Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2016:3: The effect of local taxes on firm performance: evidence from geo-referenced data

Federico Belotti (), Edoardo Di Porto () and Gianluca Santoni ()
Additional contact information
Federico Belotti: CEIS, University of Rome Tor Vergata
Edoardo Di Porto: University of Naples Federico II, CSEF and UCFS Uppsala University.
Gianluca Santoni: CEPII

Abstract: This paper studies the impact of municipal non-residential property taxation on firms' performance using a panel data of italian manufacturing firms in 2001-2010. In the spirit of Duranton et al. (2011), we use a pairwise spatial difference instrumental variable es- timator which allows to tackle the endogeneity of local taxation. As well as providing robust inference to arbitrary cross-sectional dependence and serial correlation, our em- pirical strategy also improves on existing work by exploiting the exogenous variation in local taxes generated by the political alignment of each jurisdiction with the central government. We find that non-residential property taxation exert 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; generalized method of moments; two-way clustering

JEL-codes: H22; H71; R38

37 pages, February 11, 2016

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