Income tax cuts and inflation in Ireland

A two sector model of the Irish Economy is used to analyse whether either t emporarily or permanently deferring reductions in labour tax rates would cu t inflation in the short run. If the deferral of tax cuts is seen as perman ent, simulations indicate the demand reduction caused by the higher tax rat e may outweigh the reduction in supply causing prices to fall. If the defer ral of tax cuts is seen as temporary the supply side effects dominate and t he price level will rise as long as labour's share of non-traded output is higher than labour's share of traded output. This indicates that the argume nt being made by some economists that reductions in income tax should be te mporarily deferred to curb inflation may be misguided.