Tax progressivity and productive entrepreneurship: Evidence from Italian data

Baliamoune-Lutz and Garello (2015) develop a theoretical model analyzing the interaction between progressive taxation, effort and wealth creation and show that progressive taxation, while not affecting the behavior of entrepreneurs with less profitable profit opportunities, causes “entrepreneurs benefiting from good or fairly good opportunities to reduce effort in order to lower the tax burden they would face should they maintain higher levels of effort.” The main objective of this paper is to use recent firm data from several regions in Italy to (i) further test the predictions of the Baliamoune-Lutz and Garello theoretical model, and (ii) try to identify differences between the Italian South and the Italian North. I use various proxies for productive entrepreneurship and control for a host of relevant variables. The econometric approach consists of performing Arellano-Bond generalized method of moments (A-B GMM) estimations on a large set of Italian firm data focusing on the effects of tax progressivity and how regional differences alter these effects. The preliminary empirical results show that the predictions of the theoretical model are in general validated. In addition, significant differences seem to exist between the impact of tax progressivity in the Italian South compared with the Italian North, especially in terms of the threshold level at which the negative impact of tax progressivity on the quality of entrepreneurship becomes significant. I comment on the implications of these findings and discuss their significance with regards to recent initiatives undertaken by the European Union and the Italian government, in particular, in order to promote growth and reduce unemployment in Italy.