Place-based tax incentives stimulate employment in remote regions

A place-based payroll tax incentive can be effective in stimulating employment in remote and underdeveloped regions, helping to address regional inequalities, according to a new UCL and University of Oslo study. The study, published in the Journal of Public Economics, examined the effect of a tax reform in Norway that harmonised payroll tax rates across regions. Prior to this, to promote economic activity in less developed and remote areas, the government of Norway applied geographically differentiated payroll tax rates (ranging from 0% in the northernmost regions to 14.1% in the central areas) to stimulate employment and business activity, and avoid depopulation of sparsely populated areas. The geographically differentiated tax system was abolished in 2004 in compliance with EU trade regulation. The researchers found that after the place-based tax scheme was abolished, regions more heavily exposed to the reform-induced tax hike experienced a substantial decline in employment and a modest decrease in worker wages. First author on the study, Dr Hyejin Ku (UCL Economics) said: "Our findings suggest that in countries or states where wages cannot adjust so easily, due for instance to centralised wage bargaining, place-based payroll tax incentives can indeed be an effective tool in stimulating local employment in underdeveloped regions." "Ultimately, the effectiveness of place-based payroll tax incentives in stimulating local employment depends on how flexibly wages can adjust to a given tax change.