The Elusive Impact of Corporate Tax Incentives

Despite the large fiscal footprint of corporate tax incentives, limited causal evidence exists on their impact on economic outcomes. This paper helps fill this gap by exploiting the phasing out of a large income tax exemption scheme for export- oriented firms in Tunisia. Using data on the universe of registered Tunisian firms, the analysis shows that the reform caused a decline in the entry of new firms in the sector previously benefiting from the incentives. However, the reduced entry did not translate into any effects on employment, revenue, or the wage bill, as the reform did not impact the activities of incumbent firms, which account for the bulk of economic activity in Tunisia. The findings are robust to addressing various threats to the empirical identification, and they confirm emerging evidence casting doubt on the importance of tax incentives to determine investments relative to other factors in an economy.