Finance (No. 4) Bill

Edward Leigh Excerpts

Monday 16th April 2012 Commons Chamber

[Rachel Reeves]

My hon. Friend speaks from her knowledge of her constituency in Hull and of the East Riding of Yorkshire, which will be particularly affected by changes to the caravan tax.

I was in Leicester on Thursday last week with my hon. Friend the Member for Leicester South (Jonathan Ashworth), speaking to small businesses which will be affected by the changes to VAT on hot snacks. Many businesses are worried, about both the additional tax they will have to pay and the additional bureaucracy of form-filling. As hon. Members said, it is not at all clear at which point VAT will stop being charged. What temperature does the food have to be, or by how much must it have cooled down before the tax rate goes to 0% from 20%?

We will also have a chance this week to debate and vote on important tax simplification measures. Given the generous decision of the Chancellor to simplify the tax arrangements of 4.4 million pensioners, I am surprised that they are not more grateful. That tax simplification will cost pensioners £83 a year on average and will cost hundreds of thousands of people who are coming up for retirement next year up to £322 a year.

The Chief Secretary referred to the Office of Tax Simplification. Its tax director has registered his concern about the changes to the tax allowance for pensioners and has said that the Government’s claim that they were only following its recommendations

“was not 100 per cent accurate”.

Meanwhile, Age UK was moved to write to the Chancellor about the change to tax allowances for pensioners. It stated:

“Age UK supports the OTS review of pensioner taxation and was very pleased to have been invited to be represented on the consultative committee. However given the OTS was set up with the aim of providing”

the Chancellor

“with independent expert advice on simplification we are very surprised and disappointed that”

he has

“announced a change to simplify the system without waiting for that advice.”

Contrary to coalition spin, this tax simplification will hit not those with big pension pots, but people with personal or occupational pensions that pay around £5,000 a year. It will hit people who worked in ordinary jobs for modest salaries, and who made sacrifices during their working lives to put away just enough to give themselves a small pension, which means that they do not need to depend on means-tested benefits in retirement. It is simply not true that they have been insulated from the effects of the current economic climate and other changes to taxation. Pensioners have been hit hard by VAT, quantitative easing, cuts to services that they rely on—not least the national health service—and massive increases in the heating and electricity bills for their homes. Older people deserve better than this mean-minded, penny-pinching measure. If Government Members agree, they will have a chance to vote down the granny tax later this week.

It tells people all they need to know about this Government’s priorities and the balance of power in the coalition that when the Deputy Prime Minister said that he would agree to cut the 50p rate if it was paid for by a mansion tax and the Opposition said that we would support a mansion tax if it was used to relieve the pressure on ordinary hard-working families, the Chancellor forgot the mansion tax, cut the 50p rate anyway and paid for it with a raid on pensioners’ incomes and a raid on charities.

Finally, we will offer the Chancellor a last chance to make good the great omission of the Bill—its failure to offer a shred of hope to the 1 million young people who are desperate to find work and its failure to do anything about the fact that long-term youth unemployment has more than doubled in the past year. Our amendment will open the way for the funding of a guaranteed job for every young person who is out of work for more than a year—a job that they would have to take up. That is the kind of measure that our country is crying out for. It would change the lives of thousands of young people and transform the prospects for our economy. It could easily be funded by raising new resources from the banking sector, which still squanders billions on bonuses while doing little to support British businesses and families. We will therefore offer Members a chance to vote for the reinstatement of the tax on bank bonuses to fund the creation of 100,000 new jobs for young people and the construction of 25,000 new affordable homes.

[Mr Edward Leigh (Gainsborough) (Con)]

If the 50p tax rate was such a painless revenue raiser, why did the Labour Government take 13 years to implement it?

[Rachel Reeves]

As the Chancellor once said, we are all in it together, and if we have a deficit to reduce it is right that those with the broadest shoulders bear a little more of the burden. That was why the former Chancellor increased the top rate of tax to 50p. This Government have reduced it and are instead asking millions of ordinary families and pensioners to pay more so that millionaires can pay less. That is their priority; the Opposition’s priorities are very different.

