Pareto-Efficient Tax Deductions

40 Pages Posted: 25 Jul 2019

See all articles by Sebastian Koehne

Sebastian Koehne

Stockholm University - Institute for International Economic Studies (IIES)

Dominik Sachs

Ludwig Maximilian University of Munich (LMU)

Multiple version iconThere are 2 versions of this paper

Date Written: 2019

Abstract

We analyze Pareto-efficient tax deduction rules for work-related expenses (e.g. housekeeping services, child care or elderly care). Pareto efficiency 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-off and tax revenue increases by 20 Dollars per capita.

Keywords: optimal taxation, tax deduction, Pareto-improving tax reform

JEL Classification: optimal, taxation, tax, deduction, Pareto-improvin

Suggested Citation

Koehne, Sebastian and Sachs, Dominik, Pareto-Efficient Tax Deductions (2019). CESifo Working Paper No. 7744. Available at SSRN: https://ssrn.com/abstract=3424727

Sebastian Koehne (Contact Author)

Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm University
Stockholm, SE-10691
Sweden

Dominik Sachs

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

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