Income Tax: Top Rate

Lord Newby Excerpts

Tuesday 15th July 2014 Lords Chamber

[Lord Forsyth of Drumlean]

To ask Her Majesty’s Government what effect the reduction in the top rate of income tax has had on revenue received by HM Treasury.

[Lord Newby (LD)]

My Lords, the forecast Exchequer revenue effect of reducing the additional rate of income tax to 45% is estimated at around £110 million per year. This is set out in table 2.2 of Budget 2013.

[Lord Forsyth of Drumlean (Con)]

My Lords, I am astonished that my noble friend is not prepared to take more credit for the success of the Government’s policy. Is it not the case that the reduction in the top rate of tax from 50% to 45% has resulted in a record level of 28% of all tax revenue being paid by the top 1% of taxpayers? Is that not more than twice the level that was paid by the top 1% of taxpayers when the Labour Government under James Callaghan had a marginal tax rate of 98%? Is not the lesson that lower taxes and fairer taxes are needed in order to cut the deficit and preserve public services?

[Lord Newby]

My Lords, the noble Lord has a better memory than I have. I am very happy to take credit for the Government’s achievements. The proportion of income tax collected from the top 1% has gone up from about 26% to 28% during the lifetime of this Government. Certainly, income tax take from high earners is extremely resilient because they are prepared to pay it at the levels we now have.

[Lord Dubs (Lab)]

My Lords, is that not a fairly small sum of money compared to what we lose every year through people who dodge and evade taxes?

[Lord Newby]

My Lords, it is a very considerable sum of money, but we are taking steps across a range of areas to tackle evasion and avoidance, whether by individuals or firms. There is a measure in this year’s Budget specifically designed to get tax upfront from individuals who are engaged in schemes that might subsequently be found to be avoiding tax. That will generate a considerable amount of income. A number of other measures that we have taken are bringing in hundreds of millions of pounds from people who previously were able to avoid taxes.

[Lord Wrigglesworth (LD)]

Does my noble friend not agree that if we want a fairer tax system, it also means that we need to ensure that the broadest backs bear the greatest burdens when we are facing difficulties?

[Lord Newby]

Yes, my Lords, and that is why the Government have taken a raft of measures which will ensure that those with the broadest backs pay very much more than the additional amount of income tax that they might have paid had the rate remained at 50%. For example, we have increased higher rate capital gains tax, raised the stamp duty on higher value homes and reduced the cost of pensions tax relief. These measures, taken with other measures, mean that the additional amount being paid by high earners was more than £1 billion last year and will be more than £2 billion this year and more than £4 billion next year. This is real cash coming into the Exchequer as a result of measures we have taken to hit those who otherwise were avoiding tax.

[Lord Davies of Oldham (Lab)]

My Lords, how can the Government claim that they are being fair when they cut the top rate of tax, giving a £3 billion tax reduction for millionaires? How does the Minister think that squares with the ordinary taxpayer in the country? To say that it brings in more revenue because people who have been dodging tax altogether actually decide that they will make a contribution scarcely sounds like good government.

[Lord Newby]

My Lords, there is no £3 billion, as I have explained. The effect of the cut is £110 million. The other measures we have taken will bring in over a three-year period some £7 billion extra from the same people. For people on ordinary incomes, the rise in the income tax threshold means that by next year the typical basic rate taxpayer will be £805 per annum better off and 3.2 million people who were otherwise paying income tax will not be paying income tax at all.

[Lord Lawson of Blaby (Con)]

My Lords, it may be difficult for the party opposite and my noble friends on the Liberal Democrat Benches to understand, but taxation has one purpose, and one purpose only, which is to raise revenue. The Minister said his memory is not very good, so may I remind him that when in 1988 I reduced the top rate of income tax from 60% to 40%, it brought in much more revenue and also resulted in the wealthy paying a higher proportion of tax than ever before? Will he reconsider his previous answer?

[Lord Newby]

No, my Lords, it simply is not true that the sole purpose of tax is to bring in revenue. Obviously every tax does bring in revenue, but some tax is introduced in order to affect behaviour. We are about to have a plastic bag tax but I do not think that the primary purpose of that tax is to bring in money.

[Lord Haskel (Lab)]

My Lords, the top 1% pays more tax. Is that because their income has gone up?

[Lord Newby]

It is partly because their income has gone up, but proportionately it is because they are prepared to pay the tax. As noble Lords opposite know, and as the noble Lord, Lord Lawson, has just demonstrated, when you get to very high levels of tax and very wealthy people, whether they pay it or not is not simply a question of whether they get a demand from HMRC.

[Baroness Neville-Rolfe (Con)]

My Lords, will my noble friend also comment on the beneficial effect of the decline in corporation tax—a business tax—which has had the effect of bringing some of our best companies back to London?

[Lord Newby]

My Lords, the Government are very keen to ensure that the tax regime is internationally competitive. That is the effect of the corporation tax changes. As the noble Baroness said, it is having a number of beneficial effects.

[Lord McFall of Alcluith (Lab)]

My Lords, Martin Sorrell of WPP said that for large corporations, corporation tax is a voluntary activity. Is that what the Minster meant by his answer to the last question?

[Lord Newby]

It certainly is not. As the noble Lord knows, we have taken the lead internationally to make sure that companies—which for many years in some cases have not paid much tax—will pay a proportionate amount. We have taken the lead in the G20 and the OECD to make sure that we have different rules in place, rather than rules that were designed more than 100 years ago. We are going to see the first fruits of that in September; the long-term effect will be that some companies that have been able to avoid paying tax in the past almost altogether by deciding where they were domiciled will not be able to avoid it in future.