Income Tax Treatment and Labour Supply in a multi-level hierarchical Difference-in-Differences model

Bruno Paolo Bosco, Carlo Federico Bosco and Paolo Maranzano
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Bruno Paolo Bosco: Department of Economics, Management and Statistics, University of Milano-Bicocca
Carlo Federico Bosco: Independent Researcher
Paolo Maranzano: Department of Economics, Management and Statistics, University of Milano-Bicocca and Fondazione Eni Enrico Mattei

No 2025.20, Working Papers from Fondazione Eni Enrico Mattei

Abstract: Ignoring the possible hierarchical clustering of the data that frequently characterises the structure of labour markets implies that studies of the effects of income tax changes on labour supply use less than necessary information on the variability of the labour response. Estimation efficiency is reduced and relevant relationships affecting the agents’ reaction to net wage changes remain undetected. Motivated by the desire to implement an estimation procedure that accommodates a nested hierarchical statistical structure of labour supply macro data into of a causal-effect framework, we propose a novel multilevel DiD model that can estimate labour responses to exogenous tax hikes taking the above hierarchical structure into consideration. Using Italy as a case study, we examine the labour response to exogenous income tax changes using a hierarchical DiD model modified to account for the existence of different sources of variation of the data (regional and provincial labour markets) as well as for various possible clustering of the data (territorial, age and gender). We compare results obtained from various nested and non-nested procedures and show that our multilevel variant of the DiD model generates gains in efficiency with respect to approaches that ignore the clustering nature of the labour data. The hierarchical multilevel DiD procedure permits to qualify labour response in terms of cluster membership and to shed light on aspects of the tax issues not highlighted by current literature.

Keywords: Income Taxation and Labour Supply; Tax Treatment Effect; Hierarchical Multilevel Panel Data DiD model; Linear mixed models for policy evaluation (search for similar items in EconPapers)
JEL-codes: C21 C32 H24 H31 J38 (search for similar items in EconPapers)
Date: 2025-10
New Economics Papers: this item is included in nep-lma and nep-pbe
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