Cancelling corporation tax rise will boost GDP by 1.2% – but reforming capital allowances could do even more

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  • On Friday, Kwasi Kwarteng is widely expected to cancel Rishi Sunak’s proposed rise in corporation tax from 19% to 25%
  • New modelling by the US-based Tax Foundation and the Centre for Policy Studies shows that in the long term this will increase GDP by 1.2%, investment by 2% and wages by 1.1% compared to the higher-tax scenario
  • However, this will be a case of avoiding a hit to GDP that would otherwise have taken place. The modelling shows that if Kwarteng goes further, and acts to incentivise business investment, he could increase long-run GDP by between 0.1% and 2.5%, depending on how ambitious he is
  • The two think tanks have modelled the impact of various scenarios proposed by the Sunak Treasury, as well as the costs – and added further, more generous scenarios which extend capital reliefs to structures & buildings as well as plant & machinery
  • Their modelling shows that the most generous of these options would increase long-term GDP by 2.5%, investment by 4.2% and wages by 2.1%, at an annual cost of approximately £10 billion a year
  • They urge the new Chancellor to adopt the most generous regime possible, given the beneficial long-term impacts


Tom Clougherty, CPS Head of Tax and co-author of the report, said:

‘The Government now has an opportunity to radically reform the UK corporate tax system.

‘There is no doubt that each of the reforms put forward would be an improvement. But by opting for the most radical option, full expensing, the Government will maximise business investment, boost productivity and deliver the higher levels of GDP growth that the country desperately needs. If growth is the goal, it pays to be as bold as possible.’


Daniel Bunn, Tax Foundation Executive Vice President, said:

‘Before the super-deduction, Britain ranked 30th out of 37 OECD countries when it came to the generosity of capital allowances – showing just how flawed its corporate tax system has become.

‘An aggressive, pro-growth tax agenda is the only way for the Government to deliver the long-lasting change the UK needs to emerge from its current slump. Being radical, introducing full expensing and extending it to structures and buildings is the only real answer for how to move forward.’

Date Added: Wednesday 21st September 2022