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# Explain how a reduction in corporation tax on firms’ profits might lead to supply-side improvements in the economy
- URL: https://www.a-level-economics-tutor.com/explain-how-a-reduction-in-corporation-tax-on-firms-profits-might-lead-to-supply-side-improvements-in-the-economy/
- Published: 2026-09-05T12:48:44.000Z
- Updated: 2026-09-05T12:48:44.000Z
- Author: Jaisul Naik
- Tags: AQA 10 mark question

### [AQA AS-Level Economics Paper 2 June 2018](https://www.a-level-economics-tutor.com/content/files/2026/03/AQA-AS-Level-Economics-Paper-2-Insert-June-2018-1.pdf?ref=a-level-economics-tutor.com)

**Extract E (lines 18–19) states ‘the 2017 Budget Report stated the intention to reduce the rate of corporation tax further to 17% by 2020.’**

**Explain how a reduction in corporation tax on firms’ profits might lead to supply-side improvements in the economy. (10 marks)**

Corporation tax is the tax on firms' profits. A reduction in corporation tax will mean that businesses can keep more of their profits after tax. the 2017 Budget Report stated the intention to reduce the rate of corporation tax further to 17% by 2020\. Firstly, the potential for higher retained profits incentivises more firms to set up. Secondly, higher retained profits allow businesses to increase investment in capital. Improvements in capital can allow work to be done faster. As a result, businesses are able to produce more goods and services when all factors of production are fully employed. This increases the productive potential of the economy, shown by a rightward shift in the long-run aggregate supply (LRAS) curve. This leads to a decrease in the price level from pl1 to pl2 as there is the same demand chasing more goods and services. Also, this causes an increase in economic growth from y1 to y2\. The increase in LRAS represents the potential growth.

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