Tax Fairness

Geraint Davies Excerpts

Tuesday 12th March 2013 Commons Chamber

[Chris Leslie]

What more can I say? I thought the hon. Gentleman supported the proposition in our motion, but clearly he does not. However cynical and defensive he may feel, Liberal Democrats should at least acknowledge that a principle of fair taxation is at stake today, and that it ought to transcend party differences as we try to create a more just society.

[Geraint Davies (Swansea West) (Lab/Co-op)]

Does my hon. Friend share my fear that the Liberal Democrats may become an endangered political species? Before 2010, they were very popular in Swansea but following the tuition fees, VAT and deep cuts turnaround, they lost the council. If they do not support the mansion tax, which was part of their manifesto, does he not think there is a real danger that we will never see them again in the political sphere?

[Chris Leslie]

It would be a great loss for the House to lose some of the skills and contributions of Liberal Democrat Members. Perhaps at our next Opposition day debate a Liberal Democrat protection order should be on the agenda. They may cling on in a number of ways in different places.

I am surprised that the Liberal Democrats do not support the mansion tax proposition. It is hardly surprising that Conservatives do not support the idea. After all, half of them are in politics to defend the wealth of the wealthiest, and the other half will probably need to declare an interest before they speak on the issue.

Let us consider the mansion tax in relation to the other tax benefits that the richest 1% receive. If the Lib Dem design for a mansion tax were to be enacted, it would just recoup a mere fraction of the money being given away to high net worth individuals in the millionaires’ tax cut from April—the first of too many examples of unfairness. In the last Budget, the Chancellor took the decision to hit pensioners with the so-called granny tax, which is more accurately described as a freeze on the old age personal allowance and has caused widespread disgust, especially because the Government chose to use the money to fund a cut in the higher rate of income tax. That is not fair and it is not right, and it certainly should not be part of the society we want to build. Even Liberal Democrats must know that it is deeply resented across the country, yet the Government continue to clobber lower and middle-income families, whether by freezing the maternity pay of new parents, taking child benefit away in a fiendishly complex tax assessment process or reducing the value of the tax credits on which so many working people rely. They cannot even ensure that the money men pay their fair share, with a bank levy that for two years running has undershot the supposed target of £2.5 billion that the Chancellor claimed it would collect.

On maternity pay, the bedroom tax and the cuts to tax credits, the Government have their priorities all wrong. They are handing a tax cut to millionaires when millions of hard-working families pay more. Voting for the motion is an opportunity, especially for the Liberal Democrats, to tell the Government that they need to rebalance their priorities.

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[Mr Gauke]

I am afraid the hon. Gentleman is wrong. People earning just over £40,000 have seen tax cuts and a reduction in the total amount of income tax they pay, because the personal allowance has increased to more than compensate them. The higher-rate threshold has not increased as it might have done, because higher-rate taxpayers would gain more from the personal allowance than basic rate tax payers. Someone on between £40,000 and £44,000 a year is paying less income tax as a consequence of the Government’s policies than they would have done otherwise.

[Geraint Davies]

Will the Minister take this opportunity to confess that the reason why the Treasury predicts less will be generated by the 50p rate in the one year of its operation than the 45p rate is that he knows, as I do, that millionaires can move their money between tax years? As the rate only runs for one year, they will move their money to the lower tax year. He would raise more money if he kept the 50p going. It is a con for his mates.

[Mr Gauke]

There are two points. It is correct that the wealthy are often able to move income from one year to another, but the conclusion that HMRC and the Office for Budget Responsibility reached is that even taking into account the forestalling effect, the behavioural consequences of the 50p rate were so significant that it barely raised any revenue. That is the reality. It even takes into account the hon. Gentleman’s point about forestalling. That approach has been confirmed by the OBR. The 50p rate failed.

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[Mr Gauke]

My hon. Friend is right. The Labour Government were in office for 4,758 days. For all but 36 of those days, the highest rate of income tax was at 40p. Then it moved to 50p. There is a good question to ask the Opposition about why they kept it at 40p for so long. Why did they leave it until the fag-end of their Government, when it was clear that they would not be in government any more? The reason is that the 50p rate, predictably enough, did not do what it was supposed to do. It did not raise revenue, and an income tax that does not raise revenue is not something that a sensible Government would persevere with.

