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The Duke of Montrose: My Lords, I thank the Minister for bringing these measures before your Lordships' House. They are very useful and appropriate
 
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and we can offer them broad support. I thank the Government for being prepared to incorporate the wording that has been found to be necessary in Scotland. It will be of great benefit to the Scots furth of Scotland that they will be able to apply some of these regulations using the same operative definition as exists in Scotland.

The formal part of the order rightly quotes the powers under which this takes place as being contained in Sections 104, 112(1) and 113. I am not technically skilled in these matters but it appears to me that Section 104 is primarily concerned with what the Scottish Parliament can do. If I am educated further, perhaps I will find that there is a Westminster element. However, I feel that Sections 112 and 113 allow government Ministers to help to sort out these problems when they become a little complicated.

As to the Education (Additional Support for Learning) (Scotland) Act 2004 (Consequential Modifications) Order, it is unfortunate that it has been found that the Educational Needs and Disability Act 2001 needs this fairly radical reassessment. But the last thing we want is for any education authority to feel that it can discriminate against disabled children and therefore it is good to have this measure brought forward. We are pleased to give it our support.

Lord Addington: My Lords, having considered these orders—and always being slightly wary about the law, and Scots law in particular—I have come to the conclusion that both are basically benign, if not positive. The more I have heard of the discussion and the more I have looked at the issue, I have come to that conclusion.

It is probably worth mentioning that the holistic approach in the education part of these orders is encouraging. We should always consider it. It does a better job of ensuring that we do not refer only to problems within a classroom but look outwards from childhood and on into adulthood. Anything that enables that process to go forward should be encouraged.

Lord Evans of Temple Guiting: My Lords, I am most grateful to the two noble Lords who have commented on the order.

The noble Duke, the Duke of Montrose, raised an interesting but technical point about the use of Section 104. I can only repeat what I said—if we think we need to say more I shall write to him—that Section 104 orders are used when changes are required to be made to the law of England and Wales and Northern Ireland, or when modifications of reserved law are required as a consequence of legislation in the Scottish Parliament. Such changes would be outside the legislative competence of the Scottish Parliament. For me, that answers the question.

Section 104 is the main power used to make such changes to law that is outside the competence of the Scottish Parliament. The other sections mentioned by the noble Duke are enabling powers.

We are grateful to him for the comments he made in welcoming the adults with incapacity order. It is unfortunate that the Disability Discrimination Act
 
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needs reassessment, but the Act is reserved and this could not be done by the Scottish Parliament. It is being done here in time for the enactment of the Scottish Act.

On Question, Motion agreed to.

Education (Additional Support for Learning) (Scotland) Act 2004 (Consequential Modifications) Order 2005

7.47 pm

Lord Evans of Temple Guiting: My Lords, I beg to move.

Moved, That the draft order laid before the House on 25 January be approved [8th Report from the Joint Committee, Session 2004–05].—(Lord Evans of Temple Guiting.)

On Question, Motion agreed to.

Income Tax

Lord Patten rose to ask Her Majesty's Government what they consider to be the benefits and disadvantages of a flat rate of income tax.

The noble Lord said: My Lords, I am glad to have the opportunity to ask what I believe is the first Unstarred Question of the new Parliament. I particularly look forward to the responses that will come from the three Front Benches. I shall expect nothing of the Minister other than a stalwart defence—and, indeed, advance—of the status quo, with all its glorious baroque, Brownite complexity.

I am particularly tickled by anticipation of what the noble Lord, Lord Newby, will say from the Liberal Democrat Front Bench. I have not quite calibrated him in the fast-changing Liberal scene. It is a more fissiparous party than it once was—a rather binary trend—and I am not sure whether he is an "Orange Book" Liberal or an old-style Liberal. A great many interesting things have been coming out of the Liberal Party on benefits and taxation, and perhaps the noble Lord will declare himself as more of a radical "Orange Book" Liberal than not.

Most of all, I look forward to hearing from my noble friend Lord Roberts of Conwy, who will speak from our Front Bench. He is that rare thing, much to be cherished: the radical Welsh Tory. No one does this better beyond Offa's Dyke than my noble friend. We are all licensed to think these days by my right honourable friend the Leader of the Opposition in another place, and I hope that my noble friend will seize the opportunity with both hands and swing the bat in what he has to say at the end of the debate.

Indeed, with respect, it is time that all of us in the political classes, from left to right, engaged rather more in deeper political thinking. Most political thinking of an innovative kind seemed to stop—with a few noble and notable exceptions—round about 1990.
 
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My party has not done very much since, and I must offer up a heartfelt mea culpa for my own indolence in the matter.

It is clear that New Labour has come to the end of its mining, borrowing and refining of what was essentially Conservative-driven thinking in the 1970s and 1980s in so many areas. Indeed, if the Chancellor of the Exchequer wished to leave himself a lasting memorial it would be to introduce the kind of generous tax breaks for individuals and corporations that would enable them to fund think tanks more generously, whether Conservative, Labour, Liberal Democrat, Green or flat Earth, rather as exist in the United States. Independently funded, needling, provoking, irritating, sometimes maddening thinking is exactly what would benefit the body politic in the United Kingdom today.

