Économie et Statistique n° 427-428 Internationalisation anf employment flows - The impact of tax exemption on business creation and employment in rural France - Commentary - Tax abatment and tax credit for hiring domestic workers - Are tax incentives for donations efficient? - Commentary

Economie et Statistique
Paru le : 27/05/2010
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The impact of tax exemptions on business creation and employment in rural France: a regression-discontinuity analysis

Adrien Lorenceau

In 1996, French rural development policy defined areas called “rural revitalisation zones” (Zones de Revitalisation Rurale: ZRRs), where businesses with fewer than 50 employees would be eligible for tax breaks provided (among other things) that they increased their workforce. ZRRs comprise rural areas suffering from low population density and structural disadvantages in socio-economic terms. Tax exemptions in ZRRs are substantial (30% of gross wages for wages ranging between 1 and 1.5 times the minimum wage [SMIC]). They potentially concern a significant portion of total business firms, since they are home to 10.7% of units with fewer than 50 employees. Until now, most studies of the system’s economic impact have been descriptive. Lofredi’s analysis (2007) is the only one that attempts to identify the impact of the introduction of the tax breaks on employment and business creation. One particular aspect of the system makes it possible to test the effect of exemptions in ZRRs, applying a method now widely used to measure the impact of public policies. It consists of the fact that ZRRs were defined on precise density and population criteria, and only firms located in ZRRs are eligible for exemptions. We can therefore apply a “regression-discontinuity” (RD) approach to separate the system’s effect on employment and business creation from the impact of specific ZRR characteristics. Our results tend to confirm the conclusions reached by Lofredi (2007) using a different method. The tax-exemption system appears to have no significant effect on either employment or business creation in disadvantaged rural areas. This may be due to the heavy restrictions on eligibility for exemptions and to the distinctive rural environment in which the system was introduced. However, the estimates seem relatively imprecise, and one should therefore be cautious in drawing conclusions from them.

Economie et Statistique
No 427-428
Paru le : 27/05/2010