I turn to the mansion tax.

[Geraint Davies]

Will the Minister give way?

[Mr Gauke]

No. I shall make a little progress, devastating though the hon. Gentleman’s interventions so often are.

We have always been quite clear that the proposed mansion tax is an issue on which the two parties in the coalition have differing views. Our Liberal Democrat colleagues have supported the principle for some time. I am sure that the Under-Secretary of State for Communities and Local Government, my right hon. Friend the Member for Bath (Mr Foster) will make that clear when he winds up the debate. In contrast, Conservative Ministers have very real concerns over such a proposal. We have concerns that a third of the properties in London worth more than £2 million have been in the same ownership for over 10 years, and that a mansion tax could hit asset-rich but potentially income-poor households, a point made by my hon. Friend the Member for Battersea (Jane Ellison).

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[Mr Gauke]

This is a difficult time for all major economies, and the UK is no exception, but matters would be much worse if we were to abandon our desire to bring some control to the public finances. We must ensure that there is the political will to deal with the public finances, and that is what this Government will continue to demonstrate. The approach of ignoring the deficit, believing that this is all an issue that can be addressed at some future time, is economically irresponsible and unfair on future generations who will face the bill that they will have to pick up because we failed to address those problems now.

[Geraint Davies]

Is this not also about fairness? For instance, while the threshold changes that he has mentioned of £3,000, which deliver a saving of £11.50 a week to taxpayers, cost £9 billion, he will save half a billion pounds from inflicting that £11.50 on people for the empty bedroom tax. With a small amount of the money used to raise the tax threshold, he could have alleviated that for the very poorest. Is not this about values and not inflicting the most hardship on the most poor while giving a bung to the voters?

[Mr Gauke]

I take it from what the hon. Gentleman says that rather than raise the personal allowance, he would prefer us to spend more on the welfare bill. If that is the hon. Gentleman’s position, fair enough, but I do not agree. Raising the personal allowance, taking people out of income tax, and making sure that work pays, are all things that a sensible Government should do, and I am delighted that this coalition Government are able to do that.

I come now to the taxation of those on highest incomes, on which we have already touched. The top 1% of taxpayers, those with incomes of over £150,000 a year, will pay more than a quarter of all income tax, while the top 5% of taxpayers, those with income of £68,000 or more, will pay nearly half of income tax. We agree that it is important that we create a tax system that ensures that those who earn the most contribute the most, but it is also important that we create a tax system that works. Among other things, that means a tax system that does not damage our economy by undermining our international competitiveness.

The Government inherited a top rate of tax at 50p, a rate that our predecessors, who this afternoon have painted themselves as the party of taxing the rich more, had put in place for just 36 of their 4,758 days in power. The rate that they left us with was the highest top rate among major economies. The last Labour Chancellor had made it clear that it was temporary. It was also very clear that it was having an immediate impact on our competitiveness.

Let me say something that I hope is not controversial: the principal purpose of income tax is to raise revenue. So we commissioned HMRC to analyse just how effective the 50p rate was in raising revenue.

That HMRC report, laid before the House, set out thorough and compelling evidence on the impact of the 50p rate. It showed that the rate was uncompetitive, distortive and inefficient. Not only did it not raise much revenue, but it could even have cost the Exchequer money when the indirect impacts on other taxes were taken into account. This Government were not prepared to maintain a rate of income tax that was both ineffective at raising money and that left us with the highest statutory rate of income tax in the G20, so we acted, in the interests of the country, and the top rate of tax will fall to 45p from April this year. This will see our top rate of tax drop below that of Australia, Germany, Japan and Canada, which will send a signal to businesses taking decisions on investment and location that the UK is a competitive environment.

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[Geraint Davies (Swansea West) (Lab/Co-op)]

What a load of codswallop we have been listening to since the Minister got up on his hind legs! Obviously, this motion is setting out a direction of travel. We are saying that those with the broadest shoulders should take the biggest load and the poorest should not pay the cost of the bankers’ recklessness.

