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The Macro-economic Impact of Changing the Rate of Corporation Tax

  • Economics
  • Political Science


Tackling Low Income and Deprivation: Developing Effective Policies ESRI Research Bulletin 2011/2/1 1 The Macro-economic Impact of Changing the Rate of Corporation Tax Thomas Conefrey and **John FitzGerald The size and importance of the market services sector within the Irish economy has increased dramatically since the mid 1990s and the sector now accounts for a significant share of overall exports. The rise in output and employment in market services coincided with the reduction in the corporation tax rate applicable to the sector from 40 per cent in 1994 to 12½ per cent in 2003. This low corporation tax regime was introduced for the manufacturing sector in the late 1950s. However, the exceptional growth in that sector peaked in the 1990s and thus the precise impact of the low tax rate for the manufacturing sector is not obvious. The extension of this low tax regime to the business and financial services sector after 1994 constitutes a natural experiment which allows us to consider the before and after periods and to derive an estimate of the macroeconomic impact of this tax change. The analysis in our recent paper † indicates that the reduction in the rate of corporation tax in the 1990s stimulated exports of services and, even allowing for profit repatriations by foreign firms and replacement of lost tax revenue, it resulted in an increase in domestic output. The increase in the profit rate in the business and financial services sector suggests that some of the increased output involved relocation of profits to Ireland by multinational firms. From 1989, the low manufacturing rate of corporation tax was extended to companies engaged in internationally traded financial services activities in the Irish Financial Services Sector (IFSC). In 1996, to comply with EU rules, the Irish government decided to move to apply a rate of 12½ per cent on corporate profits across all activities from 2003. This meant th

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