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

Abstract

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 121?2 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.