Finance (No. 2) Bill

Jacob Rees-Mogg Excerpts

Thursday 18th April 2013 Commons Chamber

[Fiona O’Donnell]

No, I am not. I would say that the catastrophic political mistakes are most often made on the nationalist Benches. We are stating clearly that, if we were in government today, we would not be scrapping the 50p rate. There is no ambivalence or doubt about that. That is the position of Labour Members in the Chamber.

I appeal to Liberal Democrat Members to remember their Lib Dem values, and to all Government Members to think about the people who are contacting them. Are they the people who earn more than £150,000 a year, or are they the families and pensioners who are struggling with the cost of daily living? I urge Government Members to vote according to the representations that they are receiving.

[Jacob Rees-Mogg (North East Somerset) (Con)]

It is a particular pleasure to serve under your chairmanship today, Ms Primarolo. I welcome you back, and I am glad to see you in fine health.

I have been spurred on by the hon. Member for East Lothian (Fiona O’Donnell) to speak in the debate and to defend the Government’s policy, which is wise and right and good—[Interruption.] I do not often cheer up the Whips, but if I do so, that will be an added advantage. The amendment tabled by Her Majesty’s official Opposition is completely unnecessary and wrong-headed.

[Ian Lucas]

The hon. Gentleman said that the Government’s policy was wise. He is a moral man, so will he tell me how it can be right for the richest people in our society to have their income boosted while disabled constituents of mine are having theirs reduced?

[Jacob Rees-Mogg]

Because it does not actually work like that. We know from experience that high rates of tax reduce the amount of taxation that is received. The Laffer curve is not a myth. If you put rates up, tax revenues decline.

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[The Second Deputy Chairman of Ways and Means (Dawn Primarolo)]

Order. I remind the Committee that the guidance on conventions and courtesies is quite clear on the language to be used in the Chamber. Hon. Members will know that “you” refers to the Chair as all remarks are made through the Chair. I would therefore be grateful if hon. Members would refer to each other by their constituency names, or as “the hon. Member”, “my hon. Friend” or “the Minister”. They should desist from saying “you”; otherwise, I might feel the need to answer the debate as well, and then we would have disorder. We do not want that, do we, Mr Rees-Mogg?

[Jacob Rees-Mogg]

Ms Primarolo, your answer to the debate would be so fine that it would hold the rest of us silent.

The hon. Member for Edinburgh East (Sheila Gilmore) is absolutely right. It is difficult to say at exactly what point on the Laffer curve revenue is maximised. As I understand it, however, the latest academic studies suggest that around 37% is the level at which income tax revenues would be maximised. That is why I would favour the Government going further and reducing the rate of income tax to the level at which it was kept by the Labour party when it was in office.

[Fiona O’Donnell]

I did not think that I had spurred the hon. Gentleman to speak; given his posture during my speech, I thought that I had woken him from his slumbers. Do we have another split in the coalition here? Lib Dem Members have been criticising the previous Labour Government for not having the 50p rate for longer.

[Jacob Rees-Mogg]

The coalition is, I am sure, united at the highest level, but that does not mean that Back Benchers do not sometimes disagree. My hon. Friend the Member for Bristol West (Stephen Williams) and I often discuss these matters, and we do not invariably agree on every aspect of them. The Lib Dems have their own particular policies, which they will no doubt put forward in an election campaign, but the coalition at large is committed to a single policy.

I want to come back to the amendment, which is about getting back to the 50p rate. We already have a situation in which the top 1% of taxpayers pay nearly 28% of the total income tax receipts—that is, £50 billion. If the rate of tax is put up to too high a level, people will change their behaviour to alter the amount of tax they pay. That is very straightforward, and they can do a number of things. Some people leave the country, so that their tax is paid overseas. Some work less hard, reducing their earnings to reduce their tax payments. Some use pension funds or legitimate forms of tax avoidance to minimise their income. That is all perfectly well known by those on the Opposition Front Bench, who are a fine and intelligent group of people, yet they try to make political points on the argument about fairness. Fairness seems to me to be about doing what is right.

[Julie Hilling (Bolton West) (Lab)]

It seems to me that the argument is not that we should reduce tax so that people will be kind enough to pay it; rather, we should be looking into closing down tax avoidance schemes. We should be presenting the moral case that everyone should be paying in according to their ability to pay, particularly in these difficult times.

