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Examining the Volatility of Ireland’s Tax Base in the Paradigm of Modern Portfolio Theory

Keith Fitzgerald and Jacopo Bedogni
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Keith Fitzgerald: Parliamentary Budget Office, Dublin
Jacopo Bedogni: Parliamentary Budget Office, Dublin

The Economic and Social Review, 2019, vol. 50, issue 3, 429-458

Abstract: This paper extends a theoretical and empirical framework commonly applied in international finance to present an alternative paradigm within which issues of tax revenue volatility in Ireland can be studied. We establish a trade-off between revenue growth and volatility, typically associated with financial asset returns. We observe strong but time-varying cointegration among tax revenue streams. Statistical tests of mean-variance spanning suggest diversification benefits from holding Income Tax and Excise Duty. We establish the minimum variance tax portfolio, and also find that, from a meanvariance optimality perspective, the portfolio consisting of 2017 tax shares is sub-optimal. Practical policy implications are discussed.

Keywords: tax revenue; tax policy; Ireland (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:eso:journl:v:50:y:2019:i:3:p:429-458