Pareto-Efficient Tax Deductions
40 Pages Posted: 25 Jul 2019
Date Written: 2019
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: Suggested Citation