Explain how a low rate of corporation tax may cause short-run and long-run economic growth

AQA A-Level Economics Paper 2 June 2024

Extract E (lines 17–18) states: ‘A low rate of corporation tax has also contributed to both short-run and long-run economic growth.’

With the help of a diagram, explain how a low rate of corporation tax may cause short-run and long-run economic growth. (9 marks)

1. Corporation taxes are taxes on business' profits.
2. Short-run economic growth is when there's an increase in real GDP.
3. Long-run economic growth is when there is an increase in the productive potential.

1. Lower corporation taxes enable businesses to increase investment, which is spending by businesses on capital goods.
2. Investment (I) is one of the components of aggregate demand (AD).
3. As aggregate demand increases, the economy grows, meaning it produces a higher value of goods and services.
4. Overall, lower corporation taxes can promote short-run economic growth.

1. Lower corporation taxes can also affect long-run economic growth.
2. As businesses spend more on capital goods, this allows them to produce more output per hour with their given inputs.
3. Therefore, productivity increases.
4. For example, companies who use self-checkout machines like Lidl can produce and sell more output per hour.
5. These productivity improvements mean that the economy can produce more goods and services with all its factors of production fully employed.
6. Therefore, the long-run aggregate supply curve shifts outward and the productive potential of the economy increases.

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