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Optimal Income Tax Deductions for Mixed Business and Personal Expenditures

Author

Listed:
  • Jacob Goldin
  • Sebastian Koehne
  • Nicholas Lawson

Abstract

We study the optimal taxation of expenditures that generate income while also serving a consumption function. We characterize the Pareto optimal income tax deduction for such mixed-purpose expenditures within a generalized Atkinson-Stiglitz model. Pareto optimality requires a partial deduction for mixed-purpose expenditures, where the deduction rate depends on the fraction of an expenditure’s marginal benefits that are attributable to income-generation rather than consumption. We extend our results to account for several practical considerations, including potential constraints relating to a uniform deduction rate or a fixed income tax schedule. Our results provide a rationale for non-uniform commodity taxation, distinct from existing models of preference heterogeneity or non-separability.

Suggested Citation

  • Jacob Goldin & Sebastian Koehne & Nicholas Lawson, 2024. "Optimal Income Tax Deductions for Mixed Business and Personal Expenditures," CESifo Working Paper Series 11561, CESifo.
    • Handle: RePEc:ces:ceswps:_11561
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    References listed on IDEAS

    as
    1. Spencer Bastani & Sören Blomquist & Luca Micheletto, 2019. "Nonlinear and piecewise linear income taxation, and the subsidization of work-related goods," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(4), pages 806-834, August.
    2. Christiansen, Vidar, 1984. "Which commodity taxes should supplement the income tax?," Journal of Public Economics, Elsevier, vol. 24(2), pages 195-220, July.
    3. 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.
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    Keywords

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    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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