216 FinanzArchiv vol.57 no.2 FinanzArchiv 57 (2000), 216–224. © 2000 Mohr Siebeck Verlag – ISSN 0015-2218 Tax Deductibility of Commuting Expenses and Leisure: On the Tax Treatment of Time-Saving Expenditure Matthias Wrede* Assuming that higher traveling expenses reduce traveling time, this paper considers tax deductibility of commuting expenses when a distorting wage tax is levied. While the decision on commuting expenses would not be distorted if traveling costs were completely deductible, taxation would still not be neutral with respect to the leisure-consumption choice. Moreover, the paper shows that second-best optimum taxation requires less than complete deductibility of commuting expenses. Since commut- ing expenses are simply a special case of time-saving expenditure, this paper develops optimum taxation rules concerning the taxation of time- saving expenditure. (JEL: H21, H24) 1. Introduction Tax rules concerning commuting expenses vary greatly between different in- dustrialized countries. While traveling to work expenses are not deductible in many countries such as the United States, the United Kingdom and even several continental European countries, tax allowances are granted by other countries like the Scandinavian countries and Germany [see OECD (1993), p. 37]. The main argument in favor of tax relief is that workers should not be dis- torted by the income tax when choosing their place of work. Critics, however, argue that rather than the place of work the location of residence matters and that preferential treatment of far-off domiciles by the tax code not only reduces tax revenue but is also inefficient. However, this paper will not analyze tax allowances for traveling to work expenses against the background of the discussion as to whether the choice of place of work or the choice of location of residence is causal for commut- ing [see, e.g., Krause-Junk (1996), Richter and Theile (1998), and Wrede (1999)]. Furthermore, equity considerations, which are discussed concerning work-related expenses by e.g. Baldry (1998), will also be ignored. The focus will be on a particular efficiency aspect of traveling expenses. * The author would like to thank Henrik Jacobsen Kleven,Wolfram Richter and the ref- erees for very valuable comments.