--- Later in debate ---

[Mr Edward Leigh (Gainsborough) (Con)]

Everything that the hon. Member for North Ayrshire and Arran (Katy Clark) says would be fair enough if what this Government were doing were any different from what a Labour Government would have been doing at precisely this time. The public sometimes lose track of the reality of the situation that we are in. We politicians talk in terms of billions or—perhaps soon—trillions of pounds, but a constituent put it to me like this, offering a better way of describing our situation. It is as if we were somebody who had an income of £50,000, who had knocked up a credit card debt of another £50,000, and who had promised to repay £4,000 of it but was actually repaying only £2,000. We are in a dire financial situation. I suggest that whoever were in government at this time would be doing much the same. In fact, I suggest that what the Government are doing is the bare minimum necessary to maintain market confidence.

We have had a lot of debate about the ratings agency, and I am sure that the Labour party is gearing up to tease the Government if there is any decline in our rating score, yet if we did anything less than what we are doing to address this deficit, we would be in dire trouble with the markets, and I have no doubt that interest rates would eventually have to rise, with all the consequences we know about for businesses and for ordinary mortgage payers. I therefore do not accept this apocalyptic view of the Government’s proposals. As I say, the Government are doing the bare minimum necessary to maintain market confidence.

I do not accept either the argument put forward by the hon. Member for North Ayrshire and Arran that there is some sort of right-wing plot—that we have been waiting for years for this crisis in order to take a stab at Keynesian politics and that, really, all we are interested in is a slash and burn of the public services. It is hardly a slash and burn, given the sort of figures we are talking about. In fact, Government spending is as high as it has ever been. All we are doing is trying to get to some sort of grip with the deficit.

Personally, I have always argued that the economy would benefit from deregulation and from simplification particularly of the tax system, leaving aside the total size of the public sector. I would have thought that Members on both sides of the House could accept that what is needed is simplification. How, then, are we going to get it?

I spoke in the Budget debate at about 6 o’clock. Such is the complexity of the modern Budget process that it is difficult for people to get a handle on what is going on as it is being enunciated by the Chancellor of the Exchequer. I was teased by one of the Whips because, apparently, precisely as I stood to say that it was a courageous Budget, coincidentally all the press started turning against the Government—and it has been pretty bad ever since. I say that it is courageous because the Chancellor has started to take some difficult decisions to simplify the tax system. We have heard a good speech about charitable giving. So much of the so-called bad publicity that the Government have attracted over the Easter break—whether it be over the so-called granny tax or charitable giving or child benefit or all the other problematic areas—shows that the Chancellor is beginning to try to address these appallingly difficult structural problems.

There has been a lot of talk about the Titanic this week—nobody should worry, as I am not going to repeat the tired old cliché about deck chairs—and I think that the whole structure of the ship is wrong when it comes to the tax system. The ship is unbelievably badly built, and it is gradually sinking under us. What I have found in listening to 28 successive Budgets in this Chamber is that the tax system has become progressively more complex. It was possible 25, 30 or 35 years ago for a Chancellor to come across as providing a reasonably coherent lecture in his Budget statement—we all used to get very excited because tax on whisky or the basic rate of tax was going to go up or down by 1p—but such levels of complexity have been loaded on to the whole tax process that it has become virtually impossible for any Chancellor to come out on Budget day with any coherent proposal that is not in succeeding days unpicked and trashed because of the hundreds of pages of small print. If the structure is fundamentally flawed—it is, I think, the longest tax code in the world apart from India, and one of the most complex in the world—it is virtually impossible for any Chancellor to get a grip on it. I have never made any secret of my personal belief that we have to be prepared to be radical. We cannot just try to improve the structure; we have to go back to first steps and argue what we really believe in. What I really believe in is a much flatter—ideally, flat—rate of tax.

I have recently read an excellent book written by one of our colleagues, my hon. Friend the Member for Stone (Mr Cash), about the 19th century statesman John Bright. He was wholly uninterested in politics, but was a substantial statesman, who continually argued in terms of retrenchment, sound public services and a sound financial system. He said:

“Better teach the people something good for the future than resign oneself to work institutions already in existence”.

