Ireland’s tax policy boosts business investment and enhances long term growth prospects

International agencies such as the IMF and OECD recommend that tax systems should, as far as possible, raise revenues in ways that limit distortions to economic activity. Tax systems that discourage investment in particular can have negative longer-term effects on economic growth. New research from the ESRI compares the developments in Irish tax policy mix with the rest of the European Union and investigates the extent to which the broad structure of the tax system has affected Ireland’s macroeconomic performance. The analysis is based on a newly developed set of broad tax indicators which allow a like-for-like comparison across countries and examines the period between 1995 and 2017. The results come from research conducted under a programme of work between the Department of Finance, the Revenue Commissioners and the Economic and Social Research Institute. 

The analysis illustrates significant differences between the Irish tax structure and that of the EU countries. In Ireland, taxes that are likely to have distortionary effects on economic activity, such as those on labour income, are almost eight percentage points lower than the EU average. In contrast, the tax burden related to less distortionary taxes, such as consumption, is higher by three percentage points over 1995-2017. 

Relating these estimates to indicators of economic activity, the research finds that higher labour taxes are associated with fewer hours worked, while capital and corporate taxes are negatively related with business investment.  

Commenting on the results Research Officer Petros Varthalitis says:  

“This report indicates that the fiscal policy mix followed by Ireland at least since 1995 can be one of the key contributing factors to the country’s strong economic performance. Our results show that the most distorting taxes such as labour, capital and corporate taxes are lower in Ireland compared to EU average. Higher taxes in these areas are negatively correlated with hours worked and business investment.” 

Post doctoral Research Fellow Ilias Kostarakos adds: 

“In general, higher taxes distort economic incentives. Our report finds that not only distortionary taxes but also that social security contributions, the main indicator of the non-wage cost, are significantly lower compared to the EU average while consumption taxes are relatively higher. Ireland’s tax mix seems to boost business investment and enhance long term growth prospects”