Is Ireland's Corporate Tax-System Creating Tax Induced Distortions on the Location of Investment?

Abstract: Conventional wisdom suggests, in the face of deepening European integration, that without some form of tax harmonisation "a race to the bottom" would ensue undermining the foundations of Europe's welfare states. Such wisdom can be questioned on two grounds. Firstly, Member States are not on the same "playing field" as there is great disparity between the various Member States in terms of industrial development, geographical location, wealth, not to mention market size. Market size is important because this permits viable local expansion without incurring the additional costs international expansion entails. Secondly, the necessity of constraining tax competition is questionable based on the new economic geography literature. This literature preaches that investment may not respond to marginal changes in tax if locked in by the presence of agglomerative forces. Ireland forms the case study of this paper for the following reasons: geographic location, traditional lack of industrial development, small domestic market size, growing levels of investment inflows, and the country's provision of a low tax regime. The paper determines that while taxation has been a factor in Ireland's successful attraction of investment it cannot be attributed to this factor alone. Rather domestic industrial policy has played a significant complementing role that has fostered the growth of agglomerative forces in Ireland. The legal sustainability of the Irish tax system against the Treaty of Rome is furthermore ascertained.