Income tax charge and rates for 2016-17

Finance Bill – in a Public Bill Committee am 11:30 am ar 30 Mehefin 2016.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Rob Marris Rob Marris Shadow Minister (Treasury) 11:30, 30 Mehefin 2016

I beg to move amendment 6, in clause 1, page 1, line 9, at end insert—

“(3) The Chancellor of the Exchequer shall, within three months of the passing of this Act, publish a report on the impact of setting the additional rate of income tax at 45% and at 50%.

(4) The report must estimate the impact of setting the additional rate for 2016-17 at 45% on the amount of income tax currently paid by someone with a taxable income of—

(a) £150,000 per year;

(b) £500,000 per year; and

(c) £1,000,000 per year.

(5) The report must estimate the impact of setting the additional rate for 2016-17 at 50% on the amount of income tax currently paid by someone with a taxable income of—

(a) £150,000 per year;

(b) £500,000 per year; and

(c) £1,000,000 per year.”

With this it will be convenient to discuss clause stand part.

Photo of Rob Marris Rob Marris Shadow Minister (Treasury)

On your opening remarks, Sir Roger, I wish that when I entered the House in 2001—I look around with some shock; I think that I entered the House before any other Committee member—someone had given me that explanation. That is not to say that I know it all, but it would have been helpful to have had that explanation when I started as a Member.

The amendment relates to the Chancellor publishing reports. To Committee members who are not familiar with the procedure—as ever, I stand to be corrected by the Chair on this—I say that the Opposition cannot table amendments that would put up taxes. It is therefore quite a common device for the Opposition to express disquiet about a particular course of action being proposed by a Government by means of an amendment asking the Government—often in the person of the Chancellor of the Exchequer, obviously—to prepare a report on a given subject some months or years down the line, so that there might be some evidence of the efficacy or otherwise of the disputed measure. That is, of course, what we seek to do through amendment 6.

It will not surprise Committee members that we on the Labour Benches—I cannot speak for the Scottish National party, of course—think that the highest rate of income tax should be 50%, as it used to be. We do not accept the overall medium-term accuracy of the figures propounded by the Government that suggest that the drop in the top rate from 50% to 45% was subject to a Laffer curve, whereby a greater sum was brought in even though the rate was lower. We do not accept that because, due to the change in rate, there was tax shifting, such that there was a bulge in receipts in one year, which was offset by lowered receipts in later years.

In our view, the Government have on occasion mistakenly cited the bulge year as evidence that a lower top rate of tax brought in a higher amount than a higher top rate of tax would have. They do that simply by quoting one year rather than a sequence of years, which is unfortunate in terms of getting clarity when discussing taxes. I could produce all kinds of evidence of that, but I do not wish to detain the Committee. However, we think that the top rate should be 50%, and amendment 6 seeks to pursue that point using the mechanism available to us as the official Opposition. [Interruption.]

That is my phone. I am so sorry. It can happen to all of us.

No, that is one thing the Chair never does. I call the Minister.

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

It is a great pleasure to serve under your chairmanship, Sir Roger, and I welcome you to the Chair. It is a great relief to see you here today; your guidance will be much appreciated by all the Committee members from right across the House.

Let me take this opportunity to say a bit about clause 1 as well as responding to amendment 6. Income tax is the Government’s biggest revenue source, making up 32% of revenues in 2015-16. The annual charge legislated for by Parliament in the Finance Bill is essential for the tax’s continued collection.

Clause 1 states that UK taxpayers will pay income tax at the same rates as in 2015-16, meaning that we meet our commitment to ensuring that there will be no increases to the main rates of income tax in this Parliament. When that is taken together with commitments on the personal allowance and the higher rate threshold, which I will come to, it means that we are delivering an income tax system in which working people on low and middle incomes receive tax cuts. The latest statistics show that the top 1% of earners have paid over 27% of income tax receipts—more than in any year under the last Labour Government.

Let me turn to amendment 6, which was tabled by the Opposition. As Finance Bill regulars will know, it is a familiar one. The amendment proposes that the Chancellor publish a report reviewing the impact of setting the additional rate of income tax at 45p and 50p within three months of the passing of the Act, and on the effect on the tax liabilities of typical individuals with annual incomes of over £150,000.

As I have said on a number of occasions, for such analysis to be credible, it needs to look at how such different income tax rates affect individual behaviour, for example through affecting work incentives. Simply looking at theoretical income tax liabilities when changing taxes is not enough. Further, this is something that anyone can do if they have the time and inclination.

The Government already consider the behavioural impact of decisions taken, as did the report by Her Majesty’s Revenue and Customs on the additional rate, which was published at the 2012 Budget. That report concluded that the underlying yield from the introduction of the 50p rate was much lower than originally forecast, due to large behavioural effects. It even said that it is quite possible that the 50p rate could have reduced income tax revenue instead of increasing it. Indeed, the evidence so far is that despite the reduction of the additional rate, the top 1% of income tax payers are contributing a greater share of income tax receipts than in any year under the last Labour Government. In addition, the 50p rate was one of the most uncompetitive income tax rates in the G20. It would be illogical to re-introduce a tax rate that is ineffective at raising revenue from high earners.

On a practical level, the Government need to spend their resources effectively. The Treasury and Her Majesty’s Revenue and Customs have no plans to introduce rolling annual reports on the impact of changes to tax rates. That notwithstanding, the Government always keep tax rates under review and monitor receipts. On that basis, the amendment is unnecessary

We accept that income tax receipts can move from one year to another, and that there is a degree of flexibility as a consequence of changes to rates. We have always been clear that there is some income shifting in response to the changes to income tax rates, just as there was under the previous Government, when they introduced the additional rate of tax. We made it clear that we expected that to happen. However, it is clear that the 50p rate was distorting and an economically inefficient way of raising revenue. The latest statistics show that, following the reduction in the top rate of tax to 45p, the amount of tax paid by additional rate taxpayers is expected to grow from £46 billion in 2013-14 to £47.3 billion in 2016-17.

Clause 1 ensures that the Government can collect income tax for the year 2016-17. It means that the main rates of income tax faced by UK taxpayers will remain unchanged, and will help the Government to achieve their aim of a tax system that is fair for everyone, while rewarding those who want to work hard and progress. I therefore propose that the clause stands part of the Bill without the amendment proposed by the Opposition.

Photo of Rob Marris Rob Marris Shadow Minister (Treasury) 11:45, 30 Mehefin 2016

I have nothing more to say on the clause, but I wish to press amendment 6 to a vote.

Question put, That the amendment be made.

The Committee divided:

Ayes 10, Noes 13.

Rhif adran 1 Christmas Tree Industry — Income tax charge and rates for 2016-17

Ie: 10 MPs

Na: 13 MPs

Ie: A-Z fesul cyfenw

Na: A-Z fesul cyfenw

Question accordingly negatived.

Clause 1 ordered to stand part of the Bill.

Clause 2