British Chancellor Philip Hammond. REUTERS/Bobby Yip LONDON — JPMorgan says the government's floated plan to lower corporation tax to keep Britain competitive after Brexit would be "no silver bullet for a hard Brexit."

Both Prime Minister Theresa May and Chancellor Philip Hammond have suggested that Britain may lower corporate tax rates in a bid to retain business and attract more companies to Britain after it leaves the European Union.

But Allan Monks, an economist at JPMorgan, says in a note circulated to clients earlier this month:

"Even economically, lower corporation tax would not come close to offsetting the shock of a very hard Brexit."

Monks argues that UK corporation tax of 20% has "already hit diminishing returns." He writes:

"The most recent tax rate cut to 20% has if anything coincided with a decline in corporate tax receipts. This is very different to the 1980s, when cuts to corporation tax cuts coincided with a large increase in corporate revenues relative to GDP. At present, the OBR estimates that each 1%-pt drop in the corporation tax rate is likely to lower corporate tax revenues over three years by around £2.4bn—or 0.1% of GDP."

Not only are returns diminishing, but the Treasury forecasts that Brexit will knock 1.7% off Britain's longterm GDP growth. If it is the hardest of "hard Brexits," with the UK falling out of the EU without a deal — as May has suggested could happen — and back to World Trade Organization rules, then the impact on GDP growth would be even worse.

As a result, Monks thinks the government would actually have to pay companies to stay in the UK for it to offset the economic shock of Brexit using corporation tax. He writes:

"The UK’s corporate tax regime already looks competitive both historically and internationally, further cuts are likely to prove more costly to the chancellor than before, and the tax rate would, in theory, need to turn negative to combat the shock of an ultra-hard Brexit."

"The fiscal burden of subsidizing businesses in this way, not to mention the political ramifications, mean this option would not be viable. Though the above analysis is very simple, it demonstrates that the threat of using the corporate tax system to retaliate against a very hard Brexit outcome is weak."

Monks' comments came just a few days before German central banker Dr Andreas Dombret warned the UK and the EU against a "race to the bottom" on corporation tax and financial regulation post-Brexit. At an event in London he said: "The current regulatory and supervisory standards we have set together are an important lesson from the financial crisis and it would be a mistake to roll them back."