Corporation Tax and Aggregate Demand & Supply
- A-Level, IB
- AQA, Edexcel, OCR, IB, Eduqas, WJEC
Last updated 8 Dec 2019
In this short video we look at how a cut in the main rate of corporation tax in the UK might impact on aggregate demand and supply.
Basics on corporation tax
- Most corporation tax revenue comes from the taxable profits of limited companies after taking account deductions and allowances.
- The main rate of corporation tax in the UK is 19%.
- Corporation tax was the fourth largest tax in 2018, raising £60 billion for the government.
- The main corporation tax rate is being lowered to 17% in April 2020.
Corporation tax rates in selected countries (2019)
- United Arab Emirates – Zero per cent
- Macedonia – 10 per cent
- Ireland – 12.5 per cent
- Singapore – 17 per cent
- United Kingdom – 19 per cent
- Vietnam – 20 per cent
- United States – 21 per cent
Cutting corporation tax to 17 percent
- A fall in corporation tax will increase the post-tax profits of businesses
- In theory this will increase funds available to fund capital investment e.g. in new plant, factories and technologies.
- This would then cause an outward shift of aggregate demand (AD=C+I+G+X-M)
- This increases demand / output and profits of businesses operating in the capital-goods industries e.g. machine manufacturers
- An increase in investment might also lead to an outward shift of LRAS as a country’s productive capacity increases
- Business confidence might be low – this would limit the impact of a corporation tax cut
- A tax reduction only benefits businesses making profits – many SMEs in the UK struggle to achieve a sustainable profit
- Other countries might be cutting corporation tax too which might limit the impact on inward investment
- Higher post tax profits might be shared as more generous dividends to shareholders rather than funding increased capital investment