The relative efficiency of regional fiscal policies

Michele Zanette

Politica economica, 2013, issue 1, 57-90

Abstract: Italian regions can stimulate their economies either by reducing the IRAP's taxrate or by increasing the amount of tax deductions. We have shown, using a partial equilibriummodel where firms operate in monopolistic competiton, that the latter manoeuvre is, ingeneral, relatively more efficient than the former. Therefore, an appropriate mix of the twofiscal policies can increase regional added value without worsening the regional budget. Manydifferent deduction schemes could be implemented. The most efficient policy arise when de89ductions are proportional to the increase of labour. In the short and in the medium run therelative efficiency of the two fiscal instruments, tax rate and deductions, depends crucially ondemand elasticity's value. If this value is high, general conclusions do not hold and a tax ratemanoeuvre appears more efficient than a manoeuvre based on deductions. In this case regionsface a decreasing Laffer curve. In any case a lump sum deduction should not be used.

Keywords: fiscal efficiency; regional fiscal policy; firm taxation; fiscal deductions; Laffer curve. (search for similar items in EconPapers)
Date: 2013
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