If corporation tax is lowered, what happens to a business's profits?

• A. Increase profits.
• B. Decrease government revenue.
• C. No change in profits.
• D. Decrease profits.

Answer: (A)

Lowering corporation tax reduces the tax charged on profits. If revenue and costs stay the same, the tax expense is smaller, so the profit after tax rises. For example, with a pre-tax profit of 100 and a tax rate of 20%, tax is 20 and after-tax profit is 80. If the tax rate falls to 15%, tax becomes 15 and after-tax profit increases to 85. So profits increase.

The other options don’t fit because tax cuts don’t change revenue or costs directly, they change what remains after tax. A decrease in profits would imply worse performance, which isn’t caused by a lower tax rate on the same pre-tax profit. No change in profits would require taxes to stay the same. Reducing government revenue is a government-level effect, not the business’s profit outcome.