[Jacob Rees-Mogg]

However much we tackle tax avoidance, if we set tax rates at so high a level that people decide not to work, no legislation can force them to work to earn more. Unless we want to be like the Russia of the 1980s, we cannot pass a law to prevent people from leaving the country to work elsewhere if the taxes are too high here.

[Sheila Gilmore]

The point is constantly made that the top 1% pay a very high proportion of income tax and that that makes this measure okay, but presumably they pay that because their income is high. The gap in this country between low-income people and high-income people has widened considerably. That happened under the Government of the late Baroness Thatcher, but, admittedly, not enough was done to address it under the subsequent Labour Government. The point, however, is that if people are paying so much, it is because they have the income to do so.

[Jacob Rees-Mogg]

The hon. Lady almost makes my argument for me. In 1979, that hallowed year in which the great lady to whom she referred came to office, the highest rate of income tax was 98%, and the proportion of income tax revenues paid by the top 1% was about 10%. When the rate fell, the proportion paid by the top 1% went up, so more money came from the richest in society when rates were lower. Lower rates of taxation therefore resulted in the advantage of an increase in revenue for the Government and the ability to spend more on the services deemed necessary.

This argument was proved in 1979 when the rate went down from 98% to about 60% and again in 1988 when it went down from 60% to 40%. On both occasions, the amount of tax revenue increased because people were willing to work harder and people were attracted to work in this country—so the burden was, indeed, put on to the shoulders of those best able to bear it.

An argument is made about fairness. We say it is fairer to have a high rate of tax. We say that that is symbolically right—that we should have it so that people know they are doing something difficult and we are all in this together—but what is the symbolism of saying to people we will take less tax from them, and what is the symbolism of having lower revenue for the Government?

[Julie Hilling]

Her Majesty’s Revenue and Customs says that in the one year when the 50% tax rate applied, revenues went up—the figure it is currently giving is £1 billion. It is therefore difficult to argue that we should get rid of this tax rate, especially as we do not yet have all the evidence. We are only beginning to get the evidence now, because people are paying that rate now.

[Jacob Rees-Mogg]

In fact, HMRC came out with figures showing the tax paid by the highest taxpayers declined; there was a loss in revenue of £6 billion, I think. I would prefer to take the actual figures that come in. I may be disloyal on this point—for which I hope those on the Treasury Bench will forgive me—but I think that forecasts from Her Majesty’s Treasury are absolutely useless. We do not want to go on economic forecasts; we want to follow facts, and the facts on the revenue that has historically come in make it clear that lower rates increase the tax take.

[Julie Hilling]

It is my understanding that, although tax takes went down in the first year when people could pre-pay and will definitely go down in this year when people will post-pay, they rose in the middle year, which is the one full year when the rate has applied, and for which people are now paying their taxes.

[Jacob Rees-Mogg]

The problem with that argument is that we have facts that show that the amount of revenue has gone down. Over a three-year period it has gone down very substantially, because the rate was high. The hon. Lady’s comments also serve to illustrate the following point on my behalf, for which I am grateful: when tax rates are raised, people change their behaviour so that the tax they pay is reduced. That is where the Laffer curve comes in. Income is reduced when tax rates are too high.

[Kerry McCarthy]

I am sure that the hon. Gentleman is a student of behavioural psychology, as he is of so many other subjects, so can he explain why the Government believe that if we give more money to wealthy people that encourages them to work harder, whereas the lower paid are encouraged to work harder if we give them less money?

[Jacob Rees-Mogg]

The hon. Lady—my near neighbour, as she represents a Bristol constituency—is very wise and does, I am sure, understand this point. The answer is that the question being asked differs between benefits and earnings, although the argument is essentially the same. Inevitably, where there is a level of benefits that discourages people from working, if that increases more slowly, it encourages people to work. It is an identical argument to the one that says people keep more of the money they earn if taxes are set lower.

[Sheila Gilmore]

The problem for many people at present is that the jobs simply are not out there. In my speech on Monday I explained that I had used the Government’s new universal job match. When I put in “shop assistant” on behalf of a constituent of mine, I discovered there were 76 entries, which sounds good, but 57 of them were for vacancies all over the region, not just in my city, and involved going around delivering catalogues and trying to sell things to people. Those are the kinds of so-called “jobs” that are out there, and that explains why people cannot find work.

