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Income tax deduction of commuting expenses and tax funding in an urban CGE study: the case of German cities

  • Hirte, Georg
  • Tscharaktschiew, Stefan

Germany like many other European countries subsidize commuting by granting the right to deduct commuting expenses from the income tax base. This regulation has often been changed and has regularly been under debate during the last decades. The pros (e.g. causing efficiency gains with respect to the spatial allocation of labor) and cons (e.g. causing urban sprawl) are well documented. Nonetheless, there is need for further research. For reasons of tractability the few models applied in the tax deduction related literature are based on restrictive assumptions particularly concerning the design of the income taxation scheme and the structure of households (neglecting household heterogeneity) and, most importantly, they do not integrate labor supply and location decision problems simultaneously. Here, for the first time, those and more features are taken into account in a full spatial general equilibrium simulation approach calibrated to an average German city. This model is applied to calculate the impacts of tax deductions on an urban economy thereby considering different funding schemes. Our results suggest that the tax deduction level currently chosen is below the optimal level in the case of income tax funding. If a change in the tax base occurs, e.g. toward consumption tax or energy tax funding, the optimal size of the subsidy should be even higher. Furthermore, the different policy packages cause a very differentiated pattern regarding welfare distribution, environmental (CO2 emissions) and congestion effects. We also find surprisingly small effects on urban sprawl characterized by suburbanization of residences and jobs, increasing commuting distances and spatial city growth.

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Paper provided by Dresden University of Technology, Faculty of Business and Economics, Department of Economics in its series Dresden Discussion Paper Series in Economics with number 02/11.

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Date of creation: 2011
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Handle: RePEc:zbw:tuddps:0211
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  1. Rainald Borck & Matthias Wrede, 2007. "Commuting Subsidies with two Transport Modes," CESifo Working Paper Series 1972, CESifo Group Munich.
  2. Tscharaktschiew, Stefan & Hirte, Georg, 2011. "Should subsidies to urban passenger transport be increased? A spatial CGE analysis for a German metropolitan area," Dresden Discussion Paper Series in Economics 01/11, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
  3. Wolfram Richter, 2006. "Efficiency effects of tax deductions for work-related expenses," International Tax and Public Finance, Springer, vol. 13(6), pages 685-699, November.
  4. Bruno De Borger & Bart Wuyts, 2009. "Commuting, Transport Tax Reform and the Labour Market: Employer-paid Parking and the Relative Efficiency of Revenue Recycling Instruments," Urban Studies, Urban Studies Journal Limited, vol. 46(1), pages 213-233, January.
  5. Anas, Alex & Rhee, Hyok-Joo, 2006. "Curbing excess sprawl with congestion tolls and urban boundaries," Regional Science and Urban Economics, Elsevier, vol. 36(4), pages 510-541, July.
  6. Stefan Bach, 2003. "Entfernungspauschale: Kürzung gerechtfertigt," DIW Wochenbericht, DIW Berlin, German Institute for Economic Research, vol. 70(40), pages 602-608.
  7. Brueckner, Jan K., 2005. "Transport subsidies, system choice, and urban sprawl," Regional Science and Urban Economics, Elsevier, vol. 35(6), pages 715-733, November.
  8. Tscharaktschiew, Stefan & Hirte, Georg, 2010. "How does the household structure shape the urban economy?," Regional Science and Urban Economics, Elsevier, vol. 40(6), pages 498-516, November.
  9. Parry, Ian W.H. & Bento, Antonio Miguel R., 1999. "Revenue recycling and the welfare effects of road pricing," Policy Research Working Paper Series 2253, The World Bank.
  10. Ian W.H. Parry & Kenneth A. Small, 2007. "Should Urban Transit Subsidies Be Reduced?," Working Papers 060723, University of California-Irvine, Department of Economics.
  11. Borck, Rainald & Wrede, Matthias, 2005. "Political economy of commuting subsidies," Journal of Urban Economics, Elsevier, vol. 57(3), pages 478-499, May.
  12. Eva Gutiérrez-i-Puigarnau & Jos van Ommeren, 2009. "Labour Supply and Commuting," SOEPpapers on Multidisciplinary Panel Data Research 222, DIW Berlin, The German Socio-Economic Panel (SOEP).
  13. Richard Arnott & Alex Anas & Kenneth Small, 1997. "Urban Spatial Structure," Boston College Working Papers in Economics 388., Boston College Department of Economics.
  14. Rainald Borck & Matthias Wrede, 2008. "Subsidies for Intracity and Intercity Commuting," CESifo Working Paper Series 2321, CESifo Group Munich.
  15. Wolfram F. Richter & Peter Bareis & Matthias Wrede & Martin Gasche, 2004. "Ist die Abschaffung der Entfernungspauschale ökonomisch sinnvoll?," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 57(05), pages 5-19, 03.
  16. Matthias Wrede, 2000. "Tax Deductibility of Commuting Expenses and Leisures: On the Tax Treatment of Time-Saving Expenditure," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 57(2), pages 216-, March.
  17. Tscharaktschiew, Stefan & Hirte, Georg, 2010. "The drawbacks and opportunities of carbon charges in metropolitan areas -- A spatial general equilibrium approach," Ecological Economics, Elsevier, vol. 70(2), pages 339-357, December.
  18. Anas, Alex & Xu, Rong, 1999. "Congestion, Land Use, and Job Dispersion: A General Equilibrium Model," Journal of Urban Economics, Elsevier, vol. 45(3), pages 451-473, May.
  19. Anas, Alex & Rhee, Hyok-Joo, 2007. "When are urban growth boundaries not second-best policies to congestion tolls?," Journal of Urban Economics, Elsevier, vol. 61(2), pages 263-286, March.
  20. Matthias Wrede, 2009. "A Distortive Wage Tax and a Countervailing Commuting Subsidy," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 11(2), pages 297-310, 04.
  21. Schulze, Sven, 2009. "Einige Beobachtungen zum Pendlerverhalten in Deutschland," HWWI Policy Papers 1-19, Hamburg Institute of International Economics (HWWI).
  22. Zenou, Yves, 1999. "Urban Unemployment, Agglomeration and Transportation Policies," CEPR Discussion Papers 2309, C.E.P.R. Discussion Papers.
  23. Kleven, Henrik Jacobsen, 2004. "Optimum taxation and the allocation of time," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 545-557, March.
  24. repec:ces:ifosdt:v::y:2004:i::p:5-19 is not listed on IDEAS
  25. Wrede, Matthias, 2001. "Should Commuting Expenses Be Tax Deductible? A Welfare Analysis," Journal of Urban Economics, Elsevier, vol. 49(1), pages 80-99, January.
  26. Thomas J. Nechyba & Randall P. Walsh, 2004. "Urban Sprawl," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 177-200, Fall.
  27. Anas, Alex, 1990. "Taste heterogeneity and urban spatial structure: The logit model and monocentric theory reconciled," Journal of Urban Economics, Elsevier, vol. 28(3), pages 318-335, November.
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