Fact Check: the truth about corporate tax cuts

Does slashing business rates boost investment and economic growth?

London skyline
Businesses in London and across the UK pay the lowest headline corporation tax rate in the G7
(Image credit: Dan Kitwood/Getty Images)

The exact contents of the Chancellor’s Red Box won’t be revealed until tomorrow afternoon, but Philip Hammond is expected to cut the 19% corporation tax rate.

Former chancellor George Osborne hoped to boost growth and investment in the wake of the Brexit vote by reducing the corporation tax rate to 17% by the end of 2020 - and there is speculation that Hammond may also favour a rate cut to signal that Britain is open for business.

Across the Atlantic, the Trump administration appears to be considering a similar move. A broad package of corporate and individual tax cuts aimed at reinvigorating the US economy was approved by Republicans in the House of Representatives last week. It now heads to the Senate.

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But is there any evidence, in either the UK or the US, that corporate tax cuts spur investment and lead to economic growth?

Who says what?

The theory is “straightforward and uncontroversial”, says The Wall Street Journal. Tax cuts make it cheaper to finance investment in new projects, and more spending should contribute to growth.

Supporters of corporate tax cuts often argue that the savings free up capital for investment, which in turn enables companies to expand and hire more staff.

This was broadly the thinking behind Osborne’s signature policy. As chancellor, Osborne lowered the UK’s corporation tax rate from 28% in 2010 to 20% by 2016. With the rate now at 19%, the UK has the lowest headline corporation tax rate among the G7 countries, according to the Institute for Fiscal Studies.

Osborne argued last year that cutting the corporate tax rate even further would help build a “super-competitive economy” after Britain left the EU.

Similar arguements are being made in the US. President Donald Trump, another advocate of corporate tax cuts, claims the Republican tax plan will create “magnificent growth” and make the US economy take off “like a rocket ship”. White House officials predict the package will lead to growth of more than 3% a year, but not everyone is convinced.

Leading economists have long been divided over the issue of corporate tax cuts. A 2012 poll of a panel of experts, carried out by the University of Chicago, found that 35% thought reducing taxes would boost growth, an equal number were uncertain, and just 8% disagreed with the idea.

Nobel Prize-winning economist Paul Krugman and billionaire investor Warren Buffett are among those who argue that there is no proven link between corporate tax rates, investment and jobs, according to Reuters.

“Some people claim there’s a broad consensus that tax cuts are good or bad,” Chye-Ching Huang, a tax expert at the US Center on Budget and Policy Priorities, told The New York Times.

“But there isn’t one, because the question is too big. The answer to a question that imprecise is always going to be: it depends.”

What are the facts?

Despite cutting the UK corporation tax rate by more than 10% in the past decade, Britain has not seen a significant improvement in growth, says The Wall Street Journal, citing figures from the Organisation for Economic Cooperation and Development.

“British investment as a share of GDP is actually lower than before 2007 and productivity growth - the ultimate determinant of living standards and where higher investment should leave its mark - averaged 0.6% from 2010 to 2015,” the newspaper reports.

In the US, there are historical episodes that would “seem to support” the idea that lowering taxes leads to growth, says The New York Times, most notably when an economic boom followed President Ronald Reagan’s sweeping tax cuts in the early 1980s.

But there is “considerably less evidence that this cause-and-effect applies at all times and at all places”, the newspaper says. “George W. Bush’s 2001 and 2003 tax cuts were followed by years of disappointing growth”, while Bill Clinton’s tax increases in 1993 “were followed by a boom that surpassed the Reagan-era expansion”.

Experts warn that the link between corporate tax cuts and economic growth is difficult to prove, since so many other factors are at play, including demographics, technology and regulation.

“Taxes are just one factor and they are often less potent than advocates advertise,” says The Wall Street Journal.

A study by the US Institute for Policy Studies (IPS) examined payroll changes at 92 publicly held US companies that turned a profit each year between 2008 and 2015 and that, by claiming a wide variety of deductions and exemptions, paid less than 20% of earnings in federal income tax, CNBC reports.

What researchers found, CNBC says, is that “more than half of these lightly taxed companies actually shed jobs during the period, when the overall economy boosted payrolls by 6%. Of the 92 companies studied, the median change in payrolls was minus 1%.”

So where did the companies invest their tax savings? Many bought back their corporation’s stock, which helped boost their company share price.

“The top ten job cutters each spent $45bn in stock buybacks over the 2008-15 period, a pace six times that of the S&P 500 corporate average,” according to the IPS report.

Who is right?

While a lower corporation tax rate often leads to higher levels of investment, the evidence suggests that cutting taxes in not a guaranteed way to spur economic growth on a national level.

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