Wednesday, 1 June 2011

What to do with a corporate surplus

From the Bank of England's May inflation report:

Private domestic demand growth could be boosted if more of the historically large corporate financial surpluses were spent on capital investment or transferred to households in the form of higher wages or dividends.

So corporations are running surpluses while the economy lacks capital investment and households have falling real incomes.

Why, exactly, does the Government want to cut corporation tax?


  1. Corporation donation = Member in parliament= Corporation tax cut.

  2. To make the UK a more attractive place for investment and hence stimulate growth in the economy. UK operates in a global economy. Investors seeking to maximise their returns will look for most attractive place to invest. i.e. the one with highest AFTER tax returns. Cutting the rate of corporation tax reduces the pre-tax rate of return required and so more projects will generate a sufficiently high return to justify investment. Hence more capital investment, higher productivity, higher wages, more output .....
    Check out the Mirrlees Review. It (and the team contributing to this is pretty much a who's who of academic experts in the area) propose effectively a similar thing (albeit achieved in a different way via the introduction of an allowance for corporate equity).