Household Responses to the Tax Treatment of Income from Solar PV Feed-in in Germany

In this paper, we examine the significance of compliance costs in the context of solar photovoltaics deployment and installed capacity decisions by private households in Germany. We investigate possible adverse effects of feed-in remuneration schemes induced by tax compliance costs. More specifically, we study how private households respond to a tax policy instruction issued by the German Federal Ministry of Finance in June 2021, which enables to avoid the tax compliance obligations if the installed capacity does not exceed 10 kWp. A decision model and two different empirical models are employed to show how such compliance costs may distort both deployment decisions and capacity choices. We find that the tax instruction led to a change in the capacity distribution of newly built PV systems towards 50-65% intensified excess bunching slightly below 10 kWp, leading to inefficient use of rooftop space. Lack of crosssectional variation in the data and a large number of confounding events in the observation period calls for further research to corroborate our findings.