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Examining the Volatility of Ireland’s Tax Base in the Paradigm of Modern Portfolio Theory

Author

Listed:
  • Keith Fitzgerald

    (Parliamentary Budget Office, Dublin)

  • Jacopo Bedogni

    (Parliamentary Budget Office, Dublin)

Abstract

This paper extends a theoretical and empirical framework commonly applied in international finance to present an alternative paradigm within which issues of tax revenue volatility in Ireland can be studied. We establish a trade-off between revenue growth and volatility, typically associated with financial asset returns. We observe strong but time-varying cointegration among tax revenue streams. Statistical tests of mean-variance spanning suggest diversification benefits from holding Income Tax and Excise Duty. We establish the minimum variance tax portfolio, and also find that, from a meanvariance optimality perspective, the portfolio consisting of 2017 tax shares is sub-optimal. Practical policy implications are discussed.

Suggested Citation

  • Keith Fitzgerald & Jacopo Bedogni, 2019. "Examining the Volatility of Ireland’s Tax Base in the Paradigm of Modern Portfolio Theory," The Economic and Social Review, Economic and Social Studies, vol. 50(3), pages 429-458.
    • Handle: RePEc:eso:journl:v:50:y:2019:i:3:p:429-458
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    1. Marina Malkina & Rodion Balakin, 2020. "Risks of Regional Tax Systems and Their Portfolio Decomposition: The Case of Modern Russia," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 68(6), pages 995-1009.

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