Is the Property tax a Capital tax?

Abstract

This paper studies the impact of the local property tax on business by exploiting a tax reform approved in Italy in 2015, when heavy equipment is excluded from the business property tax base. The exogenous variation due to the policy change is the key to setting a quasi-natural experiment. Using a Difference-in-Differences approach, I show that firms that previously employed heavy equipment in production increase their capital more than firms that did not. This result demonstrates that the tax acts as a capital tax on the portion of business capital that is less fixed. To the extent that the increase in equipment is randomly determined, I can construct another experimental setting that looks at the years in which the change in equipment occurs due to the policy. Using a fuzzy difference-in-differences, I investigate how increased capital investments affect value added and profits.