Income Tax

David Gauke Excerpts

Wednesday 28th November 2012 Commons Chamber

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

I beg to move an amendment, to leave out from “House” to the end of the Question and add:

“notes that the previous administration maintained the top rate of income tax at 40 per cent for 13 years, only increasing it to 50 per cent in April 2010, one month before the Government was formed, and that this new rate was damaging to UK competitiveness; further notes that the independent Office for Budget Responsibility certified the Government’s central estimate that reducing the 50 per cent rate to 45 per cent would have a cost to the Exchequer of £100 million per year and that measures introduced at the last Budget increased taxes on the wealthy by some £500 million; recognises that in contrast to the previous administration that abolished the 10 per cent rate of tax which increased taxes on more than five million low earners, the Government is cutting income tax for 25 million low and middle earners while taking two million low-paid people out of income tax altogether through increasing the tax free personal allowance; recognises that every Budget under this Government has increased taxes on the rich, including a new stamp duty land tax rate for properties over £2 million, an annual charge on these properties, introducing a cap on previously unlimited income tax reliefs and an extension to the capital gains tax regime, clamping down on tax evasion and aggressive tax avoidance, and bringing in a General Anti-Abuse Rule; and welcomes the introduction of the Triple Lock, which led this year to the biggest ever cash rise in the state pension.”

The amendment is in my name and those of my right hon. and hon. Friends. After all the anger and bluster the House has just heard, may I bring to its attention a few pertinent facts? Hon. Members have been told that the 45p rate for high earners is too low, which ignores the fact that there was a top rate of 40p for all but 36 of the 4,758 days of the Labour Government. We have been told that the rich should pay more. That ignores the fact that other changes in the tax system introduced in the Budget will raise five times the amount of tax from the wealthiest than the 50p rate raised in practice. We have heard that moving to 45p is wrong, but the Opposition will not commit to reversing it after the next general election.

[Sheila Gilmore]

Will the Minister confirm a report that I read in, I believe, The Sunday Times, which stated that the number of property sales above the level of increased stamp duty has fallen since the Budget? When will he produce figures on whether such so-called additional taxes raise any additional money?

[Mr Gauke]

I note with interest that the hon. Lady appears to be arguing that an increase in tax can sometimes lead to a loss of revenue. She is right—that can sometimes happen. As it happens, the revenue on stamp duty land tax is holding up all right, but she makes an important point, one that I hope is understood more widely in her party. I am pleased that the Opposition are keeping open the option of not increasing the 45p rate of income tax. Although it is right that those with the broadest shoulders bear the greatest burden—I will set out how the Government are making that happen—it is also necessary to ensure that the UK is competitive in attracting wealth creators to locate and stay in this country. A Government that are serious about the UK winning the global race for growth should be very careful about pursuing a policy that places a huge “closed for business” sign over our economy. That is exactly what the 50p rate of income tax was—a “closed for business” sign. I hope that at the next general election there will be a consensus that we do not want to re-erect that sign over our economy.

[Mark Pritchard]

The new growth guru in Europe is of course President Hollande of France, who is well known to the Opposition Front Bench. I wonder whether my hon. Friend thinks that the higher 75p rate of tax in France has helped entrepreneurs and business people to stay within France, or to flee to other shores, such as the low tax economy in Britain.

[Mr Gauke]

My hon. Friend raises an interesting point. Perhaps I should not be drawn too much into discussing the domestic policies of one of our close European allies, but it will be interesting to see the impact in France of a very high rate of income tax, and whether people will move out of that country and we see any additional revenue as a consequence.

[Mr Graham Stuart]

I appeal to my hon. Friend not to be too harsh on the Opposition. Does he not understand that the Labour party now gets 90% of its funding from the trade union movement? If the trade unions insist that there should be a 50p tax rate—even if it does not raise money and undermines public services—it may feel obliged to put it in its manifesto regardless.

[Mr Gauke]

My hon. Friend displays an unusual degree of cynicism. I am still hopeful that Labour Members will share with us a desire for the UK to be a competitive environment for business that attracts high net worth and high-earning individuals to locate and pay tax in the UK, and that we can raise more revenue from them. Perhaps, however, my hon. Friend will turn out to be right and they will be driven more by their trade union paymasters.

[Paul Flynn]

Did the hon. Gentleman see the filmed interview with the treasurer of the Conservative party who demanded £250,000 for an invitation to dinner with the Prime Minister? Does not that give us an idea of the source of the Tory party’s funds?

