Taxation, Expenditures and the Irish Miracle

Paul Klein and Gustavo Ventura
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Paul Klein: Stockholm University
Gustavo Ventura: Arizona State University

No 282, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: We examine the role of fiscal policy in accounting for the remarkable rise of Ireland from one of Western Europe's poorest countries to one of its richest in just a few years. We focus on the importance of business tax reform and changes in the size of government, in conjunction with other factors, which we model as a residual rise in Total Factor Productivity (TFP). We conduct our analysis using a two-sector, small-open economy model where production requires tangible and intangible capital services, and where inflows of capital are limited by a collateral constraint. We find that the much discussed reductions of business taxes played a significant, but secondary, role in the Irish miracle. However, tax reform and other changes strongly reinforce each other. We also find that Ireland's openness to capital movements was crucial: under the same driving forces, a closed economy would have experienced a much slower and significantly smaller rise in GDP.

Date: 2018
New Economics Papers: this item is included in nep-acc and nep-dge
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:red:sed018:282

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