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

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  • Pio Baake
  • Rainald Borck
  • Andreas Löffler

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 Löffler, 2004. "Complexity and Progressivity in Income Tax Design: Deductions for Work-Related Expenses," Discussion Papers of DIW Berlin 409, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp409
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    References listed on IDEAS

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    1. Kaplow, Louis, 1990. "Optimal taxation with costly enforcement and evasion," Journal of Public Economics, Elsevier, vol. 43(2), pages 221-236, November.
    2. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
    3. Ebert, Udo, 1992. "A reexamination of the optimal nonlinear income tax," Journal of Public Economics, Elsevier, vol. 49(1), pages 47-73, October.
    4. Mirrlees, J. A., 1976. "Optimal tax theory : A synthesis," Journal of Public Economics, Elsevier, vol. 6(4), pages 327-358, November.
    5. Cooter, Robert D, 1978. "Optimal Tax Schedules and Rates: Mirrlees and Ramsey," American Economic Review, American Economic Association, vol. 68(5), pages 756-768, December.
    6. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
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    Cited by:

    1. 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.
    2. Koehne Sebastian & Dominik Sachs, 2016. "Pareto-Efficient Tax Breaks," CESifo Working Paper Series 6147, CESifo Group Munich.
    3. 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.
    4. Voßmerbäumer, Jan & Wagner, Franz W., 2013. "Steuerwirkungen betrieblicher Entgeltpolitik," arqus Discussion Papers in Quantitative Tax Research 144, arqus - Arbeitskreis Quantitative Steuerlehre.
    5. Homburg, Stefan, 2008. "Die Entfernungspauschale als steuertheoretische Herausforderung," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 45-53.

    More about this item

    Keywords

    Optimal taxation; Tax deductions; Work-related expenditures;

    JEL classification:

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

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