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Complexity and Progressivity in Income Tax Design: Deductions for Work-Related Expenses

Author

Listed:
  • Pio Baake

  • Rainald Borck

  • Andreas L–ffler

Abstract

We analyze optimal income taxes with deductions for work-related or consumptive goods. We consider two cases. In the first case (called a complex tax system) the tax authorities can exactly distinguish between consumptive and work-related expenditures. In the second case (called a simple tax system) this distinction is not exact. Assuming additively separable utility functions, we show that work-related expenditures should be fully deductible in the first case while deduction rates should be less than 100 percent in the second case. Under further simplifying assumptions, we also show that the simple system can be characterized by higher tax burdens on low income earners and less redistribution.

Suggested Citation

  • Pio Baake & Rainald Borck & Andreas L–ffler, 2004. "Complexity and Progressivity in Income Tax Design: Deductions for Work-Related Expenses," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(3), pages 299-312, May.
    • Handle: RePEc:kap:itaxpf:v:11:y:2004:i:3:p:299-312
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    Cited by:

    1. Hamza Bennani & Matthias Neuenkirch, 2024. "Too complex to digest? Federal tax bills and their processing in US financial markets," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(5), pages 1179-1203, October.
    2. Jacob Goldin & Sebastian Koehne & Nicholas Lawson, 2024. "Optimal Income Tax Deductions for Mixed Business and Personal Expenditures," NBER Working Papers 33270, National Bureau of Economic Research, Inc.
    3. Sebastian Koehne & Dominik Sachs, 2016. "Pareto-Efficient Tax Breaks," CESifo Working Paper Series 6147, CESifo.
    4. Wolfram Richter, 2006. "Efficiency effects of tax deductions for work-related expenses," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 13(6), pages 685-699, November.
    5. Homburg, Stefan, 2008. "Die Entfernungspauschale als steuertheoretische Herausforderung," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, pages 45-53.
    6. Voßmerbäumer, Jan & Wagner, Franz W., 2013. "Steuerwirkungen betrieblicher Entgeltpolitik," arqus Discussion Papers in Quantitative Tax Research 144, arqus - Arbeitskreis Quantitative Steuerlehre.
    7. Hikaru Ogawa & Sayaka Yakita, 2009. "Equalization Transfers, Fiscal Decentralization, and Economic Growth," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 65(1), pages 122-140, March.

    More about this item

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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