Business taxation and economic performance in hierarchical government structures

• Autores: Federico Revelli
• Localización: Documents de treball IEB, Nº. 12, 2012, 39 págs.
• Idioma: inglés
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• Resumen

  • This paper models theoretically and investigates empirically the consequences on local economic performance of state mandates on financially distressed authorities. In particular, I analyze the switch from systematic state bailout of regional health care deficits to selectively mandated hikes in regions� own business income tax rates that took place in Italy around the mid 2000s, and exploit such dramatic switch to identify the impact of tax policy on the economy. I model factor input use within a multi-jurisdiction neoclassical framework, where production takes place in plants, and physical capital requires energy in fixed proportions depending on the size of energy-saving capital that is installed along with physical capital. Energy-saving capital can be interpreted either as tangible information technology (IT) equipment (e.g., computer-aided line speed control devices) or as intangible assets (e.g., process design skills) lowering a plant energy requirement. The estimation results based on panel data for the Italian provinces and regions over a decade (2000-2010) reveal that, by raising the user cost of capital, mandated business income tax hikes stimulate province-level business energy use, lending support to the hypothesis of short run substitution between energy and energy-saving capital, and hamper the employment of human resources in science and technology (S&T) occupations, the latter being interpretable as a proxy for energy-saving capital.