Tuesday, September 25, 2012

Tax credits for economic development do not work

Every government, from the most local to the national one, touts its success in attracting business and creating jobs through well targeted tax credits. The latter obviously come at a cost, but that is supposed to be well-compensated by new tax revenue from increased income in the particular jurisdiction. Or so these public officials think.

Luc Behaghel, Adrien Lorenceau and Simon Quantin study the French tax credit initiatives that were supposed to bring more economic activity in some rather deserted rural areas. These tax credits were implemented in various ways across time and firms, which allows to estimate their impact. And no way which way you look at the data, there is nothing to be found. That is pretty bad. In they had found an impact, one could have discussed whether it was large enough to generate increased public revenue to fund the tax credits. But there is none of that. Pure waste.

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