Income Tax

Sheila Gilmore Excerpts

Wednesday 28th November 2012 Commons Chamber

[Rachel Reeves]

The hon. Gentleman says, “Whether the rate is 45p or 50p”, but the difference between those figures is £3 billion that could be used to pay down the deficit, help families who are struggling with the rising cost of living or get rid of the granny tax that the Chancellor is introducing next year. The principle of having lower taxes is fine, but we have a deficit to reduce. I thought the Government believed we should be cutting that deficit instead of giving tax cuts. The Chancellor said that in his first Budget, but he has thought again since then and is giving a tax cut to the wealthiest while asking ordinary families to pay more. That is not what my constituents want, and I doubt it is what those of the hon. Gentleman want either.

[Sheila Gilmore (Edinburgh East) (Lab)]

Does my hon. Friend agree that, strangely, because the cut in the rate of tax was announced and then postponed, a number of people will doubtless try to do in reverse what they appear to have done when the tax was introduced? The Government will then say, “Ah, but in this year, not enough was raised through that tax.” It will almost become a self-fulfilling prophecy.

[Rachel Reeves]

Exactly that point about income profiling and not being able to estimate the impact of the tax because it has not been in place long enough was made by the IFS and the OBR. It is a shocking indictment of the Government’s priorities that the Chancellor has chosen at this time to give a tax cut to the few at the top—a tax break for millionaires—while asking working people to pay more. They are the same, old, out-of-touch Tories, and not one of their accomplices—the Liberal Democrats—had the nerve to stand up to the Chancellor.

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[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.

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[Charlie Elphicke (Dover) (Con)]

It is a real pleasure to follow a maiden speech, particularly that of the hon. Member for Cardiff South and Penarth (Stephen Doughty), whom I congratulate on his excellent speech. He has a hard act to follow, as he acknowledged, having had two illustrious predecessors: “Sunny” Jim Callaghan and Alun Michael, late of this House. We will all watch his career with interest to see whether the constituency can provide a trio of senior Cabinet Ministers in due course. I must warn him, however, that no one ever tells us before we come to this place how busy it is and how hard-worked we are. I hope that he will still find the time to go and see Cardiff City play, and to pursue his singing hobby, which I understand he is partial to.

Moving on to the matter of income tax, I believe that the right policy is one of fair taxes, not only in regard to the higher rates but across the piece. For me, that means taking the poorest out of tax altogether, as well as taking the middle classes out of the higher rate and not allowing them to be consumed by fiscal drag as they have been over the past decade. It also means avoiding punitive rates that drive people out of the United Kingdom altogether, and ensuring that multinationals pay their fair share of tax on their UK revenues. Putting all that together would create the system of fair taxes and tax justice that this country urgently requires.

Did Labour do any of those things when it was in office? It did not do much to take the poorest out of tax. Indeed, many of the comments from the Opposition today on our policy of increasing the personal rate to £10,000, which I hope to see, have been mealy-mouthed at best. They appear at times even to oppose it.

[Sheila Gilmore]

Does the hon. Gentleman accept that there are different ways of assisting those on lower wages? The Institute for Fiscal Studies has suggested that tax credits are more efficient than raising the tax threshold, which is very expensive. Furthermore, once people have fallen below the threshold and out of tax, they get no further help. It is at least arguable that the Government’s much-vaunted raising of the personal allowance will not help the poorest families, and that it will come at a very high price.

[Charlie Elphicke]

I prefer aspiration to the welfare dependency that Labour has offered over the past decade.

We have cut income tax for 25 million people in this country, and we are taking 2 million people out of tax altogether. I am proud that this Government have done that. We are increasing the personal allowance to £9,205 in April 2013, and I want to see it increased to £10,000 in due course. These are real achievements for the Government. It was wrong that the previous Government allowed so many people on middling incomes to get stuck in the 40p rate, where they should not have been. I hope that, as the public finances recover, we will be able to find more space to take middle-earning people out of the higher rate. They are not rich people; they are the people in the squeezed middle created by Labour when it was in power, and I hope that that situation will change over time.

The most important thing is to look at the effects of the punitive rates that Labour introduced. Let us face the facts. Today’s Daily Mail reports that about two thirds of Britain’s highest earners “deserted the UK” after the 50p top rate of tax was introduced. It found that in 2009-10 some 16,000 workers with an income of over a million quid paid tax, but that the number then dropped to 6,000 after the former Prime Minister brought in new tax rules.

