RUT-avdrag (tax-deduction for domestic service work)

RUT: 2007

RUT: Cleaning, cooking, laundry, baby-sitting.

RUT: Private households are intended users. One of the ideas of the reform is that it will benefit women’s participation on the labour market. The idea is that by using less time on household work, women will have more time for paid work. This is however not the main purpose of the reform. There is no explicit target group among workers.

These effects have proved difficult to measure and very few studies have focused on the impact of the measures on direct employment. One report focusing on the employment effects of the measures was published in 2011 by the National Institute of Economic Research (Konjunkturinstitutet, NIER)[1]. The Institute estimated that RUT, since it was introduced four years earlier, had led to approximately 15,000 new jobs and a slight decreased in the equilibrium unemployment rate. NIER derived the increase from three factors – first, a shift in the demand from undeclared to declared services. Second, an inflow of labour to the market for household services from groups that had previously been unemployed or who were previously not in the labour force. Third, the fact that those who purchase the services are able to spend more time in paid work, which also has a positive effect on employment. A second study, conducted by the Research Service of the Riksdag (Riksdagens Utredningstjänst) in 2014 estimated the number of employees in companies providing services covered by RUT to have increased from 105,500 in 2007 to 140,100 in 2011 (+33%).

However, both these studies suffer from methodological problems. First, the study by the Research Service of the Riksdag was based on a time series consisting of only two years. Also, there is no clear definition of what employee means in any of the studies, and according to the Research Service of the Riksdag there have been occasions where workers accounted for in the data for various reasons have not considered themselves employed. Third, many companies providing services that are covered by RUT or ROT are one-person-firms and do not have any employees as such. Lastly, there is no way of controlling whether the person employed in a company providing RUT/ROT services is actually employed to do RUT/ROT-related work.[2]

Even though the statistics presented above clearly indicate that the tax deductions have had positive effects on employment, the figures should be treated with caution and not interpreted as exact values. But even if the methodological difficulties could be disregarded, the lack of studies on how sectors that are not covered by the PHS measures have been affected by the introduction of RUT and ROT, means that it is difficult to conclude with certainty that RUT and ROT have actually created jobs. In theory, the employment demand in companies providing services that are covered by RUT and ROT might be offset by a decreased demand in other sectors[3].

The fact that the employment effects are difficult to estimate have resulted in media outlets, interest groups and political parties all presenting very different statistics with regard to the number of jobs that have been created due to the introduction of RUT and ROT. One example is the report from 2011 by the Swedish Federation of Business Owners and the Swedish Construction Federation in which it was stated that ROT has led to the creation of 25 000 declared jobs, i.e. an estimate much larger than in the study by NIER that was published the same year[4].

The indirect employment effects of the Swedish PHS measures are even more difficult to assess than the direct employment and no such study has been conducted yet.

Few studies focus on the employment effects on users of RUT and ROT. The existing ones focus on RUT, i.e. on the effects of buying services such as cleaning and laundry rather than on the effects of buying services covered by ROT (construction, renovation etc.). The likely reason is that RUT services are more directly aimed at facilitating day-to-day activities and work-life balance. By contrast, ROT services cannot be considered every-day chores. The effects of the ROT tax deduction on the time spent by the users on paid or unpaid work is likely to be smaller, and hence, not as well-researched.

With regard to the RUT deduction, one government investigation has studied the allocation of time spent on paid and unpaid work in Swedish families. It estimated the effects of the tax deduction for domestic services on women’s labour force participation[5]. The study examined the employment effects of RUT on married women aged between 25 and 55 using data on households’ use of tax-deductible domestic services on a yearly basis (statistics collected by the Swedish Tax Agency (Skatteverket) through individuals’ tax returns).

The study builds upon the assumption that the time previously spent doing unpaid domestic work, which is made free when purchasing household services, will be reallocated either to paid work or to leisure. Employment effects for women could be estimated by examining the change in annual income since purchasing domestic services and interpreting increases as more time spent in paid work. The results indicate a statistically significant positive relation between women’s consumption of domestic services and their yearly income. The results indicate that 1.8 hours is made free for every purchased hour of household services. Out of this free time, 60 percent is used for paid work. Thus, the study found that by increasing women’s time spent on paid work, the tax deduction could lead to a decreased gender pay gap, especially for women with middle or high incomes who make up the major share of PHS consumers.[6]

