Estimating the Reactivity of Investment to Tax Changes: The Case of Italy in the Nineties

Elena Gennari, Giuliana Maurizi and Alessandra Staderini

Politica economica, 2005, issue 3, 435-460

Abstract: In this paper we estimate a model investigating the impact of the user cost on investment, concentrating on the role played by the tax component. We use a methodology introduced by Cummins, Hassett and Hubbard (1994) that focuses on years of major tax changes. Italy represents an interesting case for the application of this methodology, having experienced some relevant tax changes to promote investment in the Nineties. The evaluation is carried out for the period 1994-2001 on firm level data of a panel of almost 3,000 firms. The estimation points at a reactivity of investment to the user cost of capital of -0.3 and at an elasticity of 0.5, in line with previous research work. Results also highlight that tax variables may significantly contribute to movements in investment, other fundamentals being equal

Date: 2005
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