DP14999 Pareto-improving reforms of tax deductions
|Author(s):||Sebastian Köhne, Dominik Sachs|
|Publication Date:||July 2020|
|Keyword(s):||optimal taxation, Pareto-Improving Tax Re, Tax Deduction|
|Programme Areas:||Public Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=14999|
We analyze Pareto-eï¬?cient tax deduction rules for work-related expenses. Pareto efï¬?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.