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record of the Westminster Hall debate on the tax system, 05 February 2002: Lynne
Jones (Birmingham, Selly Oak): I congratulate the hon. Member for Fareham (Mr. Hoban)
on raising this important issue and I agree with his conclusion. A simplified system would
also remove much of the fraud in the tax and benefits system at a stroke.
When I heard about the debate, I searched through my
files to locate a copy of the Saatchi and Warburton document that the hon. Gentleman
mentioned, but I did not anticipate having the opportunity to speak. Indeed, I dashed to
Westminster Hall this morning because I thought that there would be far more interest in
the debate among other hon. Members than there is. The level of interest is surprising. I
thought that, as hon. Members had to complete their tax returns only recently, the issue
would have been weighing on their minds more, but apparently not.
We owe thanks to Saatchi and Warburton for pointing out
the complexity of the tax and benefits system. As I recall, it has provoked me to table at
least one parliamentary question, a copy of which I also managed to find. The answer to
that question was that, in the year 2000-01, 69 per cent. of employees earning less than a
third of male median earnings paid tax. Sadly, that percentage had increased from 56 per
cent. in 1997-98. It is ridiculous that people on such low earnings pay tax and are
probably at the same time forced to claim means-tested benefits.
The document entitled "Poor People! Stop Paying
Tax!" points out that the tax system collects a staggering 63 per cent. of GDP, and
the citizen must then claim back 14 per cent. of GDP by navigating more than 250
allowances, reliefs, exemptions, credits, tapers, indexations, disregards and so on. In
the process, we employ 80,000 civil servants to collect the taxes and 60,000 to pay the
benefits, at huge administrative cost.
I agree with many of the proposals suggested by people
who might be considered my political opponents, which is important, because some consensus
on the tax and benefits system is desperately needed. In opposition, parties are fond of
highlighting the existence and availability of stealth taxes, but in government, they
enthusiastically use them. Perhaps instead those in opposition and those in government
should think ahead to how we might behave when our roles are reversed and try to achieve a
consensus.
Yesterday, we had a debate about pensions. Bills on tax
credits and pensions credits are currently passing through Parliament. Both types of
credit increase the complexity of the tax and benefits system, which is deeply worrying,
because the extension of means-testing
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and complexity creates disincentives to work and save and incentives to commit fraud.
Surely it is not beyond the wit of man for us to agree on at least some broad principles.
I am glad that Lord Howe is involved in the tax rewrite
project, but I agree with the hon. Member for Fareham that that is not sufficient. The
system needs a radical overhaul, and I endorse the proposals made in the "Poor
People! Stop Paying Tax!" document. A very large hike in the personal allowance is
desperately needed, so that people can earn far more before they start paying tax. A
£10,000 tax threshold is being advocated, which would be a radical change.
I have not done the sums, but the general principle of a
large rise in the threshold, coupled with a simplification of the different income tax
rates, is sound and reform is long overdue. Unfortunately, the Government have introduced
greater complexity into tax bands. The 10 per cent. and 20 per cent. tax rates were merely
a gimmick; it would have been better to put those resources into raising thresholds. We
need to consolidate the various tax rates. We should have one basic rate, perhaps around
20 or 25 per cent., an upper rate that is higher than the present 40 per cent., and
something in the middle, which would claw back the benefits from middle income
earners—the bonanza that they would otherwise receive from large increases in
personal allowances.
The interplay of national insurance contributions is also
relevant. The Chartered Institute of Taxation and other organisations believe that the
kink in the system—whereby between £29,900 and £34,000 the marginal tax rate for
each extra pound drops from 32 per cent. to 22 per cent.—could be reconciled by
raising the upper earnings limit for national insurance in line with the threshold for the
higher tax rate. From my political perspective, that would also mean an increase in the
tax take from higher earnings. That is unlikely to achieve political consensus, but
agreement across the political spectrum could be achieved on the general principles if
only the Government were willing to sacrifice some of their sacred cows.
To achieve a more simplified system, we need to restore
universal benefits and reduce means-testing. I commend the Chancellor for increasing child
benefit, but wish that he had not introduced the additional complexity of the children's
tax credit, which effectively takes us back to the position when child benefit was
introduced. At that time, family allowances and personal tax allowances meant that higher
taxpayers gained more than others for bringing up their children. I acknowledge that the
new children's tax credit system is more redistributive, but it is complex. A simpler
system might continue with universal child benefit and ensure that it adequately reflected
the additional cost of bringing up children. The better-off, including MPs like myself who
receive child benefit, will have the additional income recouped through a progressive tax
system.
I make no apology for wholeheartedly supporting
progressive taxation and for being against increasing taxes for poor people, who should be
less reliant on means-tested benefits. Such benefits will always be with us, but should be
for the exceptional cases rather than for average groups of people.
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When child benefit was first introduced, it effectively
rolled up a tax allowance into a universal benefit—a process for which there is more
scope in future for other tax allowances. If a large increase in the personal allowance is
the first step, the next step is a flat-rate benefit, otherwise known as a citizen's
income. Again, the idea initially came from the right. It may have been proposed earlier,
but to my knowledge the first suggestion was from Christopher Monckton, a researcher in
Downing street in the late 1980s or early 1990s, when the Tories were in control. The idea
may have a longer history than that.
Such a policy would draw people from both ends of the
spectrum. It would maximise personal freedom and incentives to save. Every time that it is
raised, people say that its time has not yet come. I disagree; in Ireland, for example,
there are interesting debates on the subject. However, it may be a second step. As a first
step, I plead with the Government to consider the direction that they have chosen and the
complexity and amount of means-testing. In the future, 65 per cent. of pensioners will be
subject to some kind of means-testing, and I doubt that that will be conducive to the
Government's aim of increasing private savings. Surely, we can broadly unite around such
principles. If there were the will, such changes could be introduced.
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