Income taxation and regional growth: DID evidence from an income tax treatment in Italy

Abstract This paper offers some fresh empirical evidence about the relation between income taxation and regional growth-related variables. Using the Italian regional income tax treatment of 2007 as a quasi-natural tax experiment, we present various panel data DID estimates of how income per capita and other variables related to economic growth, including labour supply, consumption, and VAT certificates, respond to exogenous income tax changes. Results show that the extensive negative adjustments of response variables measuring supply of labour services offered by taxpayers affected by the treatment is statistically significant, rapid, and strong but not long-time lasting and that treated families reduce in a similar manner their consumption with respect to families in the control (untreated) regions. Analogous adjustment responses characterise the growth of per-capita regional GDP response to tax changes. The estimated aggregate effects are further compared with the spatial-temporal patterns observed for every response variable. Policy issues are also discussed. JEL codes: C10, C18, C21 H2, E2, E32, E62, C23, C26