This blog is a summary of a recent article by Harju, J., Jysmä, S., Koivisto, A. et al. Do tax credits for cleaning services increase consumption?. Int Tax Public Finance 33, 445–468 (2026)
A good tax system generally favors a broad tax base over higher tax rates[1]. Yet policymakers are often tempted to narrow the tax base in pursuit of legitimate policy objectives, such as promoting growth, employment or other desirable outcomes. Household services tax credits are one example. These provisions reduce tax revenues with the premise that lowering the cost of household services, such as cleaning and renovation, encourages the consumption of these services, thereby creating jobs. In addition, the credit aims to discourage tax evasion by requiring the use of registered firms and increasing the amount of information reported to the tax authority.
Household services tax credits are in place in many countries including France, Germany, Sweden and Finland. Typically, these tax credits allow individuals to deduct a percentage of their spending on eligible household services directly from their tax liability, not from taxable income, which makes them rather generous. For example, in Germany the current credit amount is 20% of spending on services, such as cleaning, up to a maximum of 4,000 euros.
Despite the generosity of many household services tax credits, there has been little empirical evidence on its impact on demand and employment. In our recent study published in International Tax and Public Finance[2], we investigate how the adoption of the household services tax credit in Sweden impacted the demand for cleaning services. Comparing Swedish cleaning-sector firms with similar firms in Finland, we find no significant effects on firm-level outcomes following the introduction of the Swedish tax credit. This suggests that the reform had little impact on tax evasion or demand for cleaning services.
In an additional setting, we investigate a similar tax credit in Finland. We look how an increase in the maximum credit from 1,150 to 3,000 euros impacted firms in the Finnish renovation sector, again observing no significant effect. It is important to note that in both settings that we study, consumers did claim the tax credit in large numbers, indicating that those consumers who were already consuming these services did notice the tax credit and utilized it.
Our findings suggest that the credits were not efficient in achieving the stated goals of increasing employment in the sectors. In addition, we find no effect on tax evasion in our Nordic context. As our research is based on administrative data, reduced evasion would also show as increased business activity reported in firms’ tax filing, which we do not observe. However, research from Germany suggests that these tax credits may also support tax enforcement[3], implying that the level of initial evasion may matter for the effectiveness of the tax credit in reducing evasion.
The findings might appear surprising given the value of the credit. Yet, other research has highlighted that people tend to underreact to tax incentives that are not sufficiently visible or understood by consumers [4]. The study also includes a survey of Finnish taxpayers, which illustrates this point, by showing that most respondents do not clearly understand the details of the credit or its impact on the effective cost of services. This may be one driver for the modest impact of the credits on service demand.
Ultimately, due to little observed effect on demand, the findings suggest a low demand elasticity with respect to the after-credit price, meaning little additional sales of these services due to the credit. Since the credit does not operate like a direct price reduction, its effect on demand may be weaker than that of an equivalent price cut. First of all, the monetary threshold for starting to receive the tax credit is likely to influence the entry of new customers. Thus, in principle the incentives to consume more cleaning services are higher than to start consuming these services at all. Second, our study focuses on a credit that customers claim through their tax filing. As a result, although the credit lowers the long-run cost of the service, customers must initially pay the full price and receive compensation only later. Earlier research on tax refunds suggests that immediate costs and current liquidity constraints are often central for household consumption choices[5].
There is little effect on the sectors eligible for the credit, but is there harm in having a household services tax credit? The fact that the policy is costly in terms of revenue forgone and ineffective in its targets brings us back to the fundamental feature of a good tax system, which is a broad base. One of the main benefits of a broad base is that it allows the same amount of revenue to be raised at lower tax rates. If fewer taxes are collected from the consumers of these services, more needs to be collected elsewhere. In addition, a broad base is equitable and less distortive in decision making, when the tax rates do not vary depending on the activity.
In our study, we show that consuming cleaning and renovation services is more concentrated in the upper end of the income distribution. Thus, the benefits of the credits are allocated on average to high income households. With little effect on real outcomes in the economy, the tax credit serves as a way to redistribute and adds to the complexity of the tax system. It is ultimately a political choice who should be taxed less, yet tax reductions could also be achieved more efficiently and equitably by adjusting income tax rates without the connection to service consumption choices. Ineffective tax credits increase the administrative burden of the system both for the taxpayer and for the public sector.
[3] Doerr and Necker 2021;Buettner et al. 2023; Burgstaller et al. 2023
[4] Chetty et al 2009; Taubinsky and Rees-Jones 2017