John MacGregor – 1978 Speech on Investment Income Surcharge

Below is the text of the speech made by John MacGregor, the then Conservative MP for South Norfolk, in the House of Commons on 5 April 1978.

I beg to move,

That leave be given to bring in a Bill to abolish investment income surcharge.

This Bill is about jobs, about economic growth and about fair play. Whatever the earlier case for an extra impost, on investment income, the developments on the tax front and the growth in the tax burden over the past four years now mean that the surcharge is having seriously damaging effects in a number of important directions, and I seek this opportunity of drawing attention to them and tackling them. I wish to make six main points in relation to jobs, economic growth and fair play.

First, concerning jobs, there is now widespread agreement that in dealing with the appallingly high level of unemployment one of the main contributions in the future will have to come from the small businesses, because the public sector and the large and medium-sized companies in this country will be seeking in many cases to shed labour rather than to promote new jobs. Yet the small businesses are quite inadequately encouraged at the present time.

Much of the evidence to the Wilson Committee on the City has drawn attention to the problems of finance for small businesses. Indeed, the institutions, the banks and so on, are now doing much to assist in that area. But the real gap—and, I suspect, an increasing gap in the future—is for finance in start-up situations, in venture capital, and for the very small businesses, because the banks and institutions naturally do not wish to risk equity capital at that point since they have their own depositors to take care of.​

Getting the small business off the ground is still one of our major problems. Previously, this used to be done by private investors who knew the locality, knew the people and were prepared to risk some of their spare capital in order to get these businesses going. It is done in this way in America and in other countries where positive fiscal incentives are given compared with the fiscal disincentives that we apply here.

Even the National Research Development Corporation, in its recent evidence to the Wilson Committee, said:

“The mortality rate of small companies is high, and this in turn inhibits support for new technology-based firms in general. Special measures, including increased fiscal incentives (or the removal of current fiscal disincentives), may be required to promote the growth of small innovative enterprises.”

The plain fact is that the risk of losing one’s money in small businesses is high and the reward is virtually nil, especially at a 98 per cent. tax rate. I believe that it will be right—as I believe the Chancellor of the Duchy of Lancaster is considering—to introduce relief for losses against other income in order to assist start-ups. But the abolition of the investment income surcharge is also necessary to assist and encourage jobs in small businesses.

Secondly, turning to the more general aspects of growth, we are all agreed that we want to see more investment in British industry and commerce and, perhaps more important, better use of the investment. I would be the first to admit that encouraging saving is only one part of this problem. There is a need first to see the demand side increasing, as we do not have demand for new investment and for new capital on the scale required as we would all wish to see at the present time, because of the lack of confidence in British industry.

But at some stage the importance of the saver and the investor will come back into play. We do need to encourage new capital. Again, the investor gets poor rewards for subscribing to equities at present. For the high taxpayer the return is minute and after inflation is often acutely negative. Each year today there is a 5 per cent. decline in the number of shareholdings in British companies, and it is the individual small investor who is getting out. To a considerable ​ extent that is a tax matter because of the fiscal benefits to the pension funds, on the one hand, and the fiscal disincentives of high rates of taxation, especially investment income surcharge to the direct investor, on the other.

Another worrying aspect of this matter is the ever-increasing reliance on institutional investment in the Stock Market. I believe that this should give us some considerable cause for concern, because it means intensified volatility in the market, possibly less investment in the secondary, middle and smaller public companies and hence greater difficulty for them in raising new capital, and some would also argue the risk of only a small number of investment decision takers in stock market investment tending to concentrate on investment fashions. The abolition of the investment income surcharge would help to redress that balance and to get more investment directly from investors into British industry through equities.

Thirdly, I want to turn to one particular aspect—growth in farming. About 45 per cent. of agricultural land today is tenanted. Yet the fiscal burdens on the agricultural landlord—unless again it is an institution—are now penal, partly because his returns are treated as investment income. If he is paying between 80 per cent. and 98 per cent. in tax, he is less likely to be willing to invest in improvements to land, buildings and machinery because of the feeble after-tax return at the end of it. This is harmful to agricultural production as well as to all the allied industries which depend on a successful and growing agriculture.