I would like to congratulate my hon. Friend the Member for West Worcestershire (Harriett Baldwin) on asking the questions that drew forward these important figures. The tax paid by top earners fell from £13.4 billion to just £6.5 billion in 2010-11. That is the issue, is it not? If the rate is increased so much that it becomes punitive, people will leave the country, squirrel away their income, not declare their income, leave it in companies—personal service companies—or cash boxes where it is not subject to tax. When that happens, tax revenue is lost.

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[Charlie Elphicke]

On that basis, I am sure that the hon. Gentleman will jump up next to say that he is in favour of hanging, along with most of the British people. I do not see him or his Labour colleagues supporting that particular measure—or, indeed, a measure to leave the European Union, which is what most people in this country say they want when they are polled. I urge the hon. Gentleman to be cautious when it comes to these issues; he needs to be careful about what he wishes for.

I think that the Treasury is right to cut the 50p rate to a more sustainable level. We know it will cost £100 million, but we also know that five times that amount has been raised by taxes that are less elastic. This measure is right for the public finances and it is the right economic policy to encourage growth and prosperity in this country. It is also the case that if we cut the rate, we up the take; and I suspect the Treasury figures might turn out to be a little bit better—or perhaps it has been a little more cautious—than we think. I suspect that we might well end up with more money in the bank as a result of these measures.

Broadly, what the Government have done is right. It is important to remember that if we encourage millionaires to stay in Britain and to set up and run businesses here, they will do so far more effectively. It is important, too, for the Government to look at multinationals and ensure that they pay a fair share. We should also note that in the past decade, the Labour Government allowed multinationals to flout our tax law and not pay a fair share of tax. The reason we are talking about the super-rich—Apple, Amazon, Google and all the rest of these large combines—today is that the Labour Government let them completely off the hook. They were so determined to be the pro-business party that they did not collect the revenue from these companies that they should have done. They did not keep our tax law up to date for the internet age.

The Opposition may well want to talk about millionaires and the people who earn amounts that lead to the 50p rate, but it is wrong for them to do so while they completely let off the hook the really large businesses that have substantial revenues that they could and should pay in the UK but do not. Shame on them for that. Let us face the fact that the working nation under Labour saw income taxes rise by about 80%, whereas non-oil corporation tax revenues went up by just 6%. I do not think that is a record of which the Labour party should be proud; it is not a good record or a justifiable record, and people are very angry about the fact that Labour was completely asleep at the wheel on that score.

I think the Government took the right measure in dealing with tax avoidance by the super-rich. It is not just about the 50p income tax rate, as it is also about tackling tax avoidance. An important consultation on tax avoidance is taking place, along with the introduction of the general anti-abuse rule. It is important, too, that we are raising more money from less elastic taxes as a result of getting rid of the 50p rate. We have a package of measures, such as stamp duty land tax, cracking down on tax avoidance and introducing a cap on uncapped income tax reliefs. Reducing the 50p rate for millionaires is not the right way to approach these things; the right thing to do is to look at the inelastic taxes.

It is very revealing that we have seen interventions by Labour Members today attacking the measures on stamp duty land tax, implying that they are almost the wrong thing to do. It is important to go for the less elastic taxes and use the elastic taxes to encourage entrepreneurs, wealth creators and those who will create jobs and money. It is important, too, that the figures in the Office for Budget Responsibility report and from Her Majesty’s Custom and Excise show that the 50p rate raised next to nothing. Analysis showed that the 50p rate meant £16 billion to £18 billion of income was deliberately shifted into the tax year before it was introduced.

[Sheila Gilmore]

Will the hon. Gentleman give way?

[Charlie Elphicke]

I have already given way.

Self-assessment receipts for 2011-12 are below the forecast by £3.6 billion and the increase from the 40p to the 50p rate raised only a third of the £3 billion that the Labour Government said it would raise. It is easy for Labour to say, “Ah, but eventually this money will pop up”—but not necessarily. The money could be kept in a personal service company, as so many Labour Members and, indeed, the former Labour Mayor of London have done, and lent to oneself with a beneficial loan, helping to avoid paying tax. People can take those sorts of measures, or they can capitalise their income and invest it in something else, meaning that the money never comes into charge. That is why super-high rates are unwise. It also means driving people abroad. That is exactly what happened: people were driven abroad by the Labour Government’s penal tax rates. Again, that is not the right thing to do. We need to look at how to repair our nation’s finances, not look at how to play politics with the politics of envy.

