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Discussion Paper Details

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Title: Pareto-Efficient Tax Deductions

Author(s): Sebastian Koehne and Dominik Sachs

Publication Date: July 2019

Keyword(s): optimal taxation, Pareto-Improving Tax Reform and Tax Deduction

Programme Area(s): Public Economics

Abstract: We analyze Pareto-e?cient tax deduction rules for work-related expenses (e.g. housekeeping services, child care or elderly care). Pareto e?ciency 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-o? and tax revenue increases by 20 Dollars per capita.

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Bibliographic Reference

Koehne, S and Sachs, D. 2019. 'Pareto-Efficient Tax Deductions'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13852