However, other studies on the effect of RUT on women’s employment have argued that the positive effects on employment are exaggerated. Anita Nyberg argues that not all purchases of RUT services can be expected to have a positive effect on employment, especially since around half of the users only buy services once or twice every six months. Also, given that many of those who buy the services are above the age of retirement, their employment patterns cannot be expected to change significantly as a result of buying the services.[7]

One of the main arguments for the introduction of RUT was that it would be especially beneficial for women working part-time, due to their on average large share of the unpaid domestic work. RUT would thereby help reallocate their time spent in unpaid/paid work. However, as pointed out by Nyberg, many women in this group have chosen to work part-time because of the high value they place on time spent with their families, while being well aware that they would gain financially by working full time. The employment patterns of these women are unlikely to change due to the introduction of RUT.[8]

According to the Swedish Tax Agency (Skatteverket), many of the service providers in the RUT-related sectors are new companies. Even though it is difficult to prove any causal relationship between the RUT measure and the increase in the number of companies, the fact that as many as 47% of the companies in the sectors relevant for RUT have been created since 2007 when the measure was introduced indicate that there is at least a correlation[9]. The agency also states that any similar development of companies cannot be observed with regards to ROT. The explanation presented is that the expansion of the construction sector has mainly taken place within already established companies[10].

The study found that from the side of the providers, 74 million hours of undeclared work were conducted in connection to residence related work, household services and household belongings (cars, boats, computers etc.). This was estimated to correspond to 1.1% of the total number of hours worked in the given year. Measured from the side of the buyers, the estimate was 41 million hours of undeclared work paid in money. Out of these, 30 million hours were spent on the sort of services that could have been covered by RUT and ROT (11 million hours on RUT-activities and 19 million on ROT)[12].

Four years after the introduction of RUT, two years after ROT and with the previous mapping of undeclared work as a point of departure, the Swedish Tax Agency published an extensive report on how the use of undeclared services has changed since the introduction of the PHS measures.[13] The Swedish Tax Agency conducted interviews with a sample of buyers of RUT and ROT services. The participants were asked whether they previously had bought a corresponding but undeclared service. The results were compared to the investigation of the total mapping of undeclared work conducted in 2005. The participants were asked how they organised the housework prior to the introduction of RUT and ROT. The most common answer was that they had performed the work themselves (65 percent). One in four used to buy declared services while 6 percent of the buyers used to by undeclared services.

The agency estimated that the number of households buying undeclared services has decreased by 10% since 2005. It should however be noted that it is difficult assessing how much of the undeclared that has been ‘transformed’ into declared work as there is no way of knowing the relation between developments among informal and formal actors as the extent of undeclared work, by definition, is unknown.

The Swedish Tax Agency has also studied the attitudes of the public towards undeclared work. In connection to the agency’s yearly interview study in 2010, questions were posed to the public about their attitudes towards ROT, RUT and undeclared work. The agency found that the acceptance for purchasing undeclared services has decreased since the introduction of RUT and ROT. Furthermore, the agency states that the tax deductions has made it easier for them to investigate whether PHS-companies are paying the relevant taxes.[14]

Other studies have looked into the effects of the deductions from the side of the PHS workers. Anna Gavanas has studied undeclared work in the cleaning sector through a series of interviews with employees in the formal and persons working in the informal sector. She found that none of the interviewees spoke of informal work as a preferred option. Those who worked informally tended to have other plans and regarded their current situation a strategy of transition. When it came to formal domestic work, some interviewees considered domestic cleaning their career and found work in the cleaning sector rewarding and beneficial. Even though some did, not all interviewees considered cleaning work a necessary evil on route to other types of work but rather an acceptable opportunity for important and legitimate work.[15]

A study focusing specifically on Stockholm found that between 2009 and 2011, the share of elderly using privately provided elderly services increased from 41 to 45%. As a part of a regulation enabling the customer to choose provider of publicly financed and granted household services for elderly, private providers may offer so-called ‘additional services’ (tilläggstjänster, i.e. the option to “top up” with extra domestic services that are privately funded but subsidised by tax reductions for domestic services). As a result of the tax reductions, elderly care companies may subcontract domestic services to domestic service companies. Furthermore, in the Swedish system the elderly are not only eligible for tax deductions of 50% of the cost for domestic services rendered in their houses, but so are their adult children. In other words, adult children are eligible for tax reductions for services carried out in their elderly parents’ homes and therefore do not have to carry out unpaid family care themselves.[17] However, it is not possible to provide any indications about the motives for purchasing the services or what effects they might have had on the consumers’ possibilities for staying at home.