I suspect that too many politicians—I do not blame those on the Treasury Bench, as I know what they are paid to do—are fundamentally doing what John Bright did not want to do, which is resign themselves to work institutions already in existence. I think that the purpose of politics, certainly for those on the Back Benches, is to try as John Bright said to try to teach the people something good for the future.

I believe that this idea of a much simplified tax system or a flatter and ultimately a flat rate of tax, which has always been dismissed as an idea of the radical right, is of increasing interest to those on the left. Why? We have heard a great deal about tax avoidance, and the more complex the tax system, the easier it is to avoid it. Every time we try to deal with the problem, we create more loopholes and more difficulties, making it easier for the rich to avoid paying tax. With a much flatter—ideally, flat—rate of taxes, there is no possibility for avoidance. The TUC claims—I am sure it is right; it is not known to be a particularly right-wing organisation—that tax avoidance results in a loss to the Treasury of £13 billion a year from individuals and £12 billion a year from corporations.

To make another left-wing point, some politicians have recently had a bad press; they have been standing for various public offices or arriving in this House with good incomes outside politics, but instead of paying tax like the rest of us at the basic and then higher rates, they have put their money into private companies in order to pay much lower rates. Some politicians in America who have huge incomes, including some bidding to become President, have had a very bad press, as we found that they paid minimal rates of taxation. Why is this? It is because the tax codes in both countries are so complex that the rich and the powerful can always avoid paying tax. They cannot do that, however, under a much simplified tax system.

[Charlie Elphicke]

Does my hon. Friend not think that politicians should give a lead? It is not just Ken Livingstone who has been egregiously avoiding paying tax. It is clear from the Register of Members’ Financial Interests that some Labour Members have been routing their funds into private service companies. Should that not be stopped; should not politicians set an example?

[Mr Leigh]

I do not want to ruin my argument and I do not want to lose any support that I might have from my friends on the Opposition Benches by recommending a tax on particular Labour politicians. The trouble is that there is always a huge temptation for anyone with a high income—a politician, an entertainer or a business man—to listen to the advice provided by chartered accountants. They will say, quite rightly, “Oh dear, why is a successful chap like you”—a successful chap like, for instance, my hon. Friend the Member for Dover (Charlie Elphicke), who doubtless has a very large income—“paying all this tax, when you could be setting up a small company and paying about 11%?”

In the past I have argued for a much flatter, ideally flat, rate of tax throughout earned income, but now I will be even more radical, and suggest that there is an increasing case for transposing that to small company income. I am not privileged to serve on the Treasury Bench, and I do not have teams of civil servants to advise me. I constantly come up with ideas such as this during Finance Bill debates, and I can produce figures, but I do not know whether they are correct. I have been told that a flat-rate tax of 22% with a £15,000 allowance would result in a reduction of £63 billion in tax revenue in the first year. Although I believe that the extraordinary savings that would be made through the ending of tax avoidance might well enable us to claw that back, there is no point in my simply going to the Library and then coming up with figures.

I see that the Minister is busily scribbling down every one of my pearls of wisdom at this precise moment. It would be really nice if, rather than just saying at 10 or 10.30 tonight “I thank my hon. Friend the Member for Gainsborough for making such an interesting speech”, he wrote to me in the next week or two, when he has the necessary leisure, telling me—on the basis of the Treasury model—how much of the cost of avoidance could be saved through the adoption of a much flatter, or ideally a flat, rate of taxation, under which it would increasingly not be worth people’s while to try to shift their income from one pot to another. Is that, in fact, such a radical idea? Has it been tried out anywhere else? Well, of course it has.

As I have said, the size of the UK tax code has more than doubled since 1997. The present situation is absurd. The Chancellor is doing his best, but whereas 15% of taxpayers will pay a higher rate in 2012, only 3% paid it in 1978. Graphs showing the rise and fall in people’s incomes according to whether they have one child or more feature extraordinarily sudden and tremendous blips because of the child benefit clawback from people who earn more than £50,000 a year, of which I have been very critical. I do not know whether this is correct, but I have been told that a family with three children and an income of between £50,000 and £60,000 faces an additional effective marginal tax rate of 24%, on top of income tax and national insurance. I cannot believe that the Chancellor wanted to impose such a sudden, steep burden of taxation on middle-income taxpayers.

