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Tax relief for home maintenance services is not an effective means of tackling tax evasion. In Germany, it would cost the government a great deal of money while only marginally improving tax compliance. This is the finding of a survey of just under 2,000 private households in Germany by the Ludwig Erhard ifo Center for Social Market Economy and Institutional Economics.

“In total, 55 percent of respondents say that they would request an official invoice even if this didn’t entitle them to tax relief,” says the Director of the Ludwig Erhard ifo Center for Social Market Economy and Institutional Economics, Sarah Necker.

“If policymakers wish to use tax relief as an incentive for consumers to ask for invoices for home maintenance services, they should focus on making it easier for households to include these invoices in their returns and on making the financial advantage more transparent. Sweden has already set out on this path. There, tradespeople send their invoices to the tax authority for processing and the tax relief is immediately apparent in the form of a lower price for the consumer,” Necker says. This is particularly cost-effective when households are informed about how they benefit financially from this tax relief. Households are then willing to pay 49 percent more for a service that includes an invoice. This is just as effective as upping the reimbursement rate by 10 percentage points.

In Germany, households are able to deduct 20 percent of the cost of home maintenance services on their income tax return. The survey shows that with this tax break, households are willing to pay 35 percent more for a service that includes an invoice. However, this level of willingness is only marginally higher than when no tax relief is available. Without any tax credit, households are willing to pay 27 percent more for a service that includes an invoice. “Our results apply especially to small-scale home maintenance services such as painting walls.

When it comes to large-scale work, we expect to see a greater willingness to request an invoice because in such cases it’s more important to have a guarantee or proof on paper,” Necker says.

The study is based on two surveys involving a total of 1,974 German homeowners. Participants were asked to imagine they were commissioning a home maintenance service. They could choose from multiple sets of two offers. In particular, each pair differed in terms of price and whether an invoice would be produced.

HT

Source: ifo Institute

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