Working Paper: CEPR ID: DP14999
Authors: Dominik Sachs; Sebastian Köhne
Abstract: We analyze Pareto-efficient tax deduction rules for work-related expenses. Pareto efficiency dictates a strict rule for marginal deductions along the income distribution. An immediate implication is a recipe for designing Pareto-improving reforms. We apply our theory and simulate a Pareto-improving reform that introduces deductions for non-care household services (housekeeping, gardening, laundry) in the United States. The reform combines marginal deduction rates for household services between 55% and 85% with a slight increase in marginal tax rates.
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 |
|---|---|
| Introduction of Deductions for non-care household services (H31) | Increase in household service spending (D19) |
| Marginal deduction rates (55% to 85%) (H29) | Slight increase in marginal tax rates (H29) |
| Reform (P41) | Pareto improvement in tax system (H21) |
| Reform (P41) | Welfare gains ($10 to $20 per household) (D69) |
| Tax credits exceeding full deductibility (H20) | Pareto inefficiency (D61) |
| Lack of tax deductions for certain households (H31) | Inefficiency in tax system (H21) |