Today nearly three times as many Swedes are negative towards undeclared work compared to six years ago. One explanation to this change in attitudes are the household tax breaks introduced in 2007 and 2008. Now the government is reducing the size of the deduction and critics warn against an increase in undeclared labour.
Behind each undeclared job, whether you are selling or buying the service, there is a person making a choice — do I want to pay tax or not? There are of course exemptions. Undeclared jobs can also be offered by paperless immigrants whose only way of making a living is to work without declaring it. This can also influence anyone buying an undeclared service. Yet for the majority of people the choice between declared and undeclared work is informed by their attitude to tax; do you want to cheat or contribute to society? The mechanisms are complicated and complex, says Katarina Nordblom, Associate Professor at the Department of Economics at the University of Gothenburg.
“Behind tax avoidance there are purely economic considerations like ‘will I save money on cheating and is there a risk I’ll get found out?’ But if you only looked at the economic considerations there should be far more cheating going on than what is indicates in such a model. Other considerations people make before cheating on taxes are what social norms exist, as well as your own attitudes — the inner reluctance — you get a bad conscience and it doesn’t feel good,” says Katarina Nordblom.
There is also social pressure, if paying taxes is the social norm. Individuals consider what people might say if they cheat. This social pressure, the commonly accepted view of taxes, makes countries different. But what creates the norm?
“It is closely linked to the trust people have in politicians, that they will make good use of the money. If you believe politicians to be useless and public officials to be corrupt, it feels better to keep the money to yourself. But these norms change with time,” explains Katarina Nordblom.
Her specialty as an economist is behavioural economy and how we act when it comes to taxes. She is visiting Stockholm to give a lecture for the Ministry of Finance about how the tax reliefs for household services, ROT and RUT, introduced in 2007 an 2008, have influenced Swedes’ tax behaviour. A 2006 survey by the Swedish Tax Agency mapped how a random selection of Swedes viewed paying for undeclared work. 17 percent said it was completely wrong to buy such services. In 2012 the exact same question was repeated, and 47 percent felt it was completely wrong to hire undeclared labour. The tax agency’s own surveys also show a growing opposition to undeclared work among tax payers. Katarina Nordblom is careful in her assessment:
“I can’t say that the changing attitudes to undeclared work is a direct result of ROT and RUT, but it indicates a strong link.”
RUT and ROT was introduced seven and eight years ago, offering tax rebates for household services. RUT is the Swedish acronym for cleaning, maintenance and washing, while ROT is short for renovation, refurbishment and extension.
So far taxpayers have been allowed to deduct 50 percent for work in each area up to a total of 50,000 kronor (€5,350) per taxpayer. The centre-left government is now making changes to both RUT and ROT. The RUT deduction is being capped at 25,000 kronor per taxpayer and certain parts are being cut. The controversial tax break for homework help has already been removed. The deduction for ROT services will be reduced from 50 to 30 percent, but the 50,000 kronor cap remains. The motif for reducing the tax breaks is mainly rooted in distributive politics.
There were several motives for introducing RUT and ROT, jointly known as the household deduction. The aim was to create new service sector jobs, improve working life and free up time for workers. It was expected that making it cheaper and easier to pay for declared labour would herald a shift from undeclared to declared work.
RUT and ROT have been controversial yet popular and are being used to an increasing degree. In 2014 4.5 million purchases were registered, up by 2.5 million since 2012. Some criticise the distributive aspect — the tax breaks benefit the already well off, while revenues fall for universally beneficial tax measures. Statistics also show high earners are more likely to apply for tax breaks for household services. In 2014 ROT deductions alone came to 16.9 billion kronor (€1.8bn). Supporters have pointed to the fact that many new jobs have been created, not least for women who used to struggle getting into the labour market.
The government’s consultation paper published ahead of this autumn’s budget, however, says lowering the ceiling for deductions to 25,000 kronor will affect only a few purchasers and that the change will therefore probably have little impact on employment figures.
So the question is what impact the changes to RUT and ROT will have on people’s willingness to pay for declared labour? Several consultation institutions predict an increase in undeclared work, among them the Swedish Economic Crime Authority, the Swedish Federation of Business Owners and the Swedish Construction Federation.
A survey by the Swedish Tax Agency shows 56 percent of people purchasing ROT deducted services would continue to use declared labour even if ROT did not exist. Six percent would pay for undeclared work. 26 percent of those using RUT deducted services said they would carry on paying for declared work if the measure disappeared, and eight percent would pay for undeclared work.
Katarina Nordblom believes it is difficult to predict how the changes to RUT and ROT will affect people’s attitudes to tax in everyday life. She is keen to do more research on this development.
“It is not only a question of having made people pay for declared labour, there has been a change to norms as well and it has an effect on those who aren’t paying for services too. There has also been more focus on buying declared or undeclared services, and slowly the opposition to paying for undeclared labour has increased. There is a limit when that norm has been established, and the question is whether we have reached that limit yet. We still don’t know,” says Katarina Nordblom.
In 2007 Sweden’s centre-right coalition introduced a tax break for household services, the so-called RUT deduction (a Swedish acronym for cleaning, maintenance and washing). ROT is short for renovation, refurbishment and extension and was introduced in 2008. RUT and ROT are jointly known as the household deduction.
The tax deduction has been 50 percent for services, capped at 50,000 Swedish kronor (€5,350) per taxpayer per year. The number of people making use of the tax break has increased year on year, and in 2014 the Swedish Tax Agency registered 4.5 million purchases with household deductions.
The centre-left government now wants to halve the ceiling for RUT services and introduce some limits on the types of services covered. The 50,000 kronor ceiling for ROT services will remain, but the tax deduction rate will be cut from 50 to 30 percent. The changes are expected to lead to an added tax revenue of 5.78 billion kronor (€62bn).