Since 2010 the government has committed to increasing the transparency and sophistication of its modelling of the effects of policies. As part of this, HMRC has been developing a Computable General Equilibrium (CGE) model, capable of modelling the dynamic macroeconomic effects.
The model has been peer reviewed by leading academics in the relevant field, who found that ‘the basic design of the HMRC model for the UK economy meets at large the key requirements for state-of-the-art applied tax policy analysis’.
This report shows the results of applying the CGE model to the Corporation Tax reductions announced since 2010. Modelling suggests that the tax reductions will increase investment by between 2.5 per cent and 4.5% in the long term and GDP by between 0.6% and 0.8%.
Lower Corporation Tax will also increase the demand for labour which in turn raises wages and increases consumption. Given the share going to labour this equates to between £405 and £515 per household.
The modelling shows increased profits, wages and consumption all add to higher tax revenues. As a result, the cost of the policy falls by between 45% and 60% in the long term.