DP14999 Pareto-improving reforms of tax deductions
We analyze Pareto-eﬃcient tax deduction rules for work-related expenses. Pareto efﬁciency 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.