Abstract

Brain drain is a growing concern for many countries experiencing large emigration rates of their highly educated citizens. While several European countries have designed tax schemes to attract high-skilled expatriates and foreigners, there is limited empirical evidence on the effectiveness of fiscal incentives in a context of brain drain, and on migration responses to income tax differentials beyond top earners. In this paper we investigate the effects of the Italian 2010 tax scheme (“Controesodo”), which granted a generous income tax reduction to high-skilled expatriates who relocate to Italy. Eligibility required a college degree as well as being born in 1969 or later, which creates suitable quasi-experimental conditions to identify the effect of tax incentives. Using a Diff-in-Diff strategy and administrative data on return migration, we find that eligible individuals are 27-34% more likely to move back to Italy post-reform. Additionally, using social security data from the main origin country of returnees (Germany), we uncover a large effect from the lower half of the earnings distribution, suggesting that mobility in response to tax incentives is a broad phenomenon not limited to top earners. A simple cost-benefit analysis reveals that the net fiscal impact of the 2010 reform is marginally positive, by virtue of the tax scheme targeting young individuals.