It is important to remember that the former Chancellor of the Exchequer said that the 50p rate was always meant to be temporary and that the Revenue has been very effective in cracking down on tax avoidance, which is where the really big numbers lie. The 50p rate does not raise a whole of lot of money and it discourages a whole load of people by sending out a negative message on the competitiveness of Britain, while the tax avoidance and evasion yield has jumped to a record £21 billion. It is important to crack down on all those tax avoiders and tax evaders, making sure that they pay a fair share.

Finally, I would like to quote what the OECD says about the effect of the 50p rate on our competitiveness and on our economy. Back in July 2010, it said:

“Consider reducing the top rate of PIT”—

personal income tax—

“which is substantially above the OECD average and likely adversely to affect work incentives and entrepreneurship, particularly of high skilled workers. Consideration should be given to reducing the top rate of personal income tax to close to 40 per cent”.

It is very telling that an international organisation is saying that a country’s tax system is going to drive people away, particularly the high skilled, highly able, highly job-creating, highly entrepreneurial people that a country most needs to have. The Government have been very brave in putting the economics before the politics in the last Budget. I commend them for what they have done and for taking the tough decisions that are right for our economy.

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[Harriett Baldwin (West Worcestershire) (Con)]

It was a privilege to be present for the maiden speech of the hon. Member for Cardiff South and Penarth (Stephen Doughty), who spoke eloquently and passionately about his local area. The picture that he painted has made me eager to take the first possible opportunity to visit his constituency.

Let me begin with a small maths problem that I often pose to students in my constituency. If income tax rates were set at zero, how much income tax would the Chancellor raise? The students always get the answer right: it is zero. I then ask this question: if the Chancellor set the income tax rate at 100%, how much more income tax would he raise? Usually, someone will put his or her hand up and say, “He would raise a lot more.” I should welcome an intervention from any Opposition Member who has a view on how much income tax the Chancellor would raise if the rate was set at 100%.

[Sheila Gilmore]

Giving such an extreme and ridiculous example is unhelpful, as I think the hon. Lady is well aware. No Opposition Member is suggesting that the income tax rate should be 100%.

[Harriett Baldwin]

I seem to recall that in my lifetime—under the Government of, I think, the predecessor but one of the hon. Member for Cardiff South and Penarth—income tax was set at more than 90%. If it were set at 100%, we should have no income tax revenue, because no one would consider it worth while to work.

I then ask my students what would happen if we lowered the rate of income tax from 100% to 70%. Would we raise more or less revenue? Again, I should welcome interventions from Opposition Members. Everyone realises that we would raise more revenue, because if the rate was 70%, we would take home 30p in the pound. I notice that the new socialist Government across the channel recently introduced that income tax rate. We will see how that stacks up over time, but I expect that it will prove to be a deterrent to additional work, too.

The motion contains the seeds of its own mathematical inconsistency, because the Opposition are extrapolating a linear relationship between the income tax rate and the amount of income tax revenue raised. They are also extrapolating that those who can, in what is a global market, take their labour to any other country in the world will not take into account any difference in tax rates between the UK and other nations, yet all the evidence shows that that is not the case.

The Labour motion refers to 8,000 people paying income tax on income of £1 million or more. In 2009-10, which is the last tax year in which we had the 40p tax rate, some 16,000 people had an income of £1 million or more. Through raising the tax rate from 40p—a rate that was in place for all but one month of Labour’s entire 13 years in office—we can see that millionaires can do other things with their income. They can take their entire labour overseas, or they can decide to shelter their income or not to take a dividend that year, or they can use any of the other methods to ensure they do not pay that increase in income tax. There was a reduction of £7 billion in revenue after the income tax rate went up from 40p to 50p.

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

First, I congratulate my hon. Friend the Member for Cardiff South and Penarth (Stephen Doughty) on making such an extraordinarily good maiden speech. It was elegant, forceful, confident and amusing, and it had a global sweep, covering most of the current political agenda. I am sure that we will hear a great deal more from my hon. Friend, and I wish him well.

The basic reason why the 50p rate decision is so unfair is that the very rich caused the financial crash, yet those at the top of the banks have hardly suffered at all, while the rest of the population are having to fund the bail-out and are now paying the price in rising unemployment, shrinking incomes and reduced services. To cap it all, in those current circumstances of austerity, the Chancellor flagrantly and provocatively cut the 50p tax rate to give the 1% very richest in the country—those on more than £3,000 a week—an average £10,000 tax break, including giving 14,000 millionaires a gift of £40,000 each, which is an extra £800 a week.

The Exchequer Secretary gave two reasons for doing that, one of which was that not much money will be lost as a result, but Her Majesty’s Revenue and Customs report on the 50p rate reduction plainly states, in table A2, that the Treasury will forgo £3 billion as a result.

