Income taxation and labour response. Empirical evidence from a DID analysis of an income tax treatment in Italy

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

No 2024.16, Working Papers from Fondazione Eni Enrico Mattei

Abstract: This paper uses the Italian income tax treatment of 2006/7 as a quasi-natural tax experiment to offer some fresh empirical evidence on how labour supply responds to exogenous income tax hikes. We adopt the identification strategy based on TWFE panel data Difference-in-Differences (DID) model to define the correct statistical framework of the study, and to benefit from the specific features of the above tax experiment, namely homogeneity and contemporaneity of the treatment. Results show that the extensive negative adjustments of various response variables measuring the supply of labour services offered by treated taxpayers are statistically significant, rapid, and strong but not long-time lasting. Not surprisingly, we also find that that treated families reduce in a similar manner their consumption with respect to families in the control groups. Analogous adjustment responses to tax hikes characterise the growth of per-capita regional GDP. The estimated aggregate effects of tax hikes are further compared with the spatial-temporal patterns observed for every response variable in treated and untreated regions.

Keywords: Income Taxation; extensive labour supply change; TWFE Panel Data DID; convergence tests; taxation and regional growth (search for similar items in EconPapers)
JEL-codes: C10 C18 C21 C23 C26 E2 E32 E62 H2 (search for similar items in EconPapers)
Date: 2024-06
New Economics Papers: this item is included in nep-lma, nep-pbe and nep-pub
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