Tax credit doesn’t curb tax evasion

The tax credit is not an effective means to increase employment or prevent tax evasion, according to a new study, said a press release of the Ministry of Finance on Monday.

In its spring 2021 budget session, the government will discuss possible plans to expand the tax credit for household expenses.

Every year, more than EUR 400 million is granted in tax credits for household expenses in Finland.

Tax credits for household expenses are generally considered an excellent way to increase employment in the service sector and to discourage tax evasion.

However, according to a recent study by the Institute for Economic Research and the Labour (VATT), the tax credit for household expenses does not significantly contribute to either of these objectives. Tax credits are also disproportionally granted to people with high incomes.

The study examined how changes in the system of tax credits for household expenses affect the demand for services in Finland and Sweden. The study found that introducing or expanding the scope of tax credits did not increase the consumption of services.

“According to the study, the tax credit for household expenses seems to benefit mainly those consumers who would have used the services in any case. Because the tax credit does not increase the use of services, it does not generate new jobs in the service sector either,” said VATT Research Professor Jarkko Harju.

Changes in tax credits for household expenses, therefore, have little impact on consumption habits.

“Our research shows that when using services, consumers are not very sensitive to changes in prices. This finding is in line with earlier studies on the effects of reduced VAT rates on the demand for services,” said VATT Research Director Tuomas Kosonen.

According to the study, the recipients of tax credits for household expenses earn significantly more on average than other taxpayers. The higher a person’s income taxes the more they can take advantage of the tax credit, which particularly benefits high-income taxpayers.

The ‘Impact of The Tax Credit for Household Expenses on Employment and The Grey Economy’ study was carried out as part of the implementation of the government’s 2019 plan for analysis, assessment, and research.