[Mr Gauke]

I suspect, Mr Speaker, that you would not want us to be drawn into a lengthy debate about party funding. All I can say is that the Conservative party and this coalition Government will make decisions on tax policy on the basis of ensuring that we have a fair and competitive tax system, and that is exactly what we are doing.

[Andrew Bridgen]

Does the Minister agree that when data show that the top 1% of earners already pay 28% of all income tax, we want to encourage them to stay, and, indeed, attract other high earners to our economy?

--- Later in debate ---

[Mr Gauke]

My hon. Friend makes an important point. Our income tax receipts are dependent on high earners, and that will continue to be the case. We will continue to raise substantial sums from those high earners, but we must ensure that the UK is an attractive place for them to be located. At a time when labour mobility is perhaps greater than it has ever been before, particularly for such individuals, we have to recognise that the UK is competing for talented individuals and business investment, and that a 50p rate of income tax does not help us do that. That is the essence of the reason why we reduced the rate to 45p.

It may be helpful to provide some background to the policy we are debating. As the House will be aware, the previous Chancellor, the right hon. Member for Edinburgh South West (Mr Darling), announced in his 2009 Budget that the additional rate of income tax would come into effect in April 2010. It was accepted that there would be behavioural change as a consequence of that. The shadow Chief Secretary referred to the figure of £3 billion, which she alleged was the cost of cutting the 50p rate to 45p. She got that figure by looking at the static cost—not including any behavioural change whatsoever. It is worth pointing out that when the previous Government announced the increase from 40p to 50p, they assumed a behavioural change that would mean that rather than raising £6 billion, approximately only £2.5 billion would be raised. That was the assumption made by the previous Government. Such a substantial behavioural impact is inevitably bad for the economy. Not only were we left with an economy in a disastrous state and a huge budget deficit resulting in public sector debt growing very rapidly, we were left with a tax system that was highly uncompetitive and drove away big contributors to tax revenue.

[Andrew Bridgen]

I thank the Minister for giving way again—he is very generous. Does my hon. Friend agree that having a high income does not guarantee friends, happiness or health but does guarantee choice, and that one of the major choices is where one is domiciled for tax?

[Mr Gauke]

My hon. Friend is right, and harks back to what I was saying a moment ago. We have to bear in mind that the ability of high-earning individuals to be mobile has increased over time. It is striking, for example, that the number of UK citizens moving to Switzerland in 2010 increased by 29%. That demonstrates the fact that individuals will respond to fiscal incentives. They will respond to one of the highest rates of personal tax in the developed world, which was the position that the UK was in.

[Charlie Elphicke]

Is not the Minister’s point thrown into sharp relief by the fact that millionaires were paying approximately £13.4 billion before that measure was introduced, and that that went down to £6.5 billion? Is it not dangerous for our public finances to start jacking up the rate and driving people out of the country, as the previous Government did?

[Mr Gauke]

My hon. Friend sets out some dramatic numbers. They are the correct numbers, although it would be right to say that an element of that had to do with forestalling and people moving their income around. However, Opposition Members should not take great comfort from that. They demonstrate the enormous amount of behavioural change as a consequence of high rates. That level of forestalling is striking. What is also striking is that when the previous Government made their estimate of what would happen with income, no allowance was made for forestalling whatsoever, which again demonstrates flaws with the methodology that was in place.

[Lyn Brown (West Ham) (Lab)]

The hon. Gentleman makes an erudite argument, as always, and he sounds plausible, but can he not see that ordinary families, who are losing at least £500 per year, facing difficulties buying food and struggling with petrol costs, find it really hard to stomach why the Government are choosing to give £107,000 per year to people who are earning £1 million? It does not make sense to them. It does not make sense to us.

[Mr Gauke]

In the Office for Budget Responsibility assessment there is a tax cut of £100 million that goes to those who are paying the 50p rate.

In the same Budget package, however, there are measures to deal with stamp duty avoidance on properties over £2 million, a stamp duty increase on properties over £2 million, which is bringing in revenue, and caps on reliefs directed at high-earning individuals. So who is paying the stamp duty and not benefiting from the reliefs as before? They are high-earning individuals. They are paying for the cut in the 50p rate five times over as a consequence of the measures announced in the last Budget. That is the explanation to the hon. Lady’s constituents, and mine, of how the cut is being funded.

[Tom Blenkinsop (Middlesbrough South and East Cleveland) (Lab)]

Will the Exchequer Secretary confirm that the expectations in the OBR’s assessment in March on income tax and VAT receipts are not being met?