This debate, and my advancing of a flat tax to which I shall now turn, is designed to do exactly the opposite—to obviate the need for yet one more complicated tax break measure, some sort of new wheeze that would introduce one more strand of complexity into our ludicrously complex and costly taxation system. We should address ourselves to rethinking the way in which individuals and society relate to taxation.

There is a historical inevitability behind the eventual introduction of a much simpler form of taxation in this country, best encapsulated in the motif of a flat tax, to which people, society and corporations can much more readily relate, recognise as giving government adequate revenues for what they should be doing and accept as being as socially just as possible. So I would like to ask the Minister, as he makes his reputation in this place, to be as open-minded as possible in exploring what comes next.

Flat taxation has a number of advantages that I shall now attempt to iterate. First, it is simple; secondly, it is transparent; thirdly, it makes self-certification child's play; and fourthly, there are just two basic levers to pull to make it work. The first lever is to set the level of personal and/or corporate taxation at 20, 25, 30 per cent, or whatever. The second lever is the level at which the personal allowance is set: it could be £10,000, £15,000 or £20,000. Fifthly, the flat tax system is very progressive. If implemented, it would take a huge number of taxpayers on low income straight out of tax, reducing their dependency on sometimes very complex means-tested, income-related credits and benefits that are socially, economically and politically undesirable.

There is no opportunity for me in a properly time-limited 10-minute speech to define the right level of flat tax for the UK in the year 2005, but I can at least skim the surface. In the year ending April 2004, the median gross earnings for full-time employees on adult rates of pay were £22,060, but with taxation beginning after the first £4,745. Under a flat taxation system, the level could be fixed at, say—I bring this before your Lordships for illustrative purposes only—25 per cent, and the level at which taxation began could be between £10,000 and £15,000 of earnings. That would take
 
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something between 10 million and 15 million people out of taxation altogether, depending on the levels chosen and the way in which the two levers are pulled.

Well, the Left—or what is left of the Left—might say that 10 million or 15 million people taken out of tax is all very well, but those advantages would be offset by the fact that some of the rich would become richer, government revenues would be reduced and the dreaded cuts in social provision would emerge in health and education, all apparently as a direct result. Unfortunately, the very word "cuts", which is so deeply embedded in our political rhetoric, means that so much of the territory of sensible debate in this country is now a no-go area, a rhetorical no man's land. The left of centre threatens that it would mean the end of civilisation as we know it; the right of centre has historically—over the past eight years anyway—cowered like a rabbit before a stoat in front of the onslaught about alleged cuts in social provision. And so our grotesquely complex system continues, with all its asymmetrical effects, leading to disincentives and wasted effort by all those involved.

A flat tax system would be a great incentive to investment, to the starting up of new enterprises. The tax environment today gives all too little relief to people who lose in business and taxes profits for preference every time. A flat tax system would also reduce the onerous effects on employment and job creation of what is known, in the unlovely argot of the economist trade, as the tax wedge, which is such a disincentive to employment. The tax wedge damages the employment prospects of the less skilled and, worse, of the unemployed trying to get their feet on the paid ladder because the gross cost to a company or individual entrepreneur starting up a business might well be worth more than the work itself. Anyone pursuing British business, with experience in British business, such as the noble Viscount, Lord Chandos, would readily see the problems that the tax wedge causes.

A flat tax system would also mean that the tide to create more and more civil servants would turn, ebb and lose its velocity. Those excellent, highly trained people in the Treasury and elsewhere could be usefully redeployed, many in the productive parts of the economy, a few in the other parts of the public service.

A flat tax system would have exactly the same effect on the ever-burgeoning number of those in the professional services firms—I know that the noble Lord, Lord Newby, has some experience—who are equally locked into the non-productive industry of tax planning and advising on legitimate tax avoidance, expending much unnecessary effort. Indeed, those who wish to avoid tax and those who advise them seem to be locked into a mutually pointless war of attrition, worse than anything we saw on the battlefields of the Somme—a kind of arms race of the tax avoidance industry and those in the tax world trying to stop avoidance. That contributes nothing to national well-being, and it ties down far too much talent in fruitless tax trench warfare.
 
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Is all this theoretical—a Conservative taking the opportunity of the few months of thinking that we have been allowed? No, it is working, not only in some small island states but in at least four countries in the European Community. Estonia, most notably, has had an extraordinarily successful flat tax system since 1994 and is now reducing it. There, the tax take as a percentage of GDP has not been slashed. There have not been cuts, there have been improvements. Although a few of the rich might well have got richer, there has not been the devastation to the social structure of Estonia that many people would think.

I end on this note: inequalities, particularly in a period of taxation transition, may occur, but let me tell your Lordships two things about economic inequalities. First, Labour has, through its tax and benefits system, created more, not less, inequality since 1997. Secondly, I believe firmly that economic inequalities often happily subvert social inequalities, giving some of the best routes to what used to be called betterment and those who wish to see the betterment of our country.

There needs to be deeper thinking on taxation, and serious consideration should be made by the body politic across the political divide, looking at the benefits, and the disadvantages, of a flat tax system.

7.58 pm

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