It also means that many are tending to bring land in hand as soon as they can, for fiscal reasons, which is harmful to future tenant farmers in this country. I believe that we should be seeking a definition of a working landlord and enable him to benefit from current agriculture fiscal reliefs. That is the way mainly to go forward to the benefit of agriculture generally. Meanwhile, the abolition of the investment income surcharge would help.

My last three points relate to fiscal justice and fair play. Fourthly, we now have an appallingly muddled position in relation to tax on savings. Wins on the pools or on horses are virtually tax-free. Savings through pension funds and life assurance obtain a variety of tax benefits ​ which significantly affect the investment decisions of the saver. Gilts and other forms of Government savings, such as the Trustee Savings Bank, have considerable tax-free advantages which much distort the flow of savings patterns. It is important here to realise that the Government by their tax decisions are greatly benefiting themselves in relation to savings, especially in connection with high-rate taxpayers for whom gilts held for more than one year are enormously more advantageous than any other form of saving.

Only equities, building societies and other forms of private sector saving have to suffer the whole battery of taxes on savings. Investment income surcharge is one of the significant ones. Its abolition would help to remove distortions—indeed, gross distortions—which fiscal measures have so sweepingly introduced into savings.

Fifthly, I turn to the international comparisons. Few countries today have an investment income surcharge at all. None among our industrial competitors has rates on earned or on earned and investment income combined anywhere near ours reaching up to the top rate of 98 per cent., nor at the levels of income at which we impose them. I believe that it is no coincidence that we are not only so far out of line with them in our tax measures and tax burdens on direct and investment income but frequently out of line in our success in growth rates.

Sixthly, and most troubling of all, I want to draw attention to the quite unfair burden that the investment income surcharge now imposes on those with comparatively low incomes and on those aged over 65. Indeed, it is these groups with whom I am most concerned, despite all the other very important arguments, in pushing this measure today. One hundred and sixty thousand of those who pay investment income surcharge—or roughly one-third—have incomes below £4,000 a year. Indeed, this morning I had a letter from a constituent aged 58, who has just been declared redundant and who will have to make use of his redundancy payments and the savings which he has developed over his lifetime. He has an income—which he will expect not to grow from now on because he does not expect to get a job at his age—of about £2,000 a year and is naturally ​ infuriated as he now finds that he is paying a marginal tax rate of 44 per cent. on that income.

Over 45 per cent. of those paying the investment income surcharge are pensioners. What I find so appalling here is the quite unfair situation where those who are fortunate enough to have occupational pension schemes or self-employed schemes have their savings treated as earned income after the age of 65. But there are those who are not able to be in that position, perhaps because they were in a company which did not operate such schemes or had a small business and were not able to afford the self-employed annuity schemes which were not so generous in the past. Those who concentrated their savings on building up their businesses and get their retirement savings out of that business, or in other ways, find that they have this huge burden at a very modest rate of income of a 49 per cent. marginal tax rate.

It is scandalous that those who built up their savings in this way should be discriminated against. As the Building Societies Association points out, a single pensioner pays at a rate of 49 per cent. with an income of £3,410, whereas someone single and of working age has to reach an income level of £6,945 before he pays above the tax rate of 34 per cent. That is quite monstrous discrimination.

What particularly riles these people is that this is not unearned income at all. What they are getting after the age of 65 is income out of savings earned out of a hard working life and out of taxed income during that working life. There is no wonder that there is so little incentive to save in certain directions today, especially after inflation is taken into account. No wonder that the children of so many of these people—[HON. MEMBERS: “Too long.”]—should see themselves what has happened so that they no longer wish to save.

In conclusion, I recognise that there are many priorities in tax today. I have been among the first to argue for many of them, especially for those on low incomes and many others. I recognise that it may not be possible to carry through this measure exactly in this form at the present time. But I do believe that we should at least have amendments to this Bill to raise the threshold to £4,000 to ​ bring it back in real terms to where it was only a few years ago to help the pensioners, or perhaps to abolish it altogether on the pensioners as the Building Societies Association has urged.

But it is because I believe that the arguments long term for abolition are so compelling that I have sought to bring the Bill forward in this way today in order to encourage the wealth creators and the risk takers.