The impact of turning a tax reduction into a tax credit to subsidize in-home services: an evaluation of the 2007 reform in France

Since 1991, French taxpayers who employ someone to work at their home (for care, cleaning, etc.) can deduct 50 % of the employment cost from their income tax. In 2007, the tax reduction was turned into a tax credit, making lower income households eligible. However, this change was limited to economically active home employers, which narrowed the scope of the reform. To measure its impact, we use exhaustive tax data, built into a panel covering the 2006-2008 period. First, we study the changes in the amounts refunded, in the number and in the characteristics of home employers. In 2008, households spent 7.8 billion euros on in-home services. 2.6 billion were refunded to them in tax reduction, only 151 million in actual tax credit. Among home employers that did not benefit from the tax reduction scheme in 2006, only 14% later became recipients of the tax credit. This is because the requirement to be economically active excludes the elderly, who make up most of the less well-off home employers. Next, we try to measure the causal change in the consumption of in-home services attributable to the new tax credit. Depending on the definition of the incentive, between 15 % and 25 % of households are impacted. Combining matching and difference-in-difference estimates, we find a significant increase both in the number of home employers and in their expenditure.