Cut Corporate Taxes to Boost Growth, Wages and Investment

Reversing the corporation tax hike and replacing the super-deduction would have significant positive impacts on growth, investment and wages says think-tank

• The UK currently ranks 22nd out of 37 OECD countries in terms of tax competitiveness. This does not account for the scheduled rise in corporation tax from 19% to 25% and the expiration of the super-deduction. 

• Raising corporation tax to 25% and failing to replace the temporary super-deduction would lower businesses investment by 7.6% and average household wages by £2,500.

• In contrast, reversing the planned hike and allowing businesses to deduct the cost of new investment for all asset types by 100% would raise investment by almost 10% and GDP by 3%

A new report from the Adam Smith Institute (ASI), A Recipe for Growth: The Economic Effects of Corporate Tax Reform in the UK, presents analysis which shows that next year’s corporation tax hike and the end of the super-deduction policy is set to lower British business investment by 7.6%, output by 2.3%, and average household wages by £2,500. In contrast, if businesses were allowed to continue to deduct 100% of the cost of new investment in equipment, then relative to current law it would raise business investment by approximately 5% and real output by 1.3%. Extending 100% cost recovery to all asset types would raise investment by almost 10% and GDP by 3%. 

As the paper outlines, lower rates of corporation tax have a significant positive impact on workers’ wages. Firstly, increasing productive capital (machinery and equipment) per worker boosts productivity, which in turn generates higher wages. Secondly, more profitable industries tend to use their increased profits to hire better quality labour, bidding up wages in the process. Moreover, lower domestic corporation tax rates can improve workers’ bargaining power, as incentives for firms to move abroad are diminished. 

Based on this analysis, the Adam Smith Institute recommends reversing the corporation tax hike and replacing the super-deduction with a 100% deduction on all asset types. 

Daniel Pryor, Head of Research at the Adam Smith Institute, said:

“It’s vital that the next Prime Minister goes for growth and boosts Britain’s bleak business investment numbers. But as this report shows, the coming corporation tax hike and the end of the super-deduction will hammer the economy, choke off investment and reduce the average household wage by £2,500. If the contenders for the Conservative party leadership are serious about getting Britain back on track, they should commit to canceling the corporation tax increase and making full expensing of capital investment permanent. In the long-run, keeping corporation tax low largely pays for itself.”

Greg Smith, Member of Parliament for Buckingham and Deputy Chair of Conservative Way Forward, said: 

“If going for growth and bringing down the cost of living is our top priority, then cancelling the corporation tax rise is an absolute must. As this timely report from the ASI makes clear, lower corporation tax will increase both investment and wages, boosting the economy and driving down the cost of living.”

Steve Baker, Member of Parliament for Wycombe, said: 

“As individuals, families, and businesses suffer from the cost of living crisis, it is clear that we need to spur investment and output in the UK. This cannot be done by increasing corporation tax. As this great paper from the ASI makes clear, cancelling the increase to corporation tax and allowing firms to continue to fully expense new equipment will boost our economy and increase investment at a time when we need it the most.”

-ENDS- 

Notes to editors:  

For further comments or to arrange an interview, contact Emily Fielder, emily@adamsmith.org | 0758 477 8207.

Dr Tyler Goodspeed is a Kleinheinz Fellow at the Hoover Institute at Stanford University and Senior Fellow of the Adam Smith Institute. He served as Acting Chairman of the White House Council of Economic Advisers, 2020-2021.

The Adam Smith Institute is a free market, neoliberal think tank based in London. It advocates classically liberal public policies to create a richer, freer world.