Économie et Statistique n° 427-428 - 2009 Internationalisation anf employment flows - The impact of tax exemption on business creation and employment in rural France - Commentary - Tax abatment and tax credit for hiring domestic workers - Are tax incentives for donations efficient? - Commentary
Tax abatement and tax credit for hiring domestic workers: incentive- and redistribution-related consequences
The French budget amendment act of 30 December 1991 introduced an income-tax abatement equal to 50% of domestic-service expenditures, with a cap that has varied considerably over time. This is one of the many tax-based and social incentives to employment in the personal-services sector. Another motive was to redistribute resources toward categories that have special needs for such services (the elderly, households with young children) but can ill afford them without public subsidies. On average, 7% of French households rely on domestic services. The largest consumers are found among the elderly and working couples with dependent children. Household income is a key determinant of person-services consumption: the main beneficiaries of tax abatement are the highest-income households. In 2003, the tax-abatement ceiling was lifted, and this variation allows a “natural experiment” econometric estimate of the labour-cost elasticity of demand for domestic services. The response of demand is indeed perceptible, but modest. The ex post study of the 2002 and 2003 income-tax reforms suggests that the tax cost of raising the ceiling probably exceeded the potential fiscal cost of directly financing the new jobs created by the reform. The ceiling adjustments therefore appear to be more of an aid to households (especially to large families and the elderly) than a powerful stimulus to employment in the personal-services sector.