DP13852 Pareto-Efficient Tax Deductions
|Author(s):||Sebastian Koehne, Dominik Sachs|
|Publication Date:||July 2019|
|Keyword(s):||optimal taxation, Pareto-Improving Tax Reform, Tax Deduction|
|Programme Areas:||Public Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=13852|
We analyze Pareto-eï¬?cient tax deduction rules for work-related expenses (e.g. housekeeping services, child care or elderly care). Pareto eï¬?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-oï¬? and tax revenue increases by 20 Dollars per capita.