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IPS264 Oliver H. et al.
effects of each single deduction can be easily seen. Most apparent is the large
effect of real-estate deductions which dominates all others in magnitude.
Compared to 2001, the effects of deductions remain constant except for real-
estate deduction which had a substantially lower impact in 2011. In sum, all
deductions reduce the redistributive impact of taxes tremendously by -48.8%
(2001) and -43.1% (2011).
Detailed analysis of each category of deductions further shows that
redistributive effects vary substantially. The biggest contribution to lowering
the redistributive effect results from deductions related to real estate and
interest costs (e.g. mortgage interests). Comparing 2001 and 2011, it becomes
apparent that this effect of real estate expenses and interest costs decreased
considerably. This change is the greatest change over time and can be
explained with the ongoing decrease of the mortgage reference interest rate,
which was 4.25% in 2001 and 2.5% in 2011 thus leading to lower interest on
debt. As a result, less interest costs had to be paid, and correspondingly less
deductions were possible in 2011. Another important impact on the
redistributive effect comes from deductions of costs related to assets and
insurance. In particular, deductions of extra-mandatory payments to the
pension scheme lower the redistributive effect. This category, moreover,
gained significance over time, probably due to demographic ageing.
Deductions of work-related expenses are, in terms of volume, the second
most important category. Although work-related expenses lead to an increase
in progressivity, the redistributive effect of income taxes is still reduced
because the tax relief this causes outweighs the higher progression. Even
social deductions reduce redistribution by taxes. At the same time, social
deductions caused substantial reranking effects, of 50% (2001) and 31%
(2011), respectively. Therefore, social deductions are the biggest promoter of
inequality between households with similar initial financial situations.
Finally, it can be said that all deductions diminish the effect of redistribution
via income taxes, although some increase the progressivity. This is particularly
striking if the effects of work-related expenses and those related to real estate
and interest costs are compared.

6. Discussion and Conclusion
While most studies focus on effects of direct taxes paid, this paper is able
to expand this perspective by providing insight into the mitigating effect of
the hidden part of the fiscal welfare state: deductions.
In theory, deductions can help meet social goals, e.g., by benefitting
families or the ill, or by providing incentives for financially desirable behavior
like saving for old age. Sometimes, deductions are also a mere hotchpotch of
special interests that have accumulated over the years. In the end, the
redistributive effect of deductions is determined by the degree and extent to

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