Industry-specific tax relief – an international comparison
This study – Branch-specific tax reductions–An international comparison – is part of the Swedish Agency for Growth Policy Analysis’, Growth Analysis, framework project Do branch-specific tax reductions promote growth? The framework project investigates the so‑called RUT (cleaning, maintenance and laundry) and ROT (home repairs, conversion, extension) tax deductions. The project includes descriptive statistical analyses and effect evaluations, focusing on companies and employees who perform the services subject to tax reductions.
In this study, we have looked beyond Sweden’s borders to two Nordic countries and two other EU countries that have introduced different kinds of tax reductions for labour intensive household services. The selection of countries was mainly governed by the requirement that the initiatives studied had been evaluated with a focus on their job-creating effects.
Tax subsidies of household services are expected to increase employment
A common argument in favour of tax reductions for household services is the expectation that they will lead to a transfer from do-it-yourself work, or undeclared work, to formal paid employment. The tax reduction is thus assumed to reduce the distortion that exists between the taxed and untaxed sectors. Promoting the demand for taxed services is in the long run expected to lead to increased employment, partly due to increased demand for labour in these sectors, and partly due to an increase in hours worked among purchasers of these services.
There are a number of factors that decide the extent to which employment is affected by branch-specific tax reductions or subsidies. According to economic theory, in order to have an effect, tax reductions should be applied to price-sensitive services, which often have close substitutes, and to highly competitive branches of industry.
Tax subsidies also have crowding out effects
There are certain risks involved in broadly based initiatives such as tax reductions aimed at entire branches of industry. Above all, there is a risk of crowding out effects. For example, lowering the tax rates applicable to services that are close substitutes for do-it-yourself services, such as work in the household, leads to a distortion away from other taxed market consumption. Increased demand for labour in a subsidised branch can also lead to a risk of redistribution of resources away from more productive branches.
A common European question
Public intervention to support labour-intensive household sectors has been discussed for several decades and has been introduced in various forms and at various times in several European countries. However, the discussion gained greater relevance after the financial crisis of autumn 2008. Within the EU, the European Commission is acting to promote discussion and policy development to create jobs in sectors with locally produced, labour-intensive and low-productivity services. At the same time, EU legislation sets certain limits for government intervention in this area, for example on value added tax (VAT) rates.
Price subsidy aimed directly at the buyer or indirectly via VAT
The four cases that we focus on in the study are subsidies for the purchase of household services in Belgium and Denmark, and reductions in the VAT rate on hairdressing services in Finland, and on tourism related services (including restaurant and catering services and hotel stays) in Ireland. The basis of this selection is that the measures were introduced in the household services sector from the 1990s onward and that their purpose is to impact employment. We describe the main results from the four case studies and what conclusions that have been drawn from these results in the different evaluations.
Experiences in Europe vary
In Belgium, the evaluation of the Belgian services coupon system shows that, in 2013, companies that offered household services subsidised by the government employed approximately 149,000 people, almost all of whom were women and approximately half of whom had low formal education. About one third of those employed by the services companies had been unemployed prior to the reform. On the other hand, the evaluations cannot say with certainty to what extent the subsidies create new jobs, whether undeclared household services are replaced by declared services or whether the buyers increase their labour market participation. It is also an expensive reform and costly to administer, since the subsidy is given through a coupon system and a tax deduction.
In Denmark, the evaluation question was how the opportunity for tax deductions for housing repairs affects the labour market participation of the buyers of the services. The evaluation shows that there are no significant effects in this respect. Experiences in Denmark also show that there are great differences in what knowledge and skills among those who perform the different types of subsidised services demand of employees within the system, which leads to differences in price sensitivity. Services that require a high level of knowledge and skills (electrical work for example) are relatively insensitive as regards price, while services that require less knowledge and skills (such as cleaning) are more price sensitive.
As regards the reduction in VAT rates in Finland and in Ireland, the evaluations show that approximately half of the tax reductions were passed on to consumers. When it comes to effects on employment, experiences differ. In Finland, the evaluation cannot determine any effect, while the evaluation in Ireland shows an increase in employment of between 4,800 and 8,900 jobs. In this respect it is probably significant that hairdressing services, as in the Finnish case, are relatively insensitive as regards price.
What conclusions can we draw?
The experiences of our European neighbours show that how successful branch-specific tax reductions are in terms of increasing employment and productivity depends on a number of factors. Decision makers must analyse how price sensitive the services that they wish to subsidise are, as well as how easy it is for households to replace the services with do-it-yourself work. The Belgian and Danish examples show that the size of the subsidy offered by the government is also of significance, while it is also important to look at the effects in relation to costs–in terms of increased administrative expenditure and loss of tax revenues.
Our study also shows that, even though subsidies for household services are common in European countries, in many cases there is a lack of contrafactual studies that could show with more certainty what effects the interventions have. This means that we cannot with certainty draw any general conclusions as to whether they lead to new jobs being created and the unemployed finding work in a cost effective way. Neither do the evaluations provide any basis for conclusions whether undeclared work is converted into formal, paid employment or whether the buyers of the services increase their working hours, or on potential distortionary effects or impacts on other industries and branches.
Industry-specific tax relief – an international comparison
Serial number: PM 2018:23
Reference number: 2018/194