The Evaluation of Job Tax Incentives: An Analysis of a Regional Tax

Abstract

An employment tax deduction is frequently used as a public policy tool to stimulate economic growth and recovery. Analysis of the impact of such provisions adopted in the recent past may shed light on the effects of current tax policies. This article aims to estimate the effects of a tax deduction for Italy's <i>imposta regionale sulle attivit‡ produttive</i> (regional tax on productive activities), or IRAP, granted to firms that increased their personnel between 2005 and 2007. The main objectives of the analysis are to assess the increase in, and the permanence of, new employment; to detect any changes in the employment structure of beneficiary firms; and to evaluate the effectiveness of different deduction amounts granted to firms in disadvantaged regions in order to reduce the employment gap. The results of the analysis using a difference-in-difference model indicate that firms enjoying IRAP incentives registered more significant and more enduring changes in the selected indicators as compared with firms not taking the deduction, thus verifying the effectiveness of the provision. The adopted measure provided for larger deductions for disadvantaged regions of southern Italy, but the results do not register a larger increase in employment in those regions.