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Discussion Paper Details

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Title: Pareto-improving reforms of tax deductions

Author(s): Sebastian Köhne and Dominik Sachs

Publication Date: July 2020

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

Programme Area(s): Public Economics

Abstract: We analyze Pareto-e�cient tax deduction rules for work-related expenses. Pareto ef�ciency 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.

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Bibliographic Reference

Köhne, S and Sachs, D. 2020. 'Pareto-improving reforms of tax deductions'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14999