The responsiveness of training participation to tax deductibility

Edwin Leuven and Hessel Oosterbeek

To stimulate investment in training by individuals, the Dutch tax system allows a deduction of out-of-pocket training expenditures from taxable income. This paper investigates to what extent the resulting cost reduction encourages training investments. Two different identification strategies are used. The first strategy uses the progressive structure of the income tax scheme and compares groups with taxable income just above or just below kinks. The second strategy takes advantage of the 2001 tax reform, which implied substantial changes in marginal tax rates. These strategies exploit different sources of exogenous variation and are based on different identifying assumptions. Nevertheless, the results point in the same direction: tax incentives increase training participation.

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