[Sheila Gilmore]

Does my right hon. Friend think the Government’s rush to judgment on the effect of the 50p rate decision will be as good as their rush to judgment on the value of the future jobs fund?

[Mr Meacher]

My hon. Friend makes her own point. It is very difficult to reach a final conclusion on this matter, because of forestalling and because this change is seen as temporary. The very rich will, therefore, ensure that most of their income is put forward until the rate is lowered.

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[Stephen Williams]

My hon. Friend says it is unusual, but I would say that it should not be surprising, given what Tony Blair said would be the intention of his party while it was in office. Of course, that gives us another opportunity to remind ourselves of Lord Mandelson’s comment that new Labour was

“intensely relaxed about people getting filthy rich”.

Let us compare the Labour Government’s record with what the coalition has done. Liberal Democrat priorities in the coalition are twofold: tax cuts for the lowest paid and effective taxes on the wealthy. We have seen the £10,000 tax-free threshold go from the front page of our manifesto and election leaflets through to the coalition agreement and it is on course for delivery within this Parliament. We will have raised the tax threshold from £6,475 steadily towards £10,000 possibly within four years and certainly within five. In the previous decade under the Labour Government, the tax threshold was raised by just £2,090. Under the coalition, more than 20 million people will have a tax cut of up to £700 and 3 million will have been raised out of income tax altogether. That disproportionately helps people who work part time, who are disproportionately women, and is particularly effective in helping the young. Indeed, a young person on the minimum wage can now work full time without paying any income tax. That is a huge difference from the position we inherited.

[Sheila Gilmore]

I am listening very carefully to what the hon. Gentleman is saying. Would he support urging the Government to change how they will approach universal credit? Under the new rules, people will be assessed on their post-tax income and as a result for every £1,000 increase in tax allowance people on tax credit will receive only £70. Would he support an amendment or a change to that?

[Stephen Williams]

I think that universal credit will be seen in time as a major piece of welfare reform, sitting with what the 1945 Labour Government and 1906 Liberal Government did, and will have huge significance in simplifying the benefit system. Surely the hon. Lady, like me, will have visitors in her surgeries who fall between the stools of council tax benefit, housing benefit, jobseeker’s allowance, employment and support allowance, and all the others and who ask her to sort that out for them. The Government are making progress on that. There are intricacies to sort out—I grant her that—but the reforms are yet to be brought in and I hope that there is still time to ensure that the system, when it starts, genuinely helps the most vulnerable in society, which we certainly want to see.

The top priority for the Liberal Democrats in this coalition is the £10,000 tax-free threshold. That is now the flagship policy of the coalition and both parties should be pleased that it is being delivered, but we also want to see effective taxes on the wealthy. The Government have already raised the rate of income tax from the 18% we inherited to 28%. We have raised stamp duty on properties worth more than £2 million from 5% to 7%. That is an extra £40,000 of stamp duty that someone will pay when acquiring a property worth £2 million or more. We have also imposed a 15% surcharge stamp duty to discourage the tax avoidance that was rife under the previous Labour Government, when people used corporate vehicles to acquire personal property. We have effectively put measures in place to block that. Of course, I now want the Government to go further and to see whether in our next couple of Budgets we can get an effective mansion tax and annual wealth tax in place.

When the announcement was made in this year’s Budget that the 50p top rate would be reduced next year to 45p, the Chancellor ensured that other measures put in place would raise five times as much revenue as was predicted to be lost as a result. I am interested in having an effective top rate of income tax and 45% compares well with the international situation. In Germany, the top rate of tax is 47.5%, but it bites only after about £208,000 of income. In the US, the rate is roughly 42% in the states that have the highest rates of taxation, but it bites only at £240,000. In France—I am surprised that Opposition Members have not mentioned President Hollande more often—the top rate of tax is 41%, lower than the 45% that ours will be next year, whereas the 75% that he talks of introducing will be only on incomes of more than €1 million if it is introduced in 2013.

Rates and thresholds are effective only if taxes are collected, which is why I am pleased that the Treasury has set up an affluence unit to target people who have assets and income of more than £1 million and why we are introducing a general anti-abuse and anti-avoidance rule, for which I have called for many years. That action has been taken by this Government and was dismissed by the two Chancellors of the previous Government.

When Labour was in office, it made a virtue of low taxes on the wealthy and high earners. The coalition has slashed tax for the poor, has effective taxes in place on the wealthy and is cracking down on tax avoidance. I know which record I prefer.