Optimal Income Tax Deductions for Mixed Business and Personal Expenditures

Jacob Goldin, Sebastian Koehne and Nicholas Lawson

No 11561, CESifo Working Paper Series from CESifo

Abstract: We study the optimal taxation of expenditures that generate income while also serving a consumption function. We characterize the Pareto optimal income tax deduction for such mixed-purpose expenditures within a generalized Atkinson-Stiglitz model. Pareto optimality requires a partial deduction for mixed-purpose expenditures, where the deduction rate depends on the fraction of an expenditure’s marginal benefits that are attributable to income-generation rather than consumption. We extend our results to account for several practical considerations, including potential constraints relating to a uniform deduction rate or a fixed income tax schedule. Our results provide a rationale for non-uniform commodity taxation, distinct from existing models of preference heterogeneity or non-separability.

Keywords: optimal taxation; tax deduction (search for similar items in EconPapers)
JEL-codes: D82 H21 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-pbe
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Working Paper: Optimal Income Tax Deductions for Mixed Business and Personal Expenditures (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_11561

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