Deregolamentazione del mercato del lavoro ed effetto Laffer: evidenza empirica dall’Italia (1997-2001) / Labour deregulation and the Laffer curve:empirical evidence from Italy (1997-2001)

According to J.M Buchanan, Laffer effects, increases in revenues produced by tax cuts that offset the fall in tax revenues the reduction caused, are delayed through time. This occurs because the demand for goods and factors of production affected by the reduction of tax rates tend to increase only through time. The delay may cause a trap because governments that plan to reduce taxes may not reap the benefits of the increased revenues in the legislature in which the policy decision was made. However, situations might occur in which the delay does not prevent governments from taking advantage already during the life of a legislature of the new tax revenues generated by the measures taken. This may be the case of tax cuts targeted specifically at supply-side areas with the highest elasticity as part of deregulatory policy that seeks to stimulate increases in demand in those areas positively impacted by a cut in tax rates. We have tested this hypothesis for the Treu reform, i.e., the Italian (centreleft) Government policy of partial deregulation of labour contracts that foresaw substantial reduction of social security contributions (SC) rates in the 1997-2001 period. The reform had positive effects not only on employment, but also on SC revenues, although with a somewhat delayed Laffer effect. The results were obtained by an econometric research whose technical details are presented in another paper. Here, we focus on the nature and effects of the Treu reform, which introduced new types of flexible labour contracts and related SC rates reductions. The results, in terms of new employment and SC revenues, are compared with the hypothetical employment and SC revenues in the absence of the reform. And they increase substantially through time. The results may throw light on the likely Laffer effects of other policies of detaxation cum deregulation such as, for instance, reduction of taxes on over-time earnings.