Property tax incentives to divorce strategically

PURPOSE– The paper aims to examine the role played by property tax in influencing strategic decisionsregarding marital separation and divorce in Italian municipalities. DESIGN/METHODOLOGY/APPROACH: – The empirical analysis is conducted on a sample of 6,458 Italian municipalities by applying the ordinary least squares (OLS) and instrumental variables (IVs) approaches. FINDINGS – The estimation results show a small increase in marital separations and divorces as the difference between the municipal secondary and primary home tax rate increases. Specifically, an increase of 1‰in the property tax rate differentials is accompanied by an increase of six marital separations and four divorces per 1,000 inhabitants. RESEARCH LIMITATIONS/IMPLICATIONS – The main limitation of the analysis is that the strategic behavior of the married couple is inferred from econometric analysis with data aggregated at the municipal level. To investigate this phenomenon more precisely, it would be useful to have individual data collected by surveys on strategic divorce decisions due to property tax incentives.ORIGINALITY/VALUE – This study contributes to the scant existing literature on the tax incentives for strategicdivorce. It is the first study to empirically investigate the effects of property tax on separation and divorcedecisions by investigating the Italian context. In Italy, a property tax was introduced in 1993, encouraging“false” divorces by spouses with a second home since the tax on the secondary home was set at a rate higherthan that on the primary residence. Moreover, there were no tax deductions and no additional tax breaks on thesecondary home, while they were established on the primary one. Higher property taxes and the absence of taxbreaks on the secondary home may have encouraged a strategic behavior whereby many married couples filedfor false separation and divorce in order to recover part of property tax rebates.