Pareto-efficient Tax Deductions

Sebastian Koehne and Dominik Sachs

No 7744, CESifo Working Paper Series from CESifo

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 (search for similar items in EconPapers)
JEL-codes: D82 H21 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Pareto-Efficient Tax Deductions (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_7744

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