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Of course, we have one of the grand masters of the art replying for the Government today. The FT went on to say that,

We have done so with a candour not yet matched by either Labour or the Conservatives and we have done so with a sense of fairness absent from both.

One of the most powerful cartoons from the 1920s showed our society as a ladder coming out of flood water. On the top is an obviously wealthy toff, on the middle rung an example of the middle classes and, below him, with his head just above the water, a working-class man. The toff at the top of the ladder is saying, "Listen, I think we are all going to have to take one step down". The cartoon is headed "Equality of Sacrifice". We will not get through the storms ahead with that kind of equality of sacrifice. That is why I am proud that this party, a party of conscience and reform, is willing to put forward a fairer alternative to this House today and to the country whenever a general election is called.

11.51 am

Lord Howarth of Newport: My Lords, I agree with the noble Lord, Lord McNally, that economic policy should be developed in a spirit of fairness. I am sorry that he did not acknowledge that the Government have already moved to increase the top rate of income tax to 50 pence and all that the Government have done to help families on low incomes through the tax credit system.

It is clear that public expenditure will be more and more constrained as the Government wrestle to bring the deficit down to satisfy the markets and reduce the burden of debt on our children and our children's children. In due course-the timing, as the noble Lord said, will be a matter for very fine judgment-we hope that the private sector will successfully take over the strain of driving economic recovery and growth. Correspondingly, we should hope that the private sector will contribute more towards the provision of public services. More than ever, we will need a mixed economy in service provision.

It is ironic that services that we have kept in the public sector precisely because they are so important to our national life, notably health and education, were for so long chronically underfunded in consequence of the necessary limits on public expenditure. I am very pleased that the Government have increased spending as much as they have done on health and education, but year-on-year real terms increases, outstripping the growth of the private sector, could not go on for ever and retrenchment will have to happen.

If we are to maintain the level and quality of public services through the process of fiscal rebalancing, we shall need to enlist more resources from the private sector. I want to talk about only one aspect of this and its implications for the tax regime. We need to improve the incentives through the tax system for charitable giving. Noble Lords may ask, "What has this to do with a fairer and more progressive tax system? Aren't tax breaks for charitable giving a system of reliefs for

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the rich?", as the noble Lord, Lord McNally, just suggested. I would respond that they are a means to a fairer tax system because, to the extent that they relieve the pressures on the public purse, they lighten the personal tax burden that would otherwise fall unjustly down the income scale and they relieve the corporate tax burden that would otherwise damage employment. Tax reliefs that help to make possible better funded public services and more employment make for a fairer and more progressive society.

Perhaps I may propose a handful of specific suggestions. My noble friend Lord Mandelson has already signalled significant reductions in planned expenditure on higher education. A few years ago, a task force on voluntary giving to higher education, chaired by Professor Eric Thomas, Vice-Chancellor of Bristol University, submitted a report to the Department for Education and Skills. Its most important recommendation has not been acted on.

At paragraph 10 on page 7, the report states:

"The current tax relief rules prevent donors from deriving an income from, or retaining an interest in, gifts of assets or property to charities. With significant amounts of wealth tied-up in property, these rules are stopping the development of innovative schemes to encourage such gifts. In the USA such schemes, known as 'planned giving vehicles', are used to donate significant amounts to the higher education sector. They provide donors with tax relief and regular income in their lifetime whilst guaranteeing the institution capital on the death of donors. With widespread ownership of assets amongst alumni coming up to retirement, and a historically low number of offspring amongst which to leave this wealth, the time is right to develop such schemes in the UK".

There is a fuller discussion of planned giving on pages 47 to 49. Brief descriptions are given of specific planned giving vehicles that have greatly benefited American universities: remainder interests in personal residence, charitable gift annuities, pooled income funds, charitable remainder trusts and charitable lead trusts.

The report accepts that where a donor retains an interest in an asset gifted, the market value of that interest should be deducted before calculating the true charitable value of the gift for tax relief purposes. The key recommendation is that, instead of the whole gift being treated as ineligible for tax relief-as happens at present in the UK-as in the US, an assessment should be made of what proportion of the gift is charitable and should attract tax relief, with the remainder being taxable. With money raised in that way, universities could for example fund bursaries to support students from low-income households and outreach programmes to encourage more people from households and communities that have not traditionally gone to university to do so.

Tax relief on lifetime giving and on lifetime legacies is a theme also of the Campaign for Private Giving, led by the National Museums Directors' Conference, the Museums, Libraries and Archives Council and the Arts Council for England, supported by a wide range of cultural bodies, including the Art Fund, English Heritage and the University Museums Group.

