Modelling Recent Developments in Corporation Tax

For those interested in fiscal issues and tax modelling/forecasting, two economists in the Department of Finance, Gerard McGuinness and Diarmaid Smyth, have just published a working paper looking at Corporation Tax.

The paper uses both micro- and macro-economic perspectives and focuses on the marked rise in CT receipts and corporate profitability since 2014 is highlighted.

The paper is available from this link.

2 replies on “Modelling Recent Developments in Corporation Tax”

‘This analysis finds that approximately 90 per cent of receipts are accounted for by a suite of macroeconomic models, however close to €1 billion of receipts in 2018 cannot be fully captured by standard macroeconomic variables. This figures rises to €1.3 billion when year-ahead budget forecasts are assessed’

Systematic basis evident though, in that forecasts consistently underestimate receipts. Just looking at the period from 2010 the correlation with GDP is very high, at 0.988, even accounting for 2015, and a simple linear regression gives a standard error of 400m, without any bias. If only we could predict nominal GDP, problem solved.

This is a useful and impressive piece of work. However, the final sentence…”it is difficult to be overly definitive on whether recent CT excesses have been windfalls or, are in fact are representative of longer-term structural changes within the economy” seems to hint at an internal policy debate that analysis of this nature should be able to inform. It probably isn’t a case of ‘either/or’: windfalls vs. structural changes. Most likely it’s a mix of both. Prudence would suggest that a portion of these receipts should be squirrelled away in a sovereign wealth fund. Defining the portion will require more effort, but there is a strong case for applying the effort which would build on this and similar analyses.

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