“When it comes to corporation tax, I would love to reduce it. In the long run, I think we do get more money.”
That’s what Jeremy Hunt told the House of Commons yesterday.
The new chancellor was defending his decision to raise corporation tax – which companies pay on their profits – in direct contradiction to prime minister Liz Truss’ previous plan to keep it at current levels.
The u-turn was an attempt to calm the financial markets by showing “fiscal discipline” – effectively, that the government is capable of balancing the books.
But it will have been painful for Mr Hunt, who pledged to cut corporation tax in both of his ill-fated attempts to become Conservative party leader.
And, judging by his comments in Parliament yesterday, it seems the chancellor still believes that lowering corporation tax would raise more money for the exchequer in the long term.
So, is he right?
Laffer-ing all the way to the bank?
The idea that cutting taxes brings in more money for the government might sound strange, but it’s not without its supporters.
The best known is Arthur Laffer, an American economist who advised President Ronald Reagan in the 1980s.
His eponymous “curve” is based on the idea that raising the rate of tax increases revenues – until it doesn’t.
The theory goes that at a certain point, if the government puts up tax rates on businesses or on individuals any further, it’ll encourage firms to leave the country, or to move their taxable assets overseas. In other words, raising the tax rate after this point will reduce the total amount of money the government takes in.
Conversely, reducing business taxes makes the country more attractive for international companies – so they relocate here, and the exchequer gets tax income that would otherwise have gone to foreign governments.
Taxes cut, yet more money in the public coffers. A political win-win.
That’s the idea, at least. But does it work in the UK?
Andy King, chief of staff at the Office for Budget Responsibility (OBR) spending watchdog, says not.
“Tax cuts don’t pay for themselves and would not improve the long-term financial position,” he said in July. “In every case I can think of, when we look at tax cuts, the direct fiscal cost of cutting that tax outweighs the indirect fiscal benefit of improved economic activity.”
The Institute for Fiscal Studies (IFS) think tank was similarly confident in 2019, responding to then-leadership hopeful Mr Hunt’s proposal to slash the main corporation tax rate from 19 per cent to 12.5 per cent.
“This is not a tax cut that would pay for itself as some have claimed,” the experts wrote. “Our existing tax base is too big for it to be plausible that this loss of revenue could be made up a result of higher profits being reported in the UK.”
And as FactCheck reported last month, while total corporation tax revenue rose the last time the headline rate was cut, the IFS is clear: this was not because of the cut.
Jeremy Hunt said that reducing corporation tax would raise more money for the government in the long run.
Some economists subscribe to a theory that would support this claim. But in practice, independent experts at the Office for Budget Responsibility and the Institute for Fiscal Studies are clear: this is not true in the UK.
Update, 6pm: After we published this article, the Treasury contacted us to say: “There is a range of academic evidence which suggests that low Corporation Tax can boost investment and growth, and therefore lead to higher tax revenue.”