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[Jacob Rees-Mogg]

I am always doubtful when people are sniffy about jobs that people take. I and others in the Conservative party voluntarily go around knocking on people’s doors trying to sell them party policies. That is known as canvassing, and I wish I got paid for that activity, but I do it out of the goodness of my heart. I do not think one should be sniffy about jobs that people might apply for; they are all welcome and all valuable.

[Fiona O'Donnell]

The hon. Gentleman is completely out of touch on this point. The point is not that people are being sniffy, picky or choosy about jobs. The point is that someone might live in Edinburgh East while the job is in Fife, and we do not all have drivers and chauffeurs to take us to Fife to do the job.

[Jacob Rees-Mogg]

I wish I was in this fortunate position of having a chauffeur or driver to take me to Fife to get a job. When I tried for a job in Fife in 1997, I was distinctly unsuccessful, and came back to a job in London, but that is slightly beside the point.

The overall point is that income at whatever levels has a determinant effect on the employment people seek and the work they are willing to do. That applies to benefits— paying benefits at too high a level can create a benefit trap that makes it not worth while for people to apply for jobs—and it applies very clearly to high tax rates when people decide not to earn.

[Kelvin Hopkins (Luton North) (Lab)]

There is some research that counters part of the hon. Gentleman’s argument. In the 1980s in Germany they found that if the income of people on very high salaries is increased, they want to take more time off to enjoy it. There comes a point when they have so much income that what they want is time, not more money.

[Jacob Rees-Mogg]

As always, the hon. Gentleman makes a very interesting point, but if we aggregate across society at large, the determining factor will be that people want to earn more money. Although some individuals may prefer leisure, of course, many will want to continue earning to increase their standard of living or to provide for future generations. We are slightly moving away from the point, however, and there are some key aspects to which I wish to return.

I mentioned fairness. It is a bizarre definition of fairness to say that it is fair to set tax rates at a level that raises less tax. That is an argument that makes PR and spin and the like much more important than the realities of economics, and it is bad politics as well as dreadful economics.

I also want to tackle the question of the morality of taxation. Is it morally right that people should pay half their earnings over to the Government? I think it is morally wrong. I think there is a moral case for low taxation and allowing people to keep the fruits of their labours, and when the rate gets to 50% that is simply too high in a moral sense, even if it is economically successful, which it is not. I do not believe the state has the right to take half of somebody’s earnings.

[Robert Flello]

Is it morally right that time and again constituents come to my surgery with the figures in front of them, saying, “This is my income and these are my outgoings; I cannot afford to live”, because of the low level of their income and the apparent inability of the benefits system now to support them?

[Jacob Rees-Mogg]

I obviously do not know about the individual cases that come to the hon. Gentleman’s surgery, but with a benefits bill for this country of £220 billion a year, there really ought to be—

[Chris Leslie (Nottingham East) (Lab/Co-op)]

And rising.

[Jacob Rees-Mogg]

It is rising, as the hon. Gentleman says. There is a huge amount of money in the benefits system. If it is not going to the right people, that will be rectified by the reforms being pushed through by my right hon. Friend the Secretary of State for Work and Pensions, which are some of the Government’s most ambitious and important changes.

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[The Temporary Chair (Mr Jim Hood)]

Order. I ask hon. Members to desist from commentary during the contributions of other hon. Members.

[Jacob Rees-Mogg]

Unless such money is put in a mattress, it has an effect, because it goes into the banks. As hon. Members know, the banks have been short of capital to lend out and short of deposits.

[Kelvin Hopkins]

My study of economics, which I also used to teach, always showed that the rich have a lower marginal propensity to consume than the poor. If we want to drive economic growth, we should give money to poor people because they spend it immediately in the domestic economy, rather than hiding their surplus cash in tax havens abroad.

[Jacob Rees-Mogg]

I am grateful to the hon. Gentleman for that intervention, because it demonstrates an unduly simplistic approach. Indeed, poorer people may have a higher propensity to spend than richer people, but that is not the end point of the economic cycle. There need to be deposits in banks so that money can be lent to businesses—small businesses as well as large—and so that people can take out mortgages. There is a cycle and a flow of money.

[Andy McDonald (Middlesbrough) (Lab)]

Will the hon. Gentleman explain why, when I speak to banks—I had a conversation with Barclays bank not many weeks ago—they say that they do have deposits and the ability to lend, but that money is not flowing out because people are not approaching them? Is that the reason or is it that the terms on which they propose to lend money are so onerous that the transactions do not proceed? Whichever it is, my understanding is that the banks do have the funds.