The myth that is habitually recited by Government Members is “What a fine mess you’ve left us in,” so it is important to remind people of the facts. I recently met people from the Bank of England, and I have in my hand a graph showing that our growth rate rose continuously between 1998 and 2008, but then dipped when there was the financial tsunami. The GDP growth under Labour was 37% before that dip. We then had the fiscal stimulus thanks to our friend Mr Obama and my right hon. Friend the Member for Kirkcaldy and Cowdenbeath (Mr Brown), which got us back to some fragile growth moving into 2010, but then the Tories came to power.

I also have a graph showing that two thirds of the deficit—the green bit—is from the bankers and the other third is the Government spending above their earnings in order to pump-prime, to avoid a depression and deliver a mild recession and a prosperous future for Britain. What happened? Obviously, George Osborne came along, announced that half a million people would be sacked but he did not say who they were, so public servants stopped spending—

[Mr Deputy Speaker (Mr Nigel Evans)]

Order. Please refer to the Chancellor by his title, not his name.

[Geraint Davies]

Exactly. The Chancellor, no less, decided to announce that half a million people would be sacked but did not say who they were, so people stopped spending and started saving, consumer confidence fell and the economy has been flatlining ever since.

[Mel Stride]

The hon. Gentleman refers to employment. Does he recognise the fact that there are 1 million new private sector jobs net, unemployment is falling and the level of employment, which is currently about 30 million, is the highest on record?

[Geraint Davies]

I am grateful to the hon. Gentleman for that intervention. If 1 million more people are in work but there is zero growth—in other words, there has been no overall increase in production—that implies that people who had been in full-time jobs are now in part-time jobs and that aggregate production has not increased, which is a complete failure. It is symptomatic of Tory Britain, with people scratching around for anything they can find in difficult times.

There has been some discussion of the 50p rate of tax. As I have mentioned, the reason the Treasury thinks it would not make any money from a 50p rate is that it knows that millionaires can move money between tax years, which is precisely what they have done. They knew that their Tory mates would reduce the top rate of tax the next year and so simply shifted their income to that year. The point that I had wanted to make in another intervention—I appreciate that two were taken—relates to the idea that the 50p rate does not work and is therefore dead. However, people earning between £32,000 and £42,000 already pay 52% marginal tax—12% for national insurance and 40% for income tax—but of course no one talks about that. How does that change their behaviour, and why is it fair that they pay the higher rate while people on £150,000 do not because they have accountants? It is ridiculous.

[Mark Reckless]

rose—

[Geraint Davies]

Does the hon. Gentleman want to intervene? Perhaps he earns £150,000; I do not know.

[Mark Reckless]

I want to develop the hon. Gentleman’s point. We currently have a tax band between £100,000 and £115,000 in which people face a marginal tax rate of 62%, with the personal allowance and national insurance. Is he suggesting that that is somehow justifiable, or more justifiable than the top rate tax he is suggesting for those earning more than £150,000?

[Geraint Davies]

I am simply saying that those with the broadest shoulders should take the greatest weight, that there is a strong case for a 50p rate of tax and that some people already pay the 50p rate. I am not saying that they should pay that. Our tax system is not very fair, and I will move on to that later.

The problem we face is that there is no growth in our economy because there is no consumer demand, and although the deficit—the rate at which the debt is increasing —has gone down by 25%, as we are constantly reminded, the overall debt continues to rise to unprecedented levels. We are almost back to a pre-1997 situation in which we are paying people to stay on the dole and, at the same time, cutting services. That is the old Tory vicious cycle. We want to get back to Labour’s virtuous cycle, with people in jobs and paying tax and with unprecedented growth.

The other point that is always made is that the banks were unregulated and that is why everything went wrong. The reality is that the Financial Services Authority—I know that it has had a bad name—was introduced in the teeth of opposition from the Tories, who said that there was too much regulation already. Then, when the banks started going bust, the Labour Government said that we had better nationalise them so that people could still get money out at the hole in the wall. The Tories said, “No, let them fall.” That would have been a complete catastrophe. So in other words, the previous Labour Government did a very good job. We now have a situation in which, instead of confronting the deficit, which is what we should be doing, the Government have the wrong balance between growth and cuts, and within the cuts there is the wrong balance—80% cuts and 20% tax.

