Income tax deduction of commuting expenses in an urban CGE study: The case of German cities

Granting the right to deduct commuting expenses from the income tax base has regularly been under debate during the last decades. This paper provides for the first time an insight into the magnitude of the effects of this kind of commuting subsidy under different funding schemes. The economic and spatial effects are calculated by applying a spatial CGE approach calibrated to a German urban area. The findings suggest that effects on urban sprawl characterized by suburbanization, spatial expansion of the city, and increasing commuting distance are surprisingly small. Concerning welfare, we found that the current level of tax deductions in Germany is too small in the case of income tax funding. If one considers further changes in the tax system welfare can be considerably enhanced by raising tax deductions above that level. In particular this refers to a tax structure where energy taxes are used to make traveling by car less attractive and tax deductions are used to lower the negative impact of taxes on labor supply.