Do tax credits for cleaning services increase consumption?

Abstract

This paper studies the effects of household services tax credit (HTC) on service demand and tax evasion. HTC is an income 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 the HTC system has a negligible impact on demand for services in the cleaning sector. In addition, we do not find HTC to be efficient in reducing tax evasion. We provide counterfactual analysis suggesting that the demand elasticity is low, and that the extent of population consuming cleaning services could also be low, which is important to consider in ex ante policy analysis. Furthermore, our survey evidence suggests that consumers are poorly informed about the details of HTC rules. These are both likely factors contributing to the limited responses to the tax credit.

Publication Information

Harju, J., Jysmä, S., Koivisto, A., & Kosonen, T. (2025), Do tax credits for cleaning services increase consumption? International Tax Public Finance, 32(5).

• ISSN: 0927-5940 (painettu), 1573-6970 (verkkojulkaisu)
• JEL: H24, H25, H26, H31