As the House is aware, university museums and galleries face a particular threat that their core funding from HEFCE will no longer be protected. That core funding provides the platform for their fundraising and for the benefits that university museums and

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galleries bring to university teaching and research, as well as to schools, the general public and the wider cultural economy. The case of university museums and galleries illustrates very well the good sense of shaping policy to achieve a better complementarity between public and private funding. The Government exhort universities and cultural institutions to engage more in self-help, to raise more from private sources. They have a corresponding duty to ensure that the scheme of tax reliefs is precisely and efficiently designed to help them do that. That is even more important in a period when less national lottery money is available for the arts and heritage.

To recite the names of university museums and galleries-Whitworth, Hunter, Sainsbury, Courtauld-is to be reminded that great cultural institutions in this country were founded by philanthropists. That tradition must be sustained. Through gifts that can enrich the cultural lives of everyone, as well as through contributions to the betterment of education, of health, of the lives of people who are disabled or homeless, donors also encourage generosity in others, co-operation and the social cohesion to which the noble Lord, Lord McNally, rightly drew our attention several times. That is always precious, and particularly so in hard economic times.

There is much scope to increase giving among those who are well-off in this country. As the campaign says, we need to encourage people to give and we need to make it easier to give. In the cultural field, the Government should ease the complicated restrictions on what charitable organisations can claim from gift aid in relation to admissions charges and the benefits that come from belonging to supporters' organisations. Those restrictions make it harder to build up the crucial long-term relationships between institutions and donors. Importantly, also, tax relief should be extended, as in the USA, to cover the gift of objects that would be valuable additions to the collections of museums, galleries, libraries and archives. Our "acceptance in lieu" scheme works well if the donor has died. Comparable benefits through income tax and CGT relief should be available to the living who wish to donate important cultural objects.

In support of archives, the Government should improve the douceur scheme, so that it is extended to income tax and the benefit is split 50:50 between the writer and the collecting institution. In the heritage field, the Historic Houses Association, representing the owners of historic houses, who enable all to share in one of the greatest cultural legacies of this country, is very reasonably asking the Government for a tax regime which will support the maintenance of historic buildings for the public benefit.

If in politics we have moved beyond left and right, as my noble friend Lord Giddens has taught us to think, so in the provision of public services, we should move beyond the sterile antithesis of public and private. Collectively, we can find the resources to do what is needed.

Noon

Lord Goodhart: My Lords, I spent a good deal of my time in my practice as a barrister dealing with taxation. I was a member of the Institute for Fiscal Studies and sat on some of its committees. The amount

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of tax needed to be raised varies from year to year, but there are principles that apply to taxation that do not vary. One principle is fairness. Another is that, so far as possible-and I am afraid that that is not very far-taxation should be comprehensible. The classic example of unfairness was the poll tax. It was so unfair that even people who benefited from other people having to pay it recognised it was unfair. It plainly played a crucial part in forcing the resignation of Mrs Thatcher, as she then was, as Prime Minister.

It has been accepted for a century-indeed, ever since Lloyd George's famous Budget of 1909-that income tax, in particular, should be progressive; that is, that those who have higher incomes should pay a larger proportion of their income than those with lower incomes. I agree with that principle. I believe our party view on this matter is correct: those on the lowest income should not be liable for income tax at all and those with annual incomes above a starting point of £150,000 or £200,000 a year should, at least for the time being, pay a 50 per cent rate of income tax on the income above that starting point.

One point that concerns me is the recent increase in national insurance contributions. Employers' national insurance contributions are a tax on employment and should not be increased during a time of recession, but they have been. National insurance contributions as a whole need to be reconsidered. Few of those who pay NICs understand how they work. Most people think that NICs go into a pool that will pay for their pensions on their retirement. That is not the case. NICs do not go into a reservoir; they go into a pipe that sprays out money for current pensions. Recent increases in NICs should have been introduced as increases in income tax. They have been introduced as increases in NICs simply to conceal from the public the fact that the Government are reneging on their promises not to increase income tax. When the time arose, they should have said that it was no longer possible to stick to that promise. At the very least, employees' NICs should be paid on the whole of the employee's income. There should be no ceiling. Even so, NICs mean that more tax is payable on earned income than on investment income. That is not desirable, and it may be worth considering that employees' NICs should be absorbed into income tax, at least for those under retirement age. I should, I suppose, declare an interest as I am over retirement age.