[Jacob Rees-Mogg]

One of the major flaws that led to the banking crisis was that loan-to-deposit ratios across the banking sector were out of kilter. Banks were lending more than they had on deposit and were therefore entirely dependent on the wholesale market. The wholesale market dried up, which led to a huge calling in of loans. That was at the heart of the financial crisis.

The banks may be saying that they are more comfortable with their loan-to-deposit ratios, but if one looks at the figures, even HSBC’s loan-to-deposit ratio—for its UK business, rather than its international business—is about 100%. Historically, banks have been more comfortable in the 70% to 80% range. We therefore do need more savings in the economy and those come from the better-off saving some of the income that they earn.

[Kelvin Hopkins]

The hon. Gentleman seems to be making a powerful case for the reintroduction of exchange controls, so that money made in the domestic economy goes into the domestic banks and helps us all.

[Jacob Rees-Mogg]

I do not agree with the hon. Gentleman on that at all, because this country attracts a huge amount of foreign investment. Sticking to the example of the Hongkong and Shanghai Banking Corporation, that company was able to ease its way through the financial crisis because it could lend its overseas deposits to its British business. It was on the backs of savers in Hong Kong and China that HSBC was secure during that period.

Rich people saving their income is a good thing economically because it boosts the pool of saving that is available for productive investment, such as loans to businesses and individuals. Even if the argument were right that this policy is a great boondoggle for the wealthy, which it is not, it would be beneficial because it would help the economy get back on to a path to growth by providing the capital that is needed for the banks to lend.

In summary, it is clear that putting rates up leads to less tax. That is not a sensible thing to do when the Government are short of money. It is not fair, indeed it is unfair, because it puts a greater burden on other members of society who have less ability to pay. It is not morally defensible because high rates of tax are not a moral good and low rates a moral evil; in fact, it is the other way round. People have a right to keep the money that they earn, unless the state can show that it is essential to take it. That is economically beneficial because one of the great problems of our economy is a lack of saving. We are not in the paradox of thrift circumstance, in which excess savings deflate the economy.

For all those reasons, the amendment should be rejected and Her Majesty’s Government should be proud of what they have done. Indeed, they should go further and look to get the higher rate of tax down to 40% and perhaps even to that magic figure of 37%, which, as I said earlier, some studies show would be the perfect rate to maximise revenue, encourage people to work hard and continue us on our path to success.

[Andy McDonald]

It is a pleasure to serve under your chairmanship, Mr Hood.

I will address the amendment directly. The lowering of the top rate of income tax to 45p will benefit 267,000 people who earn more than £150,000. In my view, it cannot be right that those who earn more than £1 million a year will receive a tax cut of more than £100,000. Families across the country will be £891 worse off on average as a result of the Chancellor’s changes to tax, tax credits and benefits since 2010. I am at a loss as to how that fits with the concept that we are all in it together. The 1% cap on tax credits and working-age benefits means a cut in real terms. At the bottom, inflation outstrips increases in earnings, whereas at the top, earnings outstrip inflation.

Acres of copy have been written about Baroness Thatcher over the past week, but one of her utterances that has not received the attention that it deserves is her expression of disappointment that, despite having made it possible for a small minority of people to gain control of the majority of the wealth of this country, that has not given rise to a greater degree of charity or generosity. Interestingly, it is often those who have the least who give the most. Two examples of such generosity are imprinted on my mind. The first was in 1984, when people from my community made regular trips up to Easington colliery with bags and boxes of food to assist families in County Durham who were finding life such a struggle.

The second example is from recent weeks, when I visited one of the five food banks in my constituency run by the Trussell Trust. It was heartbreaking to hear from the local director of the trust, Nigel Perrott, that food parcels were being sent to my town of Middlesbrough from places such as York and Thirsk. He hails from the home counties and credits people in that part of the country with tremendous generosity. However, he said that he had been surprised and overwhelmed by the generosity of the people of Middlesbrough. When they come out of the supermarkets, they do not donate the occasional tin of beans or packet of rice, but bags and bags of food. It seems that everything changes, but nothing changes. It is perhaps no coincidence that such desperate need arises when the Conservative party is in power.

We used to hear a lot from the Prime Minister about the big society, although a lot less so recently. The genuine big society is, as it ever was, ordinary people looking after each other.