Corporation tax reform

• Corporation tax is the tax on the profits of firms. A reduction in corporation tax will mean more retained profits for firms
• Reduction of corporation tax would incentivise firms to stay in the country and not move to lower tax jurisdictions
• Reduction of corporation tax would incentivise using the increased amount of retained profits to increase investments in human/ physical capital
• Low levels of corporation tax would increase quality of labour/ capital; more firms, foreign and domestic, joining the economy increases the quantity of enterprise
• An example of corporation tax reform:

  During the 2000s, corporation tax was gradually reduced from 30% to 19%. Jeremy Hunt raised this to 25% recently as there was an increasing debt burden. This is still low by historic standards: it was 55% in 1980. The global average is 25%
• The Laffer curve predicts that a lower rate will actually increase tax revenue as fewer firms are incentivised to use 'creative' accounting to pay the full amount (tax evasion)
• Lower corporation tax does not mean that firms will necessarily use their retained profit for reinvestment; firms may choose to pay higher dividends to shareholders
• Lower corporation tax may lead to investment in firms abroad. It is not guaranteed that firms will invest in the UK