Inheritance tax-IHT-is also a matter of fairness. Encouraging people to work in order to leave money to help their children is perfectly legitimate and effective but, taken too far, reductions in IHT would unduly protect hereditary wealth. There has to be a balance. At present, the balance is not unfair to those who pay inheritance tax. Indeed, I think we should consider restoring a tax liability on large gifts, not the ordinary year-to-year gifts, that are made more than seven years before the death of the donor.

I turn to making the tax laws comprehensible. I am afraid that the Prime Minister was disastrous at that when he was Chancellor of the Exchequer. He inherited a tax system that was rather good, due to a large extent to the noble Lord, Lord Lawson of Blaby, whom I am sorry to see is not here today. For example,

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the noble Lord produced a very sensible system for capital gains tax by making capital gains in real terms taxable at the same rate as income tax. That put an end to tax advisers trying endlessly to convert income into capital gains. The noble Lord's schemes also produced a fair basis of taxation for trusts.

Under the chancellorship of the now Prime Minister, capital gains tax and taxes on trusts have been made far more complicated and much less fair. Year after year, the Finance Act becomes more and more obese -a little tweak here, a small relief there, the blocking of a minor loophole somewhere else-making it incomprehensible to at least 99.9 per cent of the population: indeed, to fewer than that, because 99.9 per cent means that one person in every thousand understands it, and I do not think that the number is anywhere near that. This achieves next to nothing, and printing huge Finance Acts simply increases government spending and global warming.

Finally, and more seriously, we need to look at tax avoidance, which loses billions of pounds every year. I confess that my practice as a barrister involved a number of tax avoidance schemes, some of which were unbelievably complicated, and I found myself disliking them more and more as time went on. It is a sort of game. Clever tax lawyers or accountants invent some mystic way of converting income into capital or create imaginary losses as deductions from profits. After a short time, normally, the Government learn about the scheme and stop it by putting some new and equally incomprehensible provisions into the next Finance Bill.

We need wide-ranging, broad and general legislation to block tax avoidance by depriving all artificial schemes of tax benefits. That is easier said than done, I admit. Attempts have been made in some other countries and have failed, but they can succeed. The key to success is to create uncertainty as to what may or may not impose tax liability. Lawyers and accountants hate uncertainty because they cannot give definite advice, but a major blow to tax avoidance schemes was struck in 1981 by the decision by the then Appellate Committee of your Lordships' House in the case of Ramsay v Inland Revenue Commissioners. The decision was unexpected. It said that steps in a scheme that had no purpose except to create an artificial loss should simply be ignored. For a considerable time after that, many avoidance schemes were dropped because of the uncertainty as to whether they would succeed. We need to apply that principle more widely.

That is the way forward. Tax avoidance through artificial schemes is morally wrong and should always be legally wrong.

12.08 pm

Baroness Valentine: My Lords, I declare an interest as chief executive of London First, a non-profit-making business membership organisation that works to secure London's competitiveness as a location for globally mobile business.

I congratulate the noble Lord, Lord McNally, on securing this debate. From a business perspective, taxes fund investment, which is vital to our

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competitiveness: from heavy infrastructure such as Crossrail through to essential social services such as education. Notwithstanding the debate raging in America, few businesses in the UK would covet the health insurance bills that American businesses pay, and by providing the resource for a safety net taxes create the necessary social support for flexible labour markets. I therefore firmly believe that taxes, with a redistributive element, are the price that we pay in Britain for an effective economy as well as a civilised society. There are, however, very different views of what constitute fairer taxes and where the incidence of progression should lie, which is where the nub of this debate lies.

Many of the arguments for progressive taxation were forged in the Britain of 100 years ago when there was a large, poor working class, a relatively small middle class and a geographically immobile upper class, many of whom sat in your Lordships' House. Now Britain has a vastly expanded middle class. In 1939, 10 million people paid income tax; now the number is around 30 million. The rich-I might even say the nouveau riche-generate their wealth from geographically mobile talents and capital.

Colbert, Louis XIV's Finance Minister, said that taxation was the art of plucking a goose while generating the least amount of hissing. Like it or not, the rich these days will not come to or stay in this country if they are in for a disproportionate plucking. The recent KPMG study, showing that £1 million earners in the UK keep less of their income than in any other developed economy, was read worldwide. Would anyone who earns, or aspires to earn, that sort of money not be discouraged by such a cap on ambition? Of course, London and the UK score highly on many other factors, including quality of life, language, and multiculturalism. Who wants to go out on the town in Zurich?

