The Government should consider raising the rate of corporation tax after 2010 and use the additional tax revenue generated to reform other areas of the tax system, the Economic & Social Research Institute (ERSI) has said.

Its medium-term review, covering the years from 2001 to 2007, argues that further change to industrial policy is needed to reflect the Republic's changed economic circumstances, particularly a situation of full employment.

"Many supports for the commercial sector, both through direct subsidies and through tax reliefs, were provided with the understanding that they would help create additional jobs," the report said. "In the changed market circumstances of the current decade such supports are no longer justified."

The ESRI believes the business sector can best be supported by investing in relevant public infrastructure and in tackling other problems impacting directly on competitiveness.

The institute said it was not clear how much of an increase was desirable in the corporation tax rate but posits a rate of 17.5 per cent.

However, it warns that before any final decision is taken on the rate, the sensitivity of the economy to changes in corporation tax should be examined.

"This is an area where further research is urgently required - as any mistake could prove very costly," the report says.

Too big a rise could have a dramatic negative effect on the economy, causing existing manufacturing firms to leave.

The ESRI also notes that experience has shown that the commitment many years in advance to a fixed corporation tax rate produced significant benefits in reducing the risk facing potential investors.

"It is, therefore, appropriate that we consider what should be the rate after 2010 and that this decision should take account of what is happening in other EU countries."

Corporation tax has fallen sharply in recent years, leading to tensions with the Republic's EU partners, many of whom believe it has benefited unfairly from a low corporation tax regime. Once as high as 50 per cent, the tax rate will stand at 12.5 per cent for all firms from next year following a process of phased reduction.

However, the rate has risen for certain firms. Manufacturing companies and those based in the International Financial Services Centre enjoyed a tax rate of 10 per cent - but this will rise to 12.5 per cent from next year.