from my time as a county councillor—other residents noticed that privately owned houses looked better and were obviously cared for better. As a consequence standards were raised throughout the area.

It was a most exhilarating time to be around as people experienced the newfound pleasure of being a property owner. I found it very strange that it was the Labour Party that was dead set against giving others the chance that many members of another place enjoyed themselves.

Since that time, many people have become share-owners and become thoroughly involved in a revolution which has given them a stake in society that was unknown in socialist Britain. Thousands of families have been released from being trapped in a particular house. We should never forget that it was a Conservative government who provided mobility and freedom for millions of people.
 
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Over the years, minds have turned to passing assets on to children, which is a very natural and laudable instinct. I am concerned about those who have struggled to purchase their council house. Two foreign holidays a year or extravagant living was not for them: mortgages had to be paid and expenditure had to be curtailed to match. They did not take the attitude that once all the money had gone the state would provide, so make merry while you have it. The freedom that came with ownership brought responsibilities, which, on the whole, have been discharged.

This brings me to my unease, which I share with my noble friend Lord Steinberg. The rise in the value of property means that today 2.4 million homes are worth more than the inheritance tax threshold of £263,000, a considerable number of which are council houses. It is therefore not too difficult to see that the people who took the risk 20 years ago will be paying inheritance tax. The number of estates paying inheritance tax has increased 75 per cent since 1997. Surely this tax was not meant to hit hard-working people of modest means. I always thought it was meant to penalise only the super-rich.

Let me give your Lordships an example. I was horrified to read that if someone died leaving an estate totalling £425,000—made up of a property worth £350,000, contents of £25,000 and savings of £50,000—and after, say, £6,000 had been deducted for debts and funeral expenses, that would leave £419,000 on which inheritance tax at 40 per cent—£62,400—would then have to be paid.

There is also the problem of long-term care. None of us knows what our needs will be in our latter years, and most people are only too aware of the vast amount required for care either at home or in a nursing home. Those with only very modest means and no assets never have to concern themselves with such matters, as the state will always provide. However, those who may have what is now a property of some value but very little income have to live with the fact that this Government will raid their estate after their death—in my opinion, a shocking state of affairs.

As, thank goodness, we do not know how long we will live, it is impossible for most of us to pass anything on to our heirs during our lifetime, and thus avoid tax implications. However, if you are really prosperous, you are in a position to do so. The rich are able to take advantage of smart devices to preserve their estates, but I think you have to be pretty wealthy indeed to afford the lawyers' fees to set up these intricate schemes. Now that we have a Government who appear to believe in retrospective legislation, these plans may be to no avail.

Today the rise in the value of a home—138 per cent since 1997—has found many hard-working, middle-of-the-road people in difficulties. I have thought long and hard, and have come to the conclusion that there should be a substantial hike in the figure where inheritance tax kicks in. I suggest that such a sum should be £500,000. This would relieve many people of a great deal of anxiety and enable them to leave the next generation their estate intact and, in most cases, free of government confiscation.
 
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I know that there are other anomalies in our taxation system and many other deserving cases, but I urge a Conservative government, when the situation enables them to introduce tax cuts, to consider such a measure and bring more fairness to our taxation system. There must be many thousands of people who deserve such deliberation and would, I am certain, be eternally grateful.

Lord Marlesford: My Lords, the House owes a debt of gratitude to my noble friend Lord Blackwell. With the election on the horizon, well within sight, and tax an important issue, as is always the case in any election in this country, this debate gives the House an opportunity to discuss it. The opportunity has been seized eagerly by the massed ranks of those on the Benches opposite. We must remind ourselves that the old idea that this House is mainly Tory is not true. The latest figure is that there are 202 Tory Peers and 201 Labour Peers. So we are pretty equal, as everybody can see.

Let us start with a basic fact on which we can all agree. It is not governments who make countries prosperous, although they can be very successful in preventing them being prosperous, it is individuals. If we assume—and perhaps we can agree on this too—that the socialist system of state enterprise is now abandoned throughout the world, although it does, I agree, linger on in North Korea and Cuba, it is on capitalism that we now depend. Following a visit to the Central Party School in Beijing in November, I learnt that the country was determined to stick with capitalism and the market economy. The Chinese for "capitalism and the market economy" is "socialism with Chinese characteristics". That is what is releasing a torrent of high-quality, high-tech, low-cost goods from the most entrepreneurial people in the world.

