Corporation tax revenue growth in the UK: A microsimulation analysis ¬リニ

a r t i c l e i n f o This paper examines the built-in flexibility properties — as measured by the elasticity of revenue with respect to profits — of the UK corporation tax system. Emphasis is placed on determining some of the major influences on the extent to which total corporation tax revenue changes when profits change over the economic cycle. A microsimulation model, CorpSim, is constructed and used to obtain numerical results. In the model, corporations use group relief, capital allowances and losses in a tax-minimising manner. The growth of aggregate corporation tax revenue in practice in the UK appears to be highly volatile in relation to the growth of profits. High volatility in revenue elasticities is found to be especially associated with economic downturns. In mild economic downturns, corporation tax revenue elasticities may rise (because tax growth falls less than profit growth), but in more severe downturns, large but temporary decreases in revenue elasticities (and even negative elasticities) can be expected. The purpose of this paper is to examine the built-in flexibility properties — as measured by the elasticity of revenue with respect to profits — of the UK corporation tax system. Emphasis is placed on determining some of the major influences on the extent to which total corporation tax revenue changes when profits change over the economic cycle. This exercise is motivated by the fact that volatility of corporate tax revenues in recent years has proved hard to predict, in part because the underlying revenue properties of the tax are not well understood. It is important to analyse the elasticity or built-in flexibility properties of the corporation tax system, in order to be able to distinguish their effects from those of discretionary changes in tax rates and thresholds, or other factors such as changes in avoidance and evasion. 1 Hence, in the simulations reported here, the various tax thresholds are held constant and the revenue elasticity measures the extent of fiscal drag. Section 2 briefly discusses the concepts of tax buoyancy and elasticity. It may be thought that, because the UK corporate tax schedule displays very little rate progression, its built-in flexibility properties are negligible. However, a crucial role is played by tax deductions, particularly regarding losses and capital allowances. The asymmetric treatment of gains and losses, arising from the fact that losses can only be deducted against positive profits, suggests that there may …