Capital Taxes, Trade Costs, and the Irish Miracle

Abstract

This paper uses detailed international trade data to examine whether the rapid growth of Ireland in the 1990s and its accompanying substantial increase in trade in goods and services might have been spurred by an interaction of low taxation of capital and declining international trade costs. Both tariffs and other trade costs for an important class of goods and services have declined to very low levels in the 1990s, while the expansion of foreign direct investment worldwide in that period suggests a great drop in technological and policy barriers to managing international production. The decline in trade costs has profound effects on small economies that also levy low levels of capital taxation. Such economies exhibit a great increase in the production and export of products that have high capital intensity. This implication receives strong support in detailed trade data. The expansion of such modern, high labor-productivity sectors has been identified as an important recent feature of Irish growth. (JEL: F12, F14, F21, F43, H25)