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

Today the ESRI has published a research bulletin summarising a paper entitled: The Macro-economic Impact of Changing the Rate of Corporation Tax by Thomas Conefrey (Central Bank of Ireland) and John FitzGerald (ESRI).

This paper considers the impact of changes in the rate of corporation tax in Ireland affecting the business and financial services sector. A model is estimated that relates services exports and output to world activity, competitiveness and the rate of corporation tax. This model indicates that a reduction in the rate of corporation tax in the 1990s stimulated exports 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 profitability suggests that some of the increased output involved relocation of profits to Ireland by multinational firms.

The Research Bulletin is available here.

2 thoughts on “The Macro-economic Impact of Changing the Rate of Corporation Tax”

  1. According to Table A of the recent National Income and Expenditure Accounts these were the following indices of real GDP (with the prevailing general corporate tax rates from ESRI paper in brackets):

    2010 99.6 (12.5%)

    2002 87.2 (32%)

    1997 60.7 (40%)

    1992 42.8 (40%)

    In the 5 years when corporation tax was 40%, the average anual growth rate was over 7%. In the 5 years when tax was 32%, the growth rates was fractionally higher, at 7.5%. In the 8 years since the rate was reduced to 12.5%, average growth was little more than 1.5% per annum.

    It might be argued that including the recession is unfair, even though the authors argue that the boost in activity from lower taxes was concentrated in business and and financial services. But, even if we exclude the period of the recession (but include what many now regard as an unsustainable boom) the growth rate from 2003-2007 was about half the earlier periods, about 3.5% per annum.

    It cannot be an objective of policy to boost just a couple of sectors of the economy at the expense of others, especially when they lead to a distorting and ultimately disastrous boom and bust. Optimising sustainable growth across the economy must surely be the aim.

    In which case, 12.5% has been a complete failure.

  2. @ John Fitzgerald

    I was hoping you would be able to help me in finding the answer to 2 questions I have been trying to answer for the last while, to no avail.

    What is the average corporate tax rate paid by MNC’s in Ireland?
    We know that the standard rate is 12.5 and that some companies have been able to pay less (google is one well known example) but what is the total level of profits declared in Ireland and how much tax are then paid on these profits from MNC’s?

    The subset of MNC’s that seem to be able to make best use of the current loopholes in the Irish Dutch and Bermuda tax codes are companies who declare most of their profits as a result of patents. I speak specifically of the IT and Pharmaceutical sectors.
    What is the average corporation tax paid by MNC’s in these industries?

    Do you know if this information would be available from the Irish Revenue commisioners?

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