In 2019 the UK had the lowest level of business investment in the G7 and the thirdlowest in the OECD: 10.5% of GDP compared with an OECD average of 13.6%.2. The UK's approach to taxing corporate investment is one of extremes. The UK's headline corporation tax rate (19%) is one of the lowest of any advanced economy. At the same time, however, UK investment allowances are some of the least generous in the OECD. As a result, effective tax rates in the UK (a measure that accounts for both the tax rate and the generosity of allowances) are middling by international standards.3. Just as importantly, effective tax rates vary drastically between investments. Investing in some assets is penalised much more than investing in others. Meanwhile, investments financed by borrowing can receive substantial subsidies, encouraging firms to take on more debt and to invest in low-return projects that would otherwise be unviable.4. As inflation rises, these distortions are exacerbated, increasing the premium on achieving genuine structural reform that rationalises the system and reduces such distortions.5. Kwasi Kwarteng's dramatic September 'mini-Budget' announced the cancellation of a previously planned increase in the rate of corporation tax from 19% to 25%, a decision HM Treasury said would cost a substantial £15 billion a year in forgone revenue (in 2022-23 terms). Alongside this came a (more fiscally modest) increase in the permanent level of the annual investment allowance (AIA), from £200,000 to £1 million, allowing firms to deduct more of their investment spending from taxable profits immediately. Corporation tax and investment The Institute for Fiscal Studies, October 2022 2 6. Cutting the rate of corporation tax will reduce all of the distortions associated with the tax. However, the tax reduction would be largest for more profitable investments: it would be less effective at reducing the tax on the borderline investments that are most likely to be discouraged by tax. While reducing the rate reduces the distortions to the level, allocation and financing of investment, unless it is reduced to zero, it cannot fully eliminate those distortions.7. Increasing the AIA, meanwhile, is more cost-effective as a way to encourage investment domestically -it eliminates the disincentive for equity-financed investment in qualifying assets -though not necessarily as a way to increase the UK's international competitiveness. It also increases subsidies for low-return investments funded by debt -investments that come at a cost to the exchequer but do little for growth. 8. There is strong evidence that, all else being equal, such cuts to corporation tax would be expected to increase investment in the UK. But they will do so only if they are expected to last. Investment decisions are long-term by their nature and the current political environment -and a long history of policy instability -will probably make it harder for the Chancellor to increase investment through the tax system (at least in the short term). 9. While tax matters for inves...

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Freeports: what are they, what do we know, and what will we know?

The abrdn Financial Fairness Trust has supported this project (grant reference 202107-GR000046) as part of its mission to contribute towards strategic change which improves financial well-being in the UK. Its focus is on tackling financial problems and improving living standards for people on low-to-middle incomes. It is an independent charitable foundation registered in Scotland. Co-funding from the ESRC-funded Institute for the Microeconomic Analysis of Public Policy at IFS (grant number ES/T014334/1) is also gratefully acknowledged.

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