Published 17 April 2019

Evaluation of the RUT tax deduction – effects on firm growth and survival

This report studies the effects from the tax deduction on household services, RUT, on the firms which benefits from the deduction. The econometric results suggest that the deduction has lead to large increases in turnover, labor productivity and number of employees in the targeted firms.

The size of these effects are on average 9­–12 percent higher than the control group. Firms that use the RUT tax deduction has a 3 percent higher survival rate compared to the control group.

The RUT tax deduction was implemented in 2007 in order to increase the demand for household services. In 2009, the deduction was redesigned, allowing the user to deduct directly form the invoice. This method made it simpler for household to use the deduction, since they no longer needed to wait for reimbursement. Growth Analysis have studied the effects on the targeted firms following this change and until 2015.

The challenge in finding a comparable control group

It is difficult to evaluate the effects from a reform that is implemented uniformly over the entire country, since there is no region that can act as a control group. To address this problem, several different service sectors are used as control group.

Combining data on the usage of the RUT tax deduction between 2009 and 2015 with registry data on firm variables, it is possible to estimate the effects of the reform using a difference-in-difference approach. Along with number of employees, turnover and labor productivity, we also estimate firm survival using a Kaplan-Meier survival approach.

Positive and significant effects on all the studied outcomes

The results are positive and significant for all outcome variables. The estimates suggest that the reform have created at least around 8,500 new jobs. This estimate is lower than previous studies, possible because previous studies have not used a control group approach and therefore not accounted for trends in the economy. Given the fiscal costs of RUT, this means that each newly created RUT-job cost around 1.5 million SEK. This is a gross cost, and does not take into account any tax payments by those who have gained a job, nor a reduction in possible welfare payments for previously unemployed.

The RUT tax deduction was a debated reform when implemented, and it is therefore of great importance to evaluate the effects. This study does not look into possible general equilibrium effects regarding the cost of RUT. Such a study would look into the total fiscal effects of taxes at both individual and firm level as well as unemployment benefits to evaluate the net effects for the government of the reform. Despite these caveats, this study does add to the discussion of the cost and benefits of the RUT tax deduction.

Title
Evaluation of the RUT tax deduction – effects on firm growth and survival

Serial number
PM 2019:08

Reference number
2018/193

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