While we can afford to have top rates which are not the lowest, we cannot afford to have the highest. In any case, there just are not enough rich people to provide us all with the levels of public expenditure we might like. The PBR estimates that the yield from income tax this year will be around £130 billion. The Treasury forecasts that the 10 per cent increase in the top rate from 40 per cent to 50 per cent will raise around £2.5 billion. That, too, is contested because it does not take account of other lost revenues; for example, through VAT when the money is spent. The Treasury may underestimate the dynamic effect of people working less hard, reorienting their tax exposure or just plain leaving the country. Nor does it take account of companies with headquarters outside Europe which are considering where to locate a European regional office, but which may discount the UK because it is considered to be a tax unfriendly jurisdiction. Treasury models never take account of what they cannot see.

The 50 per cent higher rate of income tax represents an important psychological milestone. According to colleagues who regularly work across the Atlantic or in the Far East, it is perceived as a reason why not to come to London. The Institute for Fiscal Studies calculates workplace tax rates for the highest earners at 66 per cent. If this issue is not addressed, we will see the converse of the Thatcher reduction in income tax;

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that is, a steadily declining contribution from the rich to the Exchequer in the medium term. By comparison, an increase in the basic rate of just 1 per cent raises £4 billion, according to the latest Treasury ready reckoner. The inconvenient truth is that funding good-quality public services requires substantial contributions from the many, not just the few. As we move to close the deficit, how we go about this matters.

My premise is that we want to close the deficit in the manner which does least damage to sustainable economic growth-the first and best way of raising revenue for the Exchequer and creating prosperity. International experience suggests that a mix of roughly 80 per cent spending cuts and 20 per cent tax increases may be the most sustainable way of achieving this outcome. So how will the 20 per cent from tax increases be realised? The Government need to be very wary of taxes which inhibit economic growth over the next few years. We have a high mountain of debt to climb and without economic growth we will be on a slippery slope rather than the cable car to the top. Those taxes which threaten international competitiveness-indeed, which fail to build on our unique position in the world-and those which discourage enterprise or corporate investment should be touched with extreme caution.

If we consider areas where our tax system is less fierce internationally or where we might provide leadership, two taxes merit further consideration. First, VAT could be brought more in line with the rest of the EU, particularly if it is levied on items where purchase is discretionary rather than essential. Secondly, if the UK led international moves towards green-based taxes it would raise revenue while discouraging unsustainable behaviour by business and consumers.

Whatever the next Government decide is the right solution to this conundrum, a vital component is the clear signalling of the way forward. There should be no sudden changes of tack and a thorough consultation with the marketplace to avoid those easy unintended consequences. The uncomfortable truth is that the heavy lifting may have to be done by taxes with a broad base, such as the basic rate of income tax or the standard rate of VAT. But I suspect that this is a view which is most easily expressed from the Cross Benches.

12.15 pm

Lord Giddens: My Lords, I am in the process of writing a book about political jokes and I dipped into my books to find jokes about taxation, some of which, I suspect, have been told already. For example, income tax forms should be printed on Kleenex because so many of us have to pay through the nose; of course you cannot take it with you, but with inheritance tax you cannot leave it behind either. This shows two characteristics of jokes about taxation: first, they seem to be uniformly weak, as noble Lords will have noticed; secondly, they are all about the imposition of tax by the state on individuals as a kind of arbitrary, dogmatic extraction of revenue without legitimacy.

The obverse should be seen to be the case-I am pleased that several previous contributors to the debate have said so-which is that taxation is a key feature of citizenship and a means of social solidarity. Countries that have lax, low taxation rates do not have high

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levels of social cohesion. Taxation, therefore, should be seen as a positive obligation of citizenship. This observation is also true of progressive taxation. In all industrial countries, the distribution of income and wealth is more equal post rather than pre taxation.

There is also a close and notable correlation between taxation as a proportion of GDP and the egalitarian nature of a society. Countries which are reasonably or strongly egalitarian all have tax ratios of more than 40 per cent of GDP, some substantially over that proportion. Incidentally, we know from Scandinavian countries that a higher ratio of taxation to GDP does not inhibit economic growth and prosperity if you get your act right.

When Labour came into power in 1997 it was faced with a specific problem-that over the previous 20 years the level of economic inequality in this country had risen more steeply than in any other industrial country apart from New Zealand, which also followed at that point liberal free-market policies. In responding to this, however, Labour Governments since 1997 have been wise in not responding with a knee-jerk leftism. It is important to emphasise that progressive taxation is not only about tax rates; it should be understood as the overall impact of a taxation system on the distribution of income and, therefore, the distribution of economic inequality.


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