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Pareto-efficient Tax Deductions

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  • Sebastian Koehne
  • Dominik Sachs

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.

Suggested Citation

  • Sebastian Koehne & Dominik Sachs, 2019. "Pareto-efficient Tax Deductions," CESifo Working Paper Series 7744, CESifo.
    • Handle: RePEc:ces:ceswps:_7744
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    Cited by:

    1. Spencer Bastani & Daniel Waldenström, 2020. "How Should Capital Be Taxed?," Journal of Economic Surveys, Wiley Blackwell, vol. 34(4), pages 812-846, September.

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    More about this item

    Keywords

    optimal taxation; tax deduction; Pareto-improving tax reform;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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