Friday, March 18, 2011

Corporation tax and investment

The issue of Ireland's much loved 12.5% corporation tax rate is being widely discussed. Some see the proposal to increase it as "suicidal", others see it as a threat to our sovereignity while the Irish Times' drama critic no less considers it all a distraction. The views of its GAA correspondent are currently unknown.
For those who actually spend any amount of time studying the topic, it is clear that investment decisions are a function of many factors and the effect of taxation is quite complicated, see for example Devereux and Griffith. A recent meta-analysis of 25 studies finds quite large effects viz. "The median value of the tax rate elasticity in the literature is around –3.3 (i.e. a 1%-point reduction in the host-country tax rate raises foreign direct investment in that country by 3.3%)."

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