Many Members favour helping people on very low incomes. I happen to believe that the best way of helping poor people is not to churn more and more tax and benefits in their direction so that they have very high marginal tax rates—as high as 73% in the case of those who increase their earnings if they earn less than £10,000—but to take them out of tax altogether. Let me say to my Liberal friends that the one good thing that they have done in recent years is to present that argument, and I think that they have made their case. An extraordinary burden has been placed on people on lower incomes, who have been taxed far too much far too early.

I believe that my idea of a flat rate of tax is not such a radical or bad idea but one that could appeal across the spectrum, and I urge my hon. Friends on the Treasury Bench to consider it carefully. Otherwise, every time the Chancellor seeks to tamper with the screws and the bolts on the Titanic to ensure that those watertight compartments do not just reach halfway up the forward decks but reach the top so that the thing does not sink, he will produce a Budget that sounds good on the first day but will be unpicked and unpicked.

I think that, rather like John Bright, the Chancellor needs to see that shining light on the horizon. He needs to say, “This is my strategy, this is my philosophy, this is what I want to do. I want to say to the British people that ultimately I will take pretty much the same share of the cake as has been taken in recent years.” We all know that, for all Mrs Thatcher’s reputation for being such a right-wing radical Prime Minister, it was only after many years that, by an almost infinitesimal margin, she gradually reduced the extent of the state’s take from ordinary people. It may be impossible for the Chancellor to make a great deal of difference in those terms, but he can say, “This is my strategy. I want to be upfront and fair to the British people, so that they know exactly where they stand. If you have an income of £300,000, I will take a third of it: I will take £100,000. If you have an income of £100,000, I will take £33,000—and so on across the spectrum.” Then there will not be all the hillocks and valleys and clawbacks and allowances and churning of benefits and taxation.

I am, in a sense, sympathetic to the philosophy behind what the Chancellor has been trying to do with child benefit. Why should middle-income earners pay tax at a certain level and then be handed it back in child benefit? I agree with the Chancellor that that is absurd. However, he got himself into a dreadful mess by taking the appalling step that meant that the moment there was one higher-rate taxpayer in a family, all that family’s child benefit vanished. I thought that that was very unfair on a family in which one person worked and another, usually the wife or female partner, wanted to stay at home and look after the children. I am not suggesting that such an arrangement is better or worse than the other form of family life, but I believe that it is simply unfair, which is why I have argued for a marriage tax allowance.

I will do a deal with the Chancellor. I will give up my campaign against his reduction in child benefit and my campaign against his continued failure to introduce a marriage tax allowance, despite what he said in his manifesto, if he will say to me, “I will get rid of all these allowances, and introduce a greatly simplified tax system which is fair and equitable for all classes of people.”

I agree that there should not be a tax system that distorts people’s choices. I agree that any attempt to influence behaviour through the tax system, whether it affects marriage, children, mortgage tax relief—as in the old days—or, now, charitable giving, will produce perverse incentives. It will cause people to adjust their behaviour to reduce their tax bills rather than doing what is right, and I want people to do what they feel to be right. I want the state to be open, fair and upfront about what it is going to take, and I want the Chancellor to come to the House and say in his next Budget “This is my strategy, and this is my belief.”

I accept that—bravely, courageously, with great difficulty, and in the face of an enormous amount of bad publicity over the last three weeks—the Chancellor has taken the first essential steps towards getting rid of those allowances, and I am prepared to stand by him. I am prepared to be unpopular over the granny tax, because I can see where he was coming from. The Chancellor considered it absurd for people to be paid that allowance. Although it was apparently very popular, when there was talk of abolishing it, no one remembered that it had been introduced by Winston Churchill in 1925. I am prepared to be unpopular by supporting the Chancellor on all those issues if he is prepared to enunciate his philosophy of creating a fairer and simpler tax system. That is a fair deal, I think.