Income Tax Deduction of Commuting Expenses and Tax Funding in an Urban CGE Study: The Case of German Cities

Dresden Economics Discussion Paper No. 02/11

40 Pages Posted: 26 Apr 2011

See all articles by Georg Hirte

Georg Hirte

Technische Universität Dresden Institute of Transport & Economics

Stefan Tscharaktschiew

Institute of Transport & Economics Chair of Spatial Economics and Regional Science

Date Written: April 26, 2011

Abstract

Germany like many other European countries subsidize commuting by granting the right to deduct commuting expenses from the income tax base. This regulation has often been changed and has regularly been under debate during the last decades. The pros (e.g. causing efficiency gains with respect to the spatial allocation of labor) and cons (e.g. causing urban sprawl) are well documented. Nonetheless, there is need for further research. For reasons of tractability the few models applied in the tax deduction related literature are based on restrictive assumptions particularly concerning the design of the income taxation scheme and the structure of households (neglecting household heterogeneity) and, most importantly, they do not integrate labor supply and location decision problems simultaneously. Here, for the first time, those and more features are taken into account in a full spatial general equilibrium simulation approach calibrated to an average German city. This model is applied to calculate the impacts of tax deductions on an urban economy thereby considering different funding schemes. Our results suggest that the tax deduction level currently chosen is below the optimal level in the case of income tax funding. If a change in the tax base occurs, e.g. toward consumption tax or energy tax funding, the optimal size of the subsidy should be even higher. Furthermore, the different policy packages cause a very differentiated pattern regarding welfare distribution, environmental (CO₂ emissions) and congestion effects. We also find surprisingly small effects on urban sprawl characterized by suburbanization of residences and jobs, increasing commuting distances and spatial city growth.

Keywords: urban general equilibrium model, commuting subsidies, income tax deduction

JEL Classification: C68, R12, R13, R14, R20, R51

Suggested Citation

Hirte, Georg and Tscharaktschiew, Stefan, Income Tax Deduction of Commuting Expenses and Tax Funding in an Urban CGE Study: The Case of German Cities (April 26, 2011). Dresden Economics Discussion Paper No. 02/11, Available at SSRN: https://ssrn.com/abstract=1823248 or http://dx.doi.org/10.2139/ssrn.1823248

Georg Hirte (Contact Author)

Technische Universität Dresden Institute of Transport & Economics ( email )

Würzburger Str. 35
Dresden, 01062
Germany

Stefan Tscharaktschiew

Institute of Transport & Economics Chair of Spatial Economics and Regional Science ( email )

Einsteinstrasse 3
Dresden, 01062
Germany

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