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

Author

Listed:
  • 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)

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.

Suggested Citation

  • Bruno Bosco & Carlo Federico Bosco & Paolo Maranzano, 2024. "Income taxation and labour response. Empirical evidence from a DID analysis of an income tax treatment in Italy," Working Papers 2024.16, Fondazione Eni Enrico Mattei.
    • Handle: RePEc:fem:femwpa:2024.16
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    More about this item

    Keywords

    Income Taxation; extensive labour supply change; TWFE Panel Data DID; convergence tests; taxation and regional growth;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation

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