Pareto-Efficient Tax Breaks

Arbeitspapier

We analyze Pareto-efficient tax breaks for work-related expenses in a Mirrleesian environment. Individuals are heterogenous in their ability. In addition to a labor-leisure choice, they decide how to spend their money between normal consumption and work-related goods. We derive an efficiency condition that relates the (implicit) subsidy rate for work-related goods to the marginal tax rate. Importantly, the condition holds irrespective of the skill distribution and the taste for redistribution. If the efficiency condition is violated, we show how to Pareto improve such allocations. For the special and policy-relevant case where goods contribute to the time available for market work (e.g., domestic services, child care or care for elderly relatives, health investment), we demonstrate that any tax system without a tax break for such goods can be improved in a Pareto sense. Pareto improvements are also possible if time-enhancing expenses are fully deductible from taxable income.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 6147

Classification and Topics

• Classification: Wirtschaft ; Asymmetric and Private Information; Mechanism Design ; Taxation and Subsidies: Efficiency; Optimal Taxation
• Subject: optimal taxation ; tax deduction ; Pareto improving tax reform

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Köhne, Sebastian ; Sachs, Dominik
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2016

Further information

• Handle: http://hdl.handle.net/10419/147401
• Last update: 10.03.2025, 11:45 AM CET