Tax treatment of commuter cost

The paper discusses the tax treatment of commuting where wages and housing cost vary across locations. An income tax distorts the locational choices of agