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Taxation, Expenditures and the Irish Miracle

Author

Listed:
  • Paul Klein

    (Stockholm University)

  • Gustavo Ventura

    (Arizona State University)

Abstract

We examine the role of fiscal policy in accounting for the remarkable rise of Ireland from one of Western Europe's poorest countries to one of its richest in just a few years. We focus on the importance of business tax reform and changes in the size of government, in conjunction with other factors, which we model as a residual rise in Total Factor Productivity (TFP). We conduct our analysis using a two-sector, small-open economy model where production requires tangible and intangible capital services, and where inflows of capital are limited by a collateral constraint. We find that the much discussed reductions of business taxes played a significant, but secondary, role in the Irish miracle. However, tax reform and other changes strongly reinforce each other. We also find that Ireland's openness to capital movements was crucial: under the same driving forces, a closed economy would have experienced a much slower and significantly smaller rise in GDP.

Suggested Citation

  • Paul Klein & Gustavo Ventura, 2018. "Taxation, Expenditures and the Irish Miracle," 2018 Meeting Papers 282, Society for Economic Dynamics.
  • Handle: RePEc:red:sed018:282
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    Cited by:

    1. Alfò, Marco & Carbonari, Lorenzo & Trovato, Giovanni, 2023. "On the effects of taxation on growth: an empirical assessment," Macroeconomic Dynamics, Cambridge University Press, vol. 27(5), pages 1289-1318, July.
    2. Fernández-Villaverde, Jesús & Ventura, Gustavo & Yao, Wen, 2025. "The wealth of working nations," European Economic Review, Elsevier, vol. 173(C).
    3. Ilias Kostarakos & Kieran McQuinn & Petros Varthalitis, 2024. "Is Ireland the most intangible intensive economy in Europe? A growth accounting perspective," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 70(2), pages 370-394, June.
    4. Fang, Lei & Herrendorf, Berthold, 2021. "High-skilled services and development in China," Journal of Development Economics, Elsevier, vol. 151(C).
    5. McQuinn, Kieran & Varthalitis, Petros, 2018. "How openness to trade rescued the Irish economy," Papers WP608, Economic and Social Research Institute (ESRI).
    6. Varthalitis, Petros, 2019. "FIR-GEM: A SOE-DSGE Model for fiscal policy analysis in Ireland," MPRA Paper 93059, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • F2 - International Economics - - International Factor Movements and International Business

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