Historically, in both America and Europe, those who have made the greatest contribution to economic development under the capitalist system were motivated by the urge to enrich themselves and their families. Those who have been most successful and have contributed most to their countries have generated wealth far beyond their capacity to absorb it or their need to pass it on. Many of the most successful have gone on to found the great charitable and philanthropic organisations which have done so much to enrich their countries, both socially and culturally. From America, the names of Carnegie, Mellon, Rockefeller and Ford spring to mind. In Britain, we might think of Nuffield, Wellcome, Rowntree and Sainsbury.

There should be one purpose only of taxation, and that is to raise the revenue necessary for public purposes and to do it without discouraging wealth creation. There are not now, I believe, many in Britain who see redistribution of wealth as a prime aim. This does not, of course, mean that taxation cannot and should not be progressive, but it must be most cautiously so.
 
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Thus the structure of tax should be used to grow the economy. It can be the most powerful tool for this purpose. That does not mean inventing some spurious economic theory, such as that of Professor Kaldor, who burdened the noble Lord, Lord Callaghan, when Chancellor of the Exchequer, with the absurd selective employment tax in the 1960s. It means taking full account of human nature, even when it is not at its most beautiful.

The watchword of the present Chancellor of the Exchequer has always been "prudence". I therefore congratulate him and the Government on keeping in place through seven and a half long years the 40 per cent top rate of income tax which was so courageously and imaginatively introduced by my noble friend Lord Lawson of Blaby in his 1988 Budget.

The Labour Party found it necessary to include in both of its election-winning manifestos a pledge to retain 40 per cent as the top rate of income tax. We are all eagerly waiting to see if it repeats the pledge for its third manifesto. If it is not in the manifesto, we can be quite certain that the top rate will not be retained, whatever the Prime Minister's lips may tell us.

There are, of course, those who still do not recognise the enormous damage done by the confiscatory rates of tax under earlier Labour governments. The top marginal rate of 98 per cent, referred to by my noble friend Lord Lamont and others, which applied for five years between 1974–75 and 1978–79 kicked in at an income threshold which, when adjusted to today's prices, would be little over £80,000 a year. Think of it. If the former Chancellor of the Exchequer, the noble Lord, Lord Healey, had still been in power, anyone with more than £80,000 a year could be paying 98 per cent tax. Indeed, the noble Lord, Lord Healey, whose personality I have always admired, told me a while ago that he did not actually think the 98 per cent rate had done any harm to the economy, it had merely made people work harder. However, noble Lords may remember some of the economic headlines that reached even the tabloids—subjects such as unemployment, inflation and especially the brain drain, to which no one still refers.

There are those, including the Liberal Democrat Party, who believe that the top rate of tax could be higher. I believe that their bid at the moment is 50 per cent plus a local income tax, although I see noble Lords on those Benches shaking their heads. Perhaps we will hear more later. Even severe increases in income tax have a surprisingly low yield. Five years ago, the noble Lord, Lord McIntosh, in a Written Answer (Official Report, 19/12/02; col. WA 165), told me that if we took 50 per cent on income between £100,000 and £500,000, 60 per cent between £500,000 and £1 million and 70 per cent over £1 million pounds, it would produce a mere £3.1 billion. By 2002, that figure had nearly doubled to £5.7 billion. The number of taxpayers affected might be only 290,000, but I suggest that they are a pretty crucial wealth-creating group in this country.

There are those who would like to see a narrowing in the gap between the bottom 10 per cent of society and the top 10 per cent. I too would like to see more
 
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done for the bottom 10 per cent. However, although in theory higher taxes can do it, in practice I doubt if they can. It is hard to make the poor richer by making the rich poorer. It does not work. My noble friend Lord Saatchi made that point very clearly in his excellent speech.

