Template-Type: ReDIF-Paper 1.0
Author-Name:  Jarkko Harju
Author-Name-First: Jarkko
Author-Name-Last: Harju
Author-Email: jarkko.t.harju@tuni.fi
Author-Workplace-Name: Tampere University, Finnish Centre of Excellence in Tax Systems Research (FIT)
Author-Name:  Sami Jysmä
Author-Name-First: Sami
Author-Name-Last: Jysmä
Author-Email: sami.jysma@labore.fi
Author-Workplace-Name: Labour Institute for Economic Research Labore
Author-Name: Aliisa Koivisto
Author-Name-First: Aliisa
Author-Name-Last: Koivisto
Author-Email: aliisa.koivisto@vatt.fi
Author-Workplace-Name: VATT Institute for Economic Research
Author-Name: Tuomas Kosonen
Author-Name-First: Tuomas
Author-Name-Last: Kosonen
Author-Email: tuomas.kosonen@vatt.fi
Author-Workplace-Name: VATT Institute for Economic Research, Finnish Centre of Excellence in Tax Systems Research (FIT)
Title: Do household tax credits increase consumption? The role of demand elasticity and the extent of demand
Abstract:This paper studies the effects of household tax credit (HTC) on service demand
and tax evasion. HTC is a tax credit for consumers to reclaim a share of the labor
costs of home improvement services, such as renovation and cleaning work. The
aim of this widely used tax credit has been both to increase demand for services
to boost employment in the service sector and to curb tax evasion. We use data
on firm-level monthly value added tax reports and annual tax filings to study the
effects of the introduction of HTC for home cleaning services in Sweden in July
2007 together with a difference-in-differences approach using small Finnish service
sector firms as a control group. Our results show that, at best, the HTC system
has very limited effects on demand for services in the cleaning sector. We provide
counterfactual analysis suggesting that the demand elasticity is low, and that the
extent of population consuming cleaning services could be low, which is important
to consider in ex ante policy analysis. In addition, we do not find HTC to be ef-
ficient in reducing tax evasion. Our survey evidence suggests that consumers are
poorly informed about the details of HTC rules, which is one likely explanation for
the limited responses to the tax credit.
Length: 44 pages
Creation-Date:  2023-03
Publication-Status: Published in FIT Working Paper Series, Finnish Center of Excellence in Tax Systems Research
File-URL: https://verotutkimus.fi/verotutkimus/wp-content/uploads/2023/03/FIT-WP8-Do-household-tax-credits-increase-consumption-300323.pdf
File-Format: Application/pdf
File-Function: First version, 2023
Number: 8
Classification-JEL: H24,H25,H26,H31
Keywords: Household tax credit, demand, employment, consumer price, tax evasion
Handle: RePEc:fit:wpaper:8