Changing tax

This morning Conservative MP Andrea Leadsom appeared on BBC Radio 4’s Today programme, and among other things discussed her party’s plans for “a proper reform of business rates”. She didn’t specify exactly what this entails, but did say “business rates is the one tax that business organisations tell us isn’t working for them”.

Presenter Nick Robinson asked her several times how the Conservatives were going to fund a reduction in business rates.

After asking for the third time “where does the money come from?”, Ms Leadsom responded:

“You’re assuming money comes from somewhere. What I’m trying to explain to you is since our reduction in the headline rate of corporation tax, the HMRC’s tax take has actually increased by something like 45% because more businesses comply”.

Ms Leadsom did not go as far as to say a reform of business rates would be funded through a reduction in corporation tax, but she did suggest that lowering corporation tax was a way of potentially generating more revenue for the government.

A couple of hours later, Boris Johnson announced that the Conservatives would postpone their proposed further cuts in corporation tax, saying that this would free up £6 billion for the NHS.

Those slightly contradictory messages aside, it’s far from clear how far corporation tax reductions have increased tax revenue overall.

The government began reducing corporation tax at the start of 2011/12. Corporation tax revenues fell over the next couple of years, but then have increased in every year since 2014/15. They haven’t gone up by 45% in that period, though. They have increased by around 45% since 2009/10, but that was two years before the Conservatives started to reduce corporation tax, when tax revenues were at a low in the immediate aftermath of the financial crisis.

And revenues as a percentage of GDP have remained fairly flat over the past decade (and are relatively low by historic standards), as you can see on this helpful chart from HMRC’s tax receipts document.

There’s no way to definitively know how corporation tax reductions might have impacted other tax revenues (such as income tax), or to what extent they may have contributed more broadly to economic growth.

As we said last time we wrote about this, "the exact impacts on economic growth are hard to predict", although HMRC's estimates suggested that the previous corporation tax cuts could result in between 0.6% and 0.8% growth in GDP over 20 years.