DP2577 Is the Household Demand for In-Home Services Sensitive to Tax Reductions? The French Case

Author(s): Anne Flipo , Denis Fougère , Lucile Olier

Publication Date: October 2000

Keyword(s): In-Home Services , Tax Reduction , Household Demand , Labour Cost

JEL(s): D13 , J12

Programme Areas: Labour Economics

Link to this Page: www.cepr.org/pubs/dps/DP2577.asp

Our paper is concerned with the impact of tax reductions on the demand for services in the home. For that purpose, we consider the particular case of the French legislation voted in 1991. This law allows households employing paid help in the home to deduct from their income tax 50% of the sums paid out, subject to an annual ceiling. Did the reduction in overall cost of jobs in the form of services to individuals stimulate the household demand for these services? To analyse this problem, we estimate a structural model of demand for in-home services by using household individual data collected by INSEE (Paris) in 1996. Our estimations show that the relative marginal effect of a price variation on the probability of a strictly positive demand for in-home services is negative; its absolute value decreases with the educational level and with the income level of the household. It is generally higher for households without children less than 6 years old. These results suggest that a differentiated tax reduction, varying with the household income level and with the presence of young children in the household, should have a higher effect on the demand for in-home services than a uniform tax credit, such as the one granted in France since 1991.