Tax-Induced Transfer of Residence: Evidence From Tax Decentralization in Italy

Abstract

This paper studies the effects of local income taxation on tax base and individual mobility since the early 2000s in Italy. Over this period of tax decentralization, regions and municipalities have been granted greater power to set different tax rates across income brackets. We combine novel fine-grained data on the universe of tax residence’s transfers with 89,860 local income tax changes and income bracket-by-municipality-level panel data on the tax base. We propose different empirical strategies, resting on tax rate variations both over time and across individuals within locations. We find that taxation significantly affects the location of the tax base. The mobility response mostly reflects tax residence relocation and involves a separation between residence and workplace. Responses strongly vary by gender, education, civil status and occupations. Yet, our estimates imply that efficiency losses due to tax-induced mobility are relatively small, thus making local redistribution feasible at least in the medium-run.