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The Evaluation of the Effectiveness of Tax Expenditures - A Novel Approach: An Application to the Regional Tax Incentives for Business Investments in Italy

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  • Antonella Caiumi

    (Italian National Institute of Statistics)

Abstract

This study evaluates the regional tax incentives for business investment in Italy and addresses the following questions: (i) how much additional investment was stimulated by the government intervention; (ii) has the public financing displaced (part of) the private financing; (iii) to what extent would the outcomes on firm performance have not been achieved without the public support? The methodology consists of applying the matching approach and selects a sample of firms composed of both recipients and non-recipients such that for each subsidised firm a comparable unsubsidised counterpart is found, which is similar in every respect except for the tax benefit. An empirical model of firm’s investment behaviour has then been estimated in order to obtain the tax-price elasticity and to test the sensitivity of investment decisions to the availability of internal funds by taking into account the dynamic structure underlying capital accumulation. This new approach to evaluate tax expenditures allows us to deal with the problem of the endogeneity of firms' participation decisions as well as to account for the different channels through which tax incentives operate. Finally, the impact of the investment tax credit on TFP levels is identified by modelling the productivity dynamics at the firm level. Une approche novatrice pour évaluer l'efficacité des dépenses fiscales : Application aux incitations fiscales régionales en faveur de l'investissement des entreprises en Italie Cette étude évalue les incitations fiscales régionales en faveur de l’investissement des entreprises en Italie et s’intéresse aux questions suivantes : (i) quel est le montant des investissements supplémentaires induits par l’intervention des pouvoirs publics ; (ii) les fonds publics ont ils supplanté, au moins en partie, les financements privés ; (iii) dans quelle mesure les effets sur les performances des entreprises se seraient ils concrétisés sans aide publique. La méthodologie fondée sur le rapprochement consiste à sélectionner un échantillon composé d’entreprises bénéficiaires et non bénéficiaires, en sorte qu’à chaque entreprise subventionnée corresponde une entreprise comparable non subventionnée, similaire en tous points hormis l’avantage fiscal. Un modèle empirique du comportement de l’entreprise en matière d’investissement est alors estimé afin de calculer l’élasticité de la demande par rapport aux prix et à l’impôt et de tester la sensibilité des décisions d’investissement à l’existence de fonds internes, en tenant compte de la structure dynamique qui sous-entend l’accumulation de capital. Cette nouvelle approche de l’évaluation des dépenses fiscales nous permet de traiter le problème de l’endogénéité des décisions de participation des entreprises, et de prendre en compte les différents canaux par lesquels les incitations fiscales exercent leur action. Enfin, l’impact du crédit d’impôt pour investissement sur les niveaux de la PTF est mesuré en modélisant la dynamique de la productivité au niveau de l’entreprise.

Suggested Citation

  • Antonella Caiumi, 2011. "The Evaluation of the Effectiveness of Tax Expenditures - A Novel Approach: An Application to the Regional Tax Incentives for Business Investments in Italy," OECD Taxation Working Papers 5, OECD Publishing.
  • Handle: RePEc:oec:ctpaaa:5-en
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    File URL: https://doi.org/10.1787/5kg3h0trjmr8-en
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    Cited by:

    1. Egger, Peter & Loumeau, Nicole, 2018. "The Economic Geography of Innovation," CEPR Discussion Papers 13338, C.E.P.R. Discussion Papers.

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