ChainWhat it assumes · how to break it
Start
The government cuts corporation tax, for example from 25% to 20%.
1
As a result, firms' after-tax profits rise.
post-tax profit
post-tax profit
Assumes: Firms are profitable.
But: Firms making losses gain nothing.
2
This means shareholders gain through higher dividends and rising share prices.
income from wealth
income from wealth
Assumes: The gain goes to owners.
But: If the extra profit funds investment that raises productivity, part of the gain reaches workers as higher wages.
3
Consequently, the gains go mainly to wealthier households, who own most shares directly.
distribution of wealth
distribution of wealth
Best link to attack
Assumes: Share ownership is concentrated.
Assumes: Share ownership is concentrated.
But: Many workers own shares indirectly through workplace pension funds, so the gains are spread more widely than direct ownership suggests.
4
Therefore, income and wealth at the top rise faster than incomes from work.
inequality
inequality
Assumes: Wages do not rise as fast.
But: Evidence that corporation tax cuts ‘trickle down’ to wages is weak, which supports the chain.
End
Income and wealth inequality widen.
Attack the whole chain: If the cut raises investment, productivity and employment, workers' wages rise too, so the overall effect on inequality may be small.
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Questions this answers
- Assess the impact of a cut in corporation tax on the distribution of income and wealth.
- Discuss the trade-off between efficiency and equity in tax policy.
- Evaluate the view that supply-side policies increase inequality.
Diagram
Lorenz curve: the curve moves further from the line of equality.
Reverse and related
Corporation tax rise → lower returns to shareholders → inequality may narrow.