Evaluating the Effect of Tax Deductions on Training

Abstract

Due to a tax law implemented in 1998, Dutch employers can claim an extra tax deduction when they train employees aged 40 years or older. This causes a discontinuity in a firm's cost of training an employee. This discontinuity is exploited to identify two effects: the effect of the tax deduction on training participation, and the effect of training participation on wages. The estimations show that the training rate of workers just above 40 is about 15-20 percent higher than the training rate of workers just below 40. This difference cannot be attributed to the stimulating effect of the tax deduction on the participation rate of older workers. Moreover, the short-term spill-over effects on workers younger than 40 are so substantial that the net effect of the age-dependent tax deduction is negative.

JEL Classification: H30, J24, J31