Increasing Corporation Tax to scrap tuition fees would be economic madness

March 04, 2010 5:44 PM

The University and Colleges Union (UCU) and Compass have released a new report arguing that corporation tax should be increased to replace tuition fees.  There are a number of critical flaws in their analysis.

Most importantly, they don't deal with the consequences of increasing corporate tax.

A CEBR report in 2007 for the TPA found that if pre-announced, phased (2 per cent each year) corporation tax cuts to 12.5 per cent were made, then by 2021 and relative to the baseline forecast: GDP would be 8.7 per cent higher; total fixed investment would be 60.9 per cent higher; total employment would be 8.7 per cent higher while manufacturing employment would be 10.1 per cent higher; disposable income would be 9 per cent higher largely due to a 13.5 per cent boost to wages and salaries; consumer spending would be boosted by 2.3 per cent; and the savings ratio would be 13.1 per cent higher.

TPA analysis found that a 10 per cent cut in corporate tax rates was associated with a 5 per cent rise in corporate tax revenue growth.  That report also cited evidence from the World Bank, produced as part of its “Doing Business” programme, which found that a 10 percentage point increase in the effective corporate tax rate reduces the ratio of investment to GDP by 2 percentage points; reduces business density by 1.9 firms per 100 people (average is 5), and the average entry rate by 1.4 percentage points (average is 8); and raises the informal economy as a share of economic activity by 2 percentage points.

So the UCU's proposal would almost certainly leave us, in short order, with less revenue (so it definitely couldn't reduce tuition fees) and a host of other economic problems.  We would all be worse off and more people would be out of work.

Does their analysis that business isn't 



The University and Colleges Union (UCU) and Compass have released a new report arguing that corporation tax should be increased to replace tuition fees.  There are a number of critical flaws in their analysis.

Most importantly, they don't deal with the consequences of increasing corporate tax.

A CEBR report in 2007 for the TPA found that if pre-announced, phased (2 per cent each year) corporation tax cuts to 12.5 per cent were made, then by 2021 and relative to the baseline forecast: GDP would be 8.7 per cent higher; total fixed investment would be 60.9 per cent higher; total employment would be 8.7 per cent higher while manufacturing employment would be 10.1 per cent higher; disposable income would be 9 per cent higher largely due to a 13.5 per cent boost to wages and salaries; consumer spending would be boosted by 2.3 per cent; and the savings ratio would be 13.1 per cent higher.

TPA analysis found that a 10 per cent cut in corporate tax rates was associated with a 5 per cent rise in corporate tax revenue growth.  That report also cited evidence from the World Bank, produced as part of its “Doing Business” programme, which found that a 10 percentage point increase in the effective corporate tax rate reduces the ratio of investment to GDP by 2 percentage points; reduces business density by 1.9 firms per 100 people (average is 5), and the average entry rate by 1.4 percentage points (average is 8); and raises the informal economy as a share of economic activity by 2 percentage points.

So the UCU's proposal would almost certainly leave us, in short order, with less revenue (so it definitely couldn't reduce tuition fees) and a host of other economic problems.  We would all be worse off and more people would be out of work.

Does their analysis that business isn't 



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