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
JEL(s): D82, H21
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14999

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.