The Effectiveness Evaluation of Selected Tax Expenditures: a Novel Approach An Application to Regional Tax Incentives for Business Investment in Italy

This study uses data on regional tax incentives for business investments in Italy to ask: How much additional investment was stimulated by the government intervention? Or does public financing displace private financing? To what extent would the outcomes on firm performance not have been achieved without public support? The methodology consists of applying the matching approach in order to select a sample of firms composed by both recipients and non-recipients such that for each subsidised firm is found a comparable unsubsidised counterpart, similar in every respect except for the tax benefit, and then estimate a structural model of investment behaviour with the aim of recovering the tax-price elasticity and testing the sensitivity of investment decisions to the availability of internal funds by taking into account the dynamic structure underlying capital accumulation. The novelty of our approach allows us to deal with the problem of the endogeneity of firms' participation decisions as well as to account for the different channels through which fiscal incentives operate. Finally, the impact of the investment tax credit on TFP levels is identified by modelling productivity dynamics at firm level.