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Do household tax credits increase consumption? The role of demand elasticity and the extent of demand

Author

Listed:
  • Jarkko Harju

    (Tampere University, Finnish Centre of Excellence in Tax Systems Research (FIT))

  • Sami Jysmä

    (Labour Institute for Economic Research Labore)

  • Aliisa Koivisto

    (VATT Institute for Economic Research)

  • Tuomas Kosonen

    (VATT Institute for Economic Research, Finnish Centre of Excellence in Tax Systems Research (FIT))

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.

Suggested Citation

  • Jarkko Harju & Sami Jysmä & Aliisa Koivisto & Tuomas Kosonen, 2023. "Do household tax credits increase consumption? The role of demand elasticity and the extent of demand," Working Papers 8, Finnish Centre of Excellence in Tax Systems Research.
    • Handle: RePEc:fit:wpaper:8
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    References listed on IDEAS

    as
    1. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and Taxation: Theory and Evidence," American Economic Review, American Economic Association, vol. 99(4), pages 1145-1177, September.
    2. Joana Naritomi, 2019. "Consumers as Tax Auditors," American Economic Review, American Economic Association, vol. 109(9), pages 3031-3072, September.
    3. Harju, Jarkko & Kosonen, Tuomas & Skans, Oskar Nordström, 2018. "Firm types, price-setting strategies, and consumption-tax incidence," Journal of Public Economics, Elsevier, vol. 165(C), pages 48-72.
    4. Youssef Benzarti & Dorian Carloni, 2019. "Who Really Benefits from Consumption Tax Cuts? Evidence from a Large VAT Reform in France," American Economic Journal: Economic Policy, American Economic Association, vol. 11(1), pages 38-63, February.
    5. Carbonnier, Clement, 2007. "Who pays sales taxes? Evidence from French VAT reforms, 1987-1999," Journal of Public Economics, Elsevier, vol. 91(5-6), pages 1219-1229, June.
    6. Brantly Callaway & Andrew Goodman-Bacon & Pedro H. C. Sant'Anna, 2021. "Difference-in-Differences with a Continuous Treatment," Papers 2107.02637, arXiv.org, revised Jan 2024.
    7. Annabelle Doerr & Sarah Necker, 2021. "Collaborative Tax Evasion in the Provision of Services to Consumers: A Field Experiment," American Economic Journal: Economic Policy, American Economic Association, vol. 13(4), pages 185-216, November.
    8. Doerr, Annabelle & Hartmann, Carina & Sajons, Christoph, 2022. "Unregistered work among refugees: Evidence from a list experiment in Germany," Working papers 2022/01, Faculty of Business and Economics - University of Basel.
    9. Kosonen, Tuomas, 2015. "More and cheaper haircuts after VAT cut? On the efficiency and incidence of service sector consumption taxes," Journal of Public Economics, Elsevier, vol. 131(C), pages 87-100.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Household tax credit; demand; employment; consumer price; tax evasion;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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