As for the claim that we are all in this together, we are now in a situation in which the poor are paying the most. I mentioned in a brief intervention—I also raised this in Prime Minister’s questions—a man who came to see me who had £20 a week, after utility bills, for food and clothing. He now faces a further hit of about £7 a week for having an empty bedroom. How will he survive on £2 a day? Allegedly, that change will save the Government about half a billion pounds, but of course it will not, because obviously people will move to the private sector, where rents are higher, and there will be empty houses in the public sector because councils will be forced to evict people. It makes no economic sense at all. However, if it did raise half a billion pounds, which is about one twentieth of what the Chancellor is investing in the tax thresholds, the hit to the very poorest will be similar to the gain to a very large number of people, and that will cost a great deal of money.

The point I am trying to make is that what will probably result in no savings will inflict enormous hardship on the most vulnerable, which is unnecessary and wrong. Those people, because they are very poor, have no option but to spend all their money locally, which helps to boost growth. If that money is redistributed from the very poorest to the squeezed middle, which is obviously good for votes—a callous and cynical manoeuvre in difficult economic times—then clearly that is not in favour of growth either. In so far as it will push money right up the income scale to the millionaires who live in mansions—the people we have been talking about—what will they do with the extra money the Government will have bunged to them? The threshold has gone up, so those at the top will also gain as a result. They will hide it away offshore.

There are therefore difficult issues to confront. We need to invest in our productive economy, but what is a fair way to do that in a—dare I say it—one nation way? Britain wants a one nation future that works and a future that cares, and the question for us all in difficult times must be how we deliver that. How do we invest, as I mentioned during Treasury questions, in super-connectivity for the city of Swansea? We do it on the back of investment in universities, electrified rail and communications and by marketing city regions, and indeed Britain, for inward investment. Those are all important. The Minister mentioned some of the issues about marginal corporate taxation, but the research tends to show that the major inward investment drivers are around research and development skills and access to markets, and we are well positioned on that.

On corporate taxation, there is a lot to be said—to be fair to the Minister, he mentioned this—for the idea of taxing economic activity where it occurs, whether we are talking about Google, Amazon or other companies. Amazon is local to my constituency and provides valuable jobs, but it needs to be fair and there needs to be a level playing field. If people are buying on Amazon rather than at a local shop, it is important that the local shop knows that they are all playing the same game.

Let us take the example of Apple phones and all the technology in the phone I am holding in my hand. The internet was invented here, and the other stuff, such as touch-screen and voice-activated technology, was invented in the national institute of science in California. So Apple is being taken to court by California for $26 billion because it does not pay any tax. Apple has taken innovation from the public sector, repackaged it, branded it, manufactured it overseas and got it taxed somewhere else. A big issue is that global conglomerates need to be brought to account and to pay their contribution to the public services where people are consuming their products.

Some of these people obviously live in mansions. The issue about the mansion tax, of course, is that it is part of a more general review of council tax, as other Members have mentioned, which has not been uprated. There needs to be a progressive system of taxation. Obviously the mansion tax, which is a Liberal Democrat proposal, had not been completely thought out in all its intricacies, but it is a direction of travel. If someone lives in a £2 million house, it is not that difficult to find ways of getting income out of it. It can be rented out and, with the rental income, the owner could have a palatial place in south Wales and a profit, so they could sit by the sea and enjoy themselves. For those people who are stuck in £2 million cupboards in London, allegedly, and we feel sorry for them, there are ways of releasing equity, as they could be rented out and people will pay the market rate.

[Gordon Birtwistle (Burnley) (LD)]

I am listening to the hon. Gentleman make some progress on the mansion tax. Obviously it is a Liberal Democrat policy, and I am really looking forward perhaps to voting for it later. Can he explain to me—I am keen to know—whether it will be in the Labour party manifesto at the next election?

