New study: Household tax credit neither boosts employment nor reduces tax evasion

Helsinki (03.02.2021 – Heikki Jokinen)

In 2019, a total of 476 million euro was granted by way of tax credits for household expenses in Finland. Since 2001, taxpayers have been able to claim costs for the acquisition of household services such as cleaning, renovations at home or in the summer house and child care to gain tax credit deductions for these services.

At present, the price of work can be reduced by 40 per cent for tax purposes, up to a maximum amount of 2,250 euros per person. The rules and maximum amounts that one can deduct have been changing over the years, as the issue is politically charged. The maximum amount ever that was deductible has been 3,000 euro and maximum percentage 60.

The purpose of the tax break is to improve employment in the service sectors included in the scheme and reduce tax evasion.

However, a new study by the Labour Institute for Economic Research PT and the Institute for Economic Research VATT suggests that these household deductions fail to meet both objectives. The study by Jarkko Harju, Sami Jysmä, Aliisa Koivisto and Tuomas Kosonen is published by the Prime Minister’s Office.

The researchers analysed extensive data from the Tax Authorities in Finland and Sweden. They discovered that the scheme “has very limited effects on the consumption of services and employment in the service sector”, as they put it in the study abstract. Nor was any evidence found that the scheme is efficient in reducing tax evasion.

One out of five Finnish taxpayers use the scheme each year. But the extent to which it is used is very much income-based: those who avail of it tend to earn significantly more on average than other taxpayers. Nor does the tax credit seem to increase the demand for services.

“This is an income transfer for those high-income people who use this deduction. They benefit from the fact that they now receive services at a cheaper price thanks to the household deduction system,” one of the researchers, professor Jarkko Harju informed Yle News.

Tax cut for high-earners

Trade union confederations hold different opinions on the household tax credit scheme.

Akava, the Confederation of Unions for Professional and Managerial Staff in Finland supports a quick broadening of the scope of the household tax credit and would like to see an increase in the maximum deduction.

STTK, the Finnish Confederation of Professionals noted in January that the benefit of the scheme is small in comparison to the costs involved – almost half a billion euro.

The benefits of the tax deduction should not be increased, STTK economist Antti Koskela says in a press release. “More cost-effective ways to boost employment could come from improving infrastructure, like investment in railways and roads. Furthermore, this would have more benefits for the wider economy.”

SAK, the Central Organisation of Finnish Trade Unions, has changed its view since the study was published. In 2020, it still saw household tax credit as a good tool for creating new jobs and combating the grey economy.

Niko Pankka, the Taxation Specialist at SAK underlines in his blog in January 2021 that it is extremely important to see how the tax deduction is used. In 2017, those earning more than 55,000 euro a year were almost one third of those using the tax scheme.

Pankka finds no  good reasons to increase the maximum amount of tax deduction. This study supports the earlier findings that tax breaks are not a good way to support employment.

As the scheme costs more than 400 million euro a year, Pankka asks whether this amount could be better used somewhere else to promote employment.

See the full study (pdf) in English.

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