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Do Household Tax Credits Increase the Demand for Legally Provided Services?

WP 2022-03.

We study the causal effects of household tax credits on the willingness to demand legally provided services using a survey experiment among 670 German home owners. Participants are randomly assigned to a scenario 1) without a tax credit, 2) a tax credit the household can claim through the annual tax return, i.e., in the following year, 3) a tax credit granted by the seller at source, i.e., as an immediate price reduction. We find that tax credits increase the probability that a household selects an offer with invoice by 13 (via tax return) and 11 (granted at source) percentage points. The willingness to pay a premium for an invoice increases by 11 and 6 percentage points, respectively, which is about one third of the change expected when the financial advantage of the tax credit would be fully factored in. The treatment effects are not significantly different between the two tax credits, suggesting that the incomplete take-up cannot be explained by the timing of tax credits or the actions related to obtaining them. Yet, individuals seem to have compliance costs of about two thirds of the tax credits’ rate that seem to be independent of the tax credits’ implementation.

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