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The Case for Corporation Tax Cuts

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Summary

  • Since 2010-11, the headline rate of corporation tax has fallen from 28% to 20%. Treasury analysis suggests that this fall will cost the Treasury between £3.2bn and £4.3bn per annum. Yet, despite this, corporation tax receipts have actually grown by 28% since 2011-12.

  • Strong economic growth and higher profitability for companies are the driving force behind this rise – which themselves have been brought about by Government measures to boost competitiveness, including cuts to corporation tax.

  • Evidence suggests that the decrease in corporation tax rate has supported growth and jobs. Treasury analysis shows that over the next 20 years they will increase investment by up to £6.2bn, GDP by up to £12.2bn and wage growth by up to £515 per household.

  • A further cut in the corporation tax rate to 17% is now planned. The Labour party has publicly stated their intention to reverse the cuts and further increase the rate to 21.5%.

  • At most, this action would raise between £3.7 and £5 billion pa in the long term – although there is no clear historical evidence that higher corporation tax rates lead to more revenues. The main corporation tax rate has fallen from 52% in 1982, yet corporation tax receipts are now a higher % of GDP at a rate of just 20%.

  • Labour has made pledges costing at least £15 billion pa linked to its plans on raising the corporation tax rate to 21.5%. These spending pledges are at least three times the maximum amount that could be raised from its planned increase in corporation tax rates.

  • Overall, there is at least a £10 billion a year funding gap between Labour’s corporation tax plan and their directly connected spending pledges.
  • To reconcile these without increases in other taxes or borrowing, Labour would have to increase the rate higher. Even if the corporation tax rate was reset at 28%, the gap is likely to remain. The maximum cost to the Treasury of the fall from 28% to 20% is between £3.2bn pa and £4.3bn pa – well short of the gap in Labour’s plans.

  • Furthermore, such an increase would reverse the gains achieved from the cuts in the corporation tax rate, including in investment, GDP growth, wage increases, and jobs growth. A rise in the UK’s corporation tax rate would damage competitiveness when other developed economies, including Canada and Japan, have been slashing their rates.