Abstract

After the introduction of the IRAP tax in the Italian fiscal system, taxes paid by firms are computed as a percentage of the value added, rather than net income. Such a reform is likely to change firms' behaviour. In this paper we analyse the effects of the IRAP on the optimal behaviour of a firm operating in a monopolistic competition setting, in terms of changes in factor utilisation, production and profits. The theoretical model is used to evaluate empirically the expected effects of tax reform on the largest firms of the Marche Region.