[Geraint Davies]

Sadly, I cannot confirm that at the moment because I am not quite in a position to be writing the party’s manifesto, although I have ambition.

In difficult times we should focus on growth and ensure that those with the broadest shoulders take the weight and that we do not just squeeze the poor for the bankers’ mistakes. This proposal is part of a tapestry of opportunity to move forward on that, and we call on the Liberal Democrats to support us on what is, after all, their idea. Locally in Swansea the Liberal Democrats have been a very strong party with control of the council. Since 2010, they have been in a woeful state because people are worried about their broken promises on tuition fees and so on. This is their chance to redeem themselves so that there can be some glimmer of belief in a future for the Liberal party. If they do not vote for their own policy, what hope is there? Very little, I am afraid.

[Mr Deputy Speaker (Mr Nigel Evans)]

I call Stephen Williams.

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[The Parliamentary Under-Secretary of State for Communities and Local Government (Mr Don Foster)]

I begin by thanking those Members who gave a welcome to my hon. Friend the Member for Eastleigh (Mike Thornton). I join them by adding my own welcome.

The hon. Member for Newcastle upon Tyne North (Catherine McKinnell) is absolutely right. The debate may have been robust, but it was genuinely thoughtful. It is thus a great disappointment that when she closed the debate and the hon. Member for Nottingham East (Chris Leslie) opened it, they did not take the opportunity to apologise to the country for the Labour Government’s role in creating the economic difficulties in which we find ourselves. The hon. Member for Swansea West (Geraint Davies) was right too. On the Government Benches and in the country at large, we say “What a fine mess you’ve left us.”

I congratulate the Opposition on their proposal, because one good thing happened today: after three years of opposing our revenue-raising policies, three years of opposing our cuts and three years of failing to propose a single solution for the economic mess they left us, I am glad that in the Chamber today they have at last put forward an actual concrete policy. As we heard, it is a Liberal Democrat policy, but I am delighted that Labour Members now support our mansion tax. I shall be even more delighted when it takes pride of place in my party’s election manifesto in 2015—something I can say but they apparently cannot.

[Geraint Davies]

Will the Minister give way?

[Mr Foster]

Let me make a little progress and I will happily give way.

We have been perfectly up front: this is a matter on which the two parties in the coalition disagree. As my hon. Friend the Member for Bristol West (Stephen Williams) made clear in an excellent speech, the Conservatives have always been vocal in their opposition to such a scheme and Liberal Democrats have always been vocal in our support for it.

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[Mr Foster]

No, I will not give way to the hon. Lady.

It is worth reminding ourselves that although we as Liberal Democrats accept that a mansion tax would be a further step in creating greater fairness, by being part of the coalition with our Conservative colleagues we have made huge strides towards building a fairer society and a stronger economy. I agree with the hon. Members for Edinburgh East (Sheila Gilmore) and for Scunthorpe (Nic Dakin), who said that creating fairness is vital. Our achievements in doing so are in marked contrast to those of the Labour Government.

[Geraint Davies]

Will the Minister give way?

[Mr Foster]

No.

The previous Government introduced the fuel duty escalator, hitting the pockets of families and businesses, whereas we have taken steps that will make pump prices 13p per litre lower than they would have been under Labour. They abolished the 10p tax rate, hitting 800,000 single earners, whereas we are taking 2.2 million people out of paying tax altogether. Whereas in 2000 they gave pensioners a miserable 75p a week pension increase, last year we gave the biggest ever increase of £5.30 a week.

[Mr Foster]

We are not here to discuss the under-occupancy arrangements. Let me remind the hon. Gentleman, who has breezed into the Chamber, that we have had discussions on many occasions about this. I am aware of 300,000-odd families with two or more spare bedrooms and 250,000 families who are overcrowded, so it is right and proper that we take action to try to help them out, and that is what we are doing. I am more than happy to talk about this Government’s record on fairness.

[Geraint Davies]

Will the Minister give way?

[Mr Foster]

No, I will not.

A number of speakers debated the 50p tax—[Interruption.]