Does Household Tax Credit Increase Demand and Employment in the Service Sector?

Abstract

This report studies the effects of household tax credit (HTC). We use data from the Tax Authorities in Finland and Sweden. These data are firm-level monthly value added tax reports, annual income tax filings and individual-level reports on the usage of HTC. In addition, we use self-collected survey data focusing on the usage of HTC and the rules of the HTC system.

The survey results show that approximately 20% of the working age population in Finland use services that are eligible for the HTC. These results also show that individuals are not very aware of the HTC rules, and our analysis using administrative data also supports this observation. Our descriptive analysis shows that the HTC system is highly regressive, i.e. high-income individuals claim a large share of the HTC.

Our results using register data show that at best the HTC system has very limited effects on the consumption of services and employment in the service sector. We also do not find evidence that the HTC is efficient in reducing tax evasion. Therefore, our results suggest that expansion of the HTC system would be inefficient in spurring demand and employment and in reducing tax evasion. These results are also very well in line with previous studies that focus on estimating the effects of reduced VAT rates on prices, demand and employment.