Why corporation tax cuts work

Statistics out this week show that onshore corporation tax receipts have increased by 44% since 2011-12, rising from £34bn to nearly £50bn in 2016-17. This has rapidly exceeded the Office for Budget Responsibility’s expectations in 2013, which projected that total corporation tax receipts would be just £38.2bn.  This has occurred despite a cut in the headline rate of corporation tax from 28% to 20% over this period. Cuts in the headline rate of corporation tax since 2010 – as part of a raft of measures to increase competitiveness – have led to strong economic growth and higher profitability for companies. These in turn have helped to increase corporation tax receipts.

The current government is planning to further reduce the corporation tax rate to 17% by 2020, which will give an additional boost the UK’s competitiveness. However, the paper – which has been updated following the publication of figures this week – highlights that Labour’s current commitments on corporation tax will undermine the UK’s competitiveness while leaving a series of unfunded spending commitments.   The Labour Party has publically stated that it would fund £15 billion worth of commitments by increasing the corporation tax rate to 21.5%. This will leave at least a £10 billion funding gap.

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