Having said this, the groups of society in which the deductions are most common are known. According to Statistics Sweden, RUT services is most popular among people with two children, which was true for both couples and for single parents.[18] However, couples were twice as likely to use the services compared to single parents. Also, it was ten times as common for families within the highest quartile of incomes to use the services as for those in the lowest quartile. For households with no children, it was approximately three times as common to use RUT-services among the group in the highest income quartile compared to those in the lowest. Although no studies have been conducted with regards to this issue, the question of work-life balance and its relation to PHS services has been one of the main arguments used in the Swedish political debate. The phrase ‘life puzzle’ is commonly used in Sweden to describe the difficulties many experience in trying to establish a good work-life balance. It has been used frequently in the political debate and in particular in connection to the debate on the RUT deduction.[19] The proponents of the deduction argue that families use the services to get more time to spend with their children and/or in paid work, which is argued to be of gain for all of society. The opponents on the other hand stress the redistributive issues resulting from not all families being able to afford the services, thus arguing that the outcome is unfair.[20]

In order to work in the formal sector one needs to have a Swedish social security number. Undocumented migrants are excluded by default and hence make up a large share of those remaining in the informal sector. There have also been signs of a dual development in the wake of the tax deductions. Because domestic services have become more formalised, there is less exploitation. But it still occurs that domestic workers do not get their correct payment.[21] One representative for an organization that works with undocumented migrants, interviewed by Gavanas, claims that the tax deductions and formalization of domestic services has caused a decrease in the payment rates for those who still work informally, as they now have to compete with tax deductible formal services[22]. Gavanas also found signs of a positive development, especially for migrant workers, as a result of the tax deductions. Many had started their own domestic service companies and in their experience the expanding formal domestic service sector is able to offer great work opportunities with fair and regulated working conditions that increase opportunities for social inclusion in the labour market for a significant number of people.[23] The issue of changing conditions for women working in the cleaning industry has also been a major topic in the Swedish political debate in connection to the RUT-deduction. Some proponents of the tax deduction seek to professionalise domestic service and raise the social status of traditionally undervalued “women’s work.” [24]

In addition to the contributions made in this field by Gavanas, Statistics Sweden regularly conducts surveys on working conditions and work-related disorders in collaboration with the Swedish Work Environment Authority.[25] The data is differentiated according to gender, age, occupation and branches of industry. Even though it would be possible to combine this information with data on the companies that have applied for RUT or ROT deductions no such study has yet been published.

In the most recent budget proposal, the maximum deduction for RUT services is decreased from SEK 50,000 (€5,366.13) to SEK 25,000 (€ 2,683.06) annually for people under the age of 65. Furthermore, some services previously included in the RUT deduction will no longer be deductible and for ROT the subsidy rate is lowered from 50 to 30% of the labour costs.

The motives for the reform of RUT primarily regard financial redistribution and for ROT the issue is mainly a budgetary issue for the government. When ROT was introduced in 2008 it was expected to cost SEK 3.6 billion for 2009. However, in 2014 the Swedish Tax Agency reports the deductions to have amounted to approximately SEK 17 billion. These new limitations on RUT and the lowered rate of subsidy on ROT are expected by government to increase the tax revenues with an estimated SEK 5.77 billons in 2016.[26]

The study estimated the costs for ROT between 2009 and 2010 to have been approximately SEK 9.4 billion (€ 1.01 billion). This was estimated to correspond to a business turnover (including material purchases) of roughly SEK 27 billion (€2.90 billion). And in turn, this is thought to have brought in tax revenues in the form of payroll taxes and VAT amounting to over SEK 10 billion (€ 1.07 billion). To this should be added the employers’ and employees’ income taxes. Thus, for every SEK 1 (€0.11) spent on ROT, Företagarna has calculated the earn-back to be SEK 1.5-2 (€ 0.16-0.2). The association has thus concluded ROT to be a real contribution to the treasury. The earn-back effects from RUT are estimated to be smaller. For the same period the total amount spent on RUT was SEK 900 million (€ 96.59 million), corresponding to a business turnover of SEK 2 billion (€ 214.64 million), generating VAT and payroll taxes at around SEK 900 million (€ 96.59 million).

The earn-back effect is thought to be smaller than for ROT due to the relatively small material costs. If income taxes are included, Företagarna concludes the measure to be greatly beneficial for the treasury. Together, the PHS measures in Sweden were deemed to have a positive impact on public finances. Företagarna argues further that had increased private consumption and decreased spending on unemployment benefits and various employment programs been taken into account, the estimated effects would have been even greater.