To find an extra £5 billion or even £10 billion from better government is not impossible. The Conservative Party and my noble Friend Lord Saatchi's team have already identified savings much greater than that. Much can be done by cutting out over-regulation—and the present Government are becoming guiltier every passing day of increasing regulation. Sadly, I have no time to set out any examples, but I have many relating to Defra, which is one of the main culprits. I am looking forward to opportunities to take them up with the noble Lord, Lord Whitty, in the weeks to come.

It is particularly important to realise that we live in a tax-competitive world. In terms of income tax and many other taxes we are still one of the lowest in Europe. Some EU countries would like tax harmonisation. Rightly, HMG have resisted that. No wonder one of the directors of the French Ministry of Finance said to me years ago, "We have 30,000 Frenchmen living in Kent who are refugees from our tax system. We have got to get them back. We have to have a level playing field". "Ah, whose level?", I asked him. He smiled.

I have a few examples of EU taxation. Denmark has a 59 per cent top rate and threshold of only £28,000. Sweden has 57 per cent and Belgium has 54 per cent with a very low threshold indeed. There is competition in taxation, as we have heard, especially in corporation tax. The Baltic states, which have very low corporation tax, are getting terrible stick from the French who regard it as the most unfair form of taxation and the French are even trying to deny them structural funds as a penalty.

Another area where tax competition is important is VAT, which I think is an excellent tax. It collects a lot of revenue, it is economically efficient and relatively easy to collect and police. However, when I say that competition is important I do not in the case of VAT necessarily mean in rates. At 17.5 per cent, we are at the low end, well below Sweden, Denmark and Hungary, which have 25 per cent VAT, but above the three tiny countries that have 15 per cent. If I were Chancellor, I might be tempted to use VAT if I had to raise more tax. An extra 1 per cent would raise £4.4 billion and £11 billion if we went up to a 20 per cent VAT rate.

But there is another really important aspect of VAT, which, when fully utilised, can be a great economic benefit. I refer to the threshold above which people have to register for VAT. A high threshold helps small businesses where the main input is labour and the main clients are those who are not registered for VAT and do not therefore have the ability to claim back the VAT that they pay. Typical examples would be small tradesmen, such as plumbers or carpenters, hairdressers and others who are self-employed and do jobs for domestic households and private customers.
 
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At present, the UK has the highest VAT threshold in the EU, at £58,000. There is a proposal for an EU Council directive to amend the existing directive 77/388/EEC. Among other things, the new directive would raise the threshold to 100,000 euros or £70,000. The threshold in Germany is only £11,000, in France it is £51,000 for goods and £18,000 for services. Italy, Spain, Sweden and the Netherlands have no threshold so everyone has to register for VAT. I hope that the Chancellor will make full use of this EU change. It would encourage more entrepreneurs to enter the bottom rung of the business ladder, reduce the administrative burden on those who find record keeping a particular burden and please householders who are already clobbered by high council taxes.

The national insurance contribution is another example where we could have better economic management. We all know that the demographic and actuarial balance between earners and pensioners means that we all need to work longer. The actuaries work out that we should work until we are 72 to balance the books. At present pensioners pay no NIC on their earnings. Would it not be possible to offer some NIC relief, perhaps on a sliding scale, to employers employing older people?

Finally, a word about capital taxation. Thank goodness that we have avoided the wealth tax, which drives many wealthy and successful Frenchmen out of France, particularly when they retire. We had a narrow squeak because the noble Lord, Lord Healey, tried to introduce a wealth tax in 1976. As a number of noble Lords have said, inheritance tax is becoming a real political issue, partly because of the high value of houses.

Actually, I believe that we could use stamp duty as an alternative to inheritance tax. In a sense, stamp duty is a more voluntary tax. You choose how much to pay for a house and obviously work out what the price will be including stamp duty. If we increased the 1 per cent and 4 per cent rates by 1 per cent each that would give approximately £2 billion, which would enable the inheritance tax rate to come down to 20 per cent. That would be much better than raising the threshold because at the same £2 billion cost the threshold would have to be raised by an amount that would not exclude many houses in London. Anyone with a home costing more than £379,000 would still be caught by the tax.

I hope that we will hear from the noble Lord, Lord McIntosh, an indication of his attitude to the philosophy of taxation.

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