Taxation, expenditures and the Irish miracle

Paul Klein and Gustavo Ventura

Journal of Monetary Economics, 2021, vol. 117, issue C, 1062-1077

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 overall changes in fiscal policy, 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 (disciplined to account for the GNP to GDP gap). 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 significantly smaller rise in GDP.

Keywords: Ireland; Corporate taxation; Fiscal policy; Economic development (search for similar items in EconPapers)
JEL-codes: F2 H2 O4 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:117:y:2021:i:c:p:1062-1077

DOI: 10.1016/j.jmoneco.2020.08.004

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