[Mr Gauke]

The hon. Gentleman tempts me down that route, but we have an autumn statement next week on that matter, when we will hear the OBR numbers.

[Jonathan Edwards]

Obviously, my party does not agree with this measure and voted against it following the Budget statement, but, if the Treasury intends to pursue this line of argument, when will it drop the rate to 40p?

[Mr Gauke]

I admire the hon. Gentleman’s ambition. To be fair, he did not make this point, but, when Labour voted on this matter in the Finance Bill debates, effectively they would have got us to a 40p rate—but there we go. It was HMRC’s assessment that a reduction from 50p to 45p would be relatively inexpensive, and, given the damage the 50p rate was doing to our competitiveness, we believed it would be well worth doing. Of course, all taxes are under review, but the 45p rate remains in place.

[Barry Gardiner (Brent North) (Lab)]

I understand the Exchequer Secretary’s point. He calculates that the reduction in the top rate of tax has been, in his eyes, more than compensated for—five times over, he said—by the other taxes. How, then, will the reduction in the top rate of tax provide the incentive to those taxpayers he wants to domicile here? How will this fivefold increase in tax not send them rushing abroad? I thought that was precisely his point.

[Mr Gauke]

Very simply, different taxes have different elasticities. It is perfectly simple: people are more likely to respond to high direct rates of income tax than to stamp duty. Of course, the OBR took into account the behavioural impacts when it assessed how much revenue would be raised on, for example, stamp duty land tax. As Tony Blair sets out in his memoirs, which I was flicking through last night, direct rates of income tax are not a good way of raising income.

[Charlie Elphicke]

I thank my hon. Friend for giving way once more; he is being incredibly generous.

On the point about elasticity, is income tax not notorious for raising more revenue, the more it is cut? We saw that throughout the ’80s, when it fell from the sky-high levels of Labour to 60% and then 40%. Each time, the take increased. Is it not the case that, if we cut the rate of income tax, broadly we end up increasing the take?

[Mr Gauke]

It depends where we are on the Laffer curve, but, if we have the highest rate of income tax of any of the G20 economies, we are clearly in a vulnerable position. That was the position we inherited and why we were right to remove it.

I want to touch on the HMRC report laid before the House of Commons at the time of the Budget. It contained the assessment of the 50p rate. It showed that the additional rate was distortive, inefficient, and damaging to our international competitiveness, and that the previous Government greatly understated its impact on the behaviour of those affected. High earners were able to bring forward about £18 billion before the new rate came in, which the previous Government did not account for in their revenue projections. The 50p rate has failed: it has been criticised by business, damaged the UK economy and raised much less for the Exchequer than the last Government had hoped. In fact, it could have generated a net loss. The HMRC report estimates that it raised at most only £1 billion, and, when indirect taxes are taken into account, could have raised less than nothing.

The Government have decided not to stifle the economy further and to show that we are open for business, which is why we will reduce the rate to 45p from April next year. This move to 45p, based on the central estimate of the taxable income elasticity, will cost only £100 million—a small price to pay to regain some of the international competitiveness we lost as a result of the previous Government’s decisions. In fact, when indirect taxes are taken into account, this move could even result in a positive yield.

The 50p rate not only harmed our economy and contributed little to the Exchequer, but placed us in the unwanted position of having the highest statutory rate of income tax in the G20. Our decision to lower the rate will see us drop below Australia, Germany, Japan and Canada. In 2011-12, the top 1% of taxpayers paid about 25% of income tax revenues, and for over a decade our dependence on them has grown. Owing to this considerable economic contribution to the UK, each highly mobile earner who is driven out by internationally high tax rates hits the Exchequer and results in less revenue for public services.

Opposition Members might not care when internationally mobile individuals leave, but, given our dependence on high earners, we want them working in the UK, creating wealth and paying taxes, not moving abroad or retiring early. A competitive tax environment is unambiguously in the UK’s interests, and failing to act decisively as we did would be to ignore our long-term interests, as the 50p rate continued to drive high earners out of the country.

[Mr Anderson]

Has any assessment been made of how many people have become highly mobile and left, how many will leave and how many will come back?

[Mr Gauke]

The HMRC assessment set out the impacts that had already emerged. I highlighted the number of people moving to Switzerland and so on. The assessment of the behavioural impact was that about one third to half was a consequence of reduced economic activity—either people retiring or moving outside the UK. That is a considerable impact. It is not good for the UK economy, and the sooner we take steps to address it and set out plans to get rid of the 50p rate, the better.

[Andrew Bridgen]

Following on from the Exchequer Secretary’s last point, has the Treasury assessed the impact that the top rate of tax was having on dissuading foreign people from coming here?

[Mr Gauke]

That is also included in the HMRC assessment of the consequences for economic activity. My hon. Friend raises an important point, however: it is not just about people leaving the UK, but the fact that people would not be moving to the UK, thus damaging our reputation as a business centre. I am pleased to say that under this Government we now have a competitive top rate and corporate tax system. That is why, just this week, UBM and Seadrill announced they were moving to the UK—because it is a good place to do business, and our tax system plays a part in that.

We have taken measures to ensure that high earners make a fair contribution without resorting to punitive and populist measures that damage the economy. We have raised revenues from the most well-off in society in every Budget since we came to power, creating a fairer tax system—one where those with the broadest shoulders bear the greatest burden. That has included increases in capital gains tax and stamp duty. We have also taken a tough stance on avoidance and evasion. For example, we introduced the disguised remuneration legislation in the 2011 Budget, raising £750 million a year, mainly from higher and additional rate tax payers. That is seven and a half times the amount that was being raised by 50p as compared with 45p—and by the way, the Opposition voted against it.

In the 2012 Budget we set out policies on tackling tax avoidance. All our Budgets have included firm measures to close loopholes and strengthen HMRC’s ability to deal with tax avoidance.

[Mr Michael Meacher (Oldham West and Royton) (Lab)]

Will the Minister give way?

[Mr Gauke]

I will give way to the right hon. Gentleman, who I know is interested in this issue.

[Mr Meacher]

If the Minister is trying to make a point about how tax loopholes are being closed, how can he possibly justify changing the controlled foreign company rules in 2013-14 to reduce the rate on multinationals with a finance company in a tax haven from the current 23% to just over 5%?

[Mr Gauke]

The CFC reforms are making the UK much more attractive for businesses headquartered here. The House will remember that in 2007 a number of businesses left the UK. Now some of them are returning, including UBM, which announced just two days ago that it was moving to the UK. Artificial diversion of profits is dealt with under the reformed CFC regime. The old CFC was past its sell-by date. It was unattractive and was driving businesses out of the UK. Indeed, there has been cross-party consensus on the need to reform the CFC legislation. Because of that, we are now seeing businesses moving to the UK, which I welcome.

We have taken steps to deal with tax avoidance. I would like briefly to touch on the issue of pensioners, as the shadow Chief Secretary raised it and it is touched on in the motion. The House should remember that we have seen a substantial increase in the state pension this year. Indeed, the increase has been £120 a year greater than it would have been had we stuck with the plans inherited from Labour. The abolition of the age-related allowances will not result in any cash losers. There are those who are affected by the withdrawal, but they will benefit from the largest ever cash increase in their personal allowance—a real-terms tax cut of £170. Since coming to power, we have taken steps to increase the personal allowance. That is the really big tax cut that dominated the last Budget and it is benefiting millions of people.

We have taken steps to cut fuel duty, with pump prices now 10p a litre lower than they would have been under the previous Government’s plans. We are supporting those on benefits by improving incentives to move into work and increase the number of hours they work. The introduction of universal credit will see the number of people losing more than 70% of their earnings when they move into 10 hours of work fall by 1.2 million. In addition, the single taper in universal credit will ensure that practically every household will face a marginal tax rate of less than 80% when they increase gross earnings, compared with 500,000 under the current system.

In all parts of this House we agree that those who can most afford to should contribute their fair share to the Exchequer, but those in opposition who insist that we should do that through a 50p rate that damaged our economy, sacrificed our international competitiveness and did not raise the revenues intended are making a big mistake. Those advocating a return to a 50p rate have to answer this question. Given that it will not raise any significant amount of revenue—it may even cost money—why do it? It is not about deficit reduction or economics, and it is not even about getting more from the wealthy, because there are better ways to do it; it is all about the politics. But at what cost? At a time when the UK must compete to prosper in a globalised world and when we have a choice to sink or swim, those who advocate a 50p rate are taking the easy choice—short-term populism triumphing over increased competitiveness; a traditional message of “bash the rich” prevailing over the need to attract and keep wealth creators in this country. This country’s route to success will not be through the lazy populism we have heard from Labour. Instead, we have taken steps to ensure that those with the most contribute the most, but also ensured that we have a tax system that enables us to compete on a global stage, creating a fairer tax system that still shows that the UK is open for business.

[Several hon. Members]

rose—