The Effect of Local Taxes on Firm Performance: Evidence from Geo-Referenced Data
37 Pages Posted: 15 Apr 2016
Date Written: April 13, 2016
This paper investigates the impact of business property taxation on firms' performance using a panel of Italian manufacturing firms. To account for endogeneity in local taxation, we exploit a pairwise spatial differenced generalized method of moments estimator. As well as providing robust inference, we also improve on existing work by exploiting the exogenous variation in local taxes generated by the political alignment of each local government with the central one. We find that property taxation exerts a negative impact on firms' employment, capital and sales to such an extent as to significantly affect total factor productivity.
Keywords: Local taxation, endogeneity, spatial differencing, two-way clustering
JEL Classification: H22, H71, R38
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