Spatial consequences of tax reforms on tax compliance: econometric evidence from the Italian Minimum Taxpayer Regime

Abstract This paper investigates the consequences of the introduction of Italy’s 2008 flat–rate tax regime for self-employed earning less than 30 thousand Euros on tax compliance, combining counterfactual, spatial and temporal modeling. Using data from the Labour Force Survey on regional self–employment and administrative data on taxable income, we implement a Difference-in-Differences design to estimate the behavioral responses of self–employed taxpayers at the provincial level. To account for spatial and temporal dependence, we extend the standard DiD specifications with hierarchical spatio–temporal clustering. Results reveal the ambiguous consequences of the reform. On the one hand, it has encouraged individuals to underreport earnings in order to remain below the 30 thousand Euro threshold. On the other hand, it has favored the tax compliance of new self-employed workers, as our findings reveal a negative relationship between the proportion of self-employed individuals and tax evasion. We also observe unintended consequences of the reform in terms of heterogeneous spatial dynamics. In particular, low-income regions have been especially affected by the proportional rate regime, whereas limited evidence of behavioral adjustment has emerged in high-income areas. The effectiveness of the analysed policy is also affected by the traditional north–south divide.