Working Paper: CEPR ID: DP13852
Authors: Sebastian Koehne; Dominik Sachs
Abstract: We analyze Pareto-efficient tax deduction rules for work-related expenses (e.g. housekeeping services, child care or elderly care). Pareto efficiency dictates a tight rule for how the rate of deductibility should vary with income and expenditures. An immediate implication is a recipe for designing Pareto-improving tax reforms. We apply our theory to housekeeping services in the U.S.: Introducing deduction rules such that between 55% (low expenses) and 85% (high expenses) of housekeeping services can be marginally deducted from taxable income yields a Pareto improvement if combined with a slight increase in marginal tax rates. Nobody is made worse-off and tax revenue increases by 20 Dollars per capita.
Keywords: Optimal Taxation; Tax Deduction; Pareto-improving Tax Reform
JEL Codes: D82; H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax deduction rules (H20) | Pareto improvements (D61) |
| tax deductions for work-related expenses (J32) | economic well-being of individuals (I31) |
| tax deductions for work-related expenses (J32) | tax revenue (H27) |
| allowing deductions of 55% for low expenses and 85% for high expenses (H20) | Pareto improvements (D61) |
| current tax system (H20) | consumption level of domestic services (E20) |
| tax policy design (H29) | economic efficiency (D61) |