Effect of CT reductions

In a document referred to by George Osborne in the Autumn Statement, HMRC estimate that the reductions in the rates of corporation tax announced in recent years will increase investment by 2.5%-4% in the long term and GDP by 0.6%-0.8%. Further, lower corporation tax will increase the demand for labour which in turn will raise wages and increase consumption. Increased profits, wages and consumption will generate higher tax revenues, meaning that the cost of the reductions (which are expected to save businesses £7.8bn a year) will fall by 45-60% in the long term say Harris & Co the specialist small business accountants.

The document shows the results of applying the Computable General Equilibrium (CGE) model to the corporation tax reductions announced since 2010 (i.e. the reduction in the main rate of corporation tax from 28 per cent in 2010 to 20 per cent by 2015-16 and the reduction in the small profits rate from 21 per cent to 20 per cent). CGE models are commonly used to analyse the economic effects of changes in taxation and governments and institutions such as the World Bank, the OECD and the IMF use CGE models in some form.

HMRC acknowledge that the figures are “subject to some uncertainty”. However, for HMRC the results of the exercise are “broadly consistent with the wider academic literature which finds that reductions in Corporation Tax boost investment leading to higher GDP and partial revenue recovery”.

The document, Analysis of the dynamic effects of Corporation Tax reductions, can be found here.