Antonella Caiumi on The Evaluation of the Effectiveness of Tax Expenditures: a Novel Approach

This study evaluates the regional tax incentives for business investment in
Italy and addresses the following questions: (i) how much additional investment
was stimulated by the government intervention; (ii) has the public financing
displaced (part of) the private financing; (iii) to what extent would the outcomes
on firm performance have not been achieved without the public support? The
methodology consists of applying the matching approach in order to select a
sample of firms composed of both recipients and non-recipients such that for
each subsidised firm a comparable unsubsidised counterpart is found, which is
similar in every respect except for the tax benefit. An empirical model of firm’s
investment behavior has then been estimated in order to obtain the tax-price
elasticity and to test the sensitivity of investment decisions to the availability of
internal funds by taking into account the dynamic structure underlying capital
accumulation. This new approach to evaluate tax expenditures 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 tax incentives operate.
Finally, the impact of the investment tax credit on TFP levels is identified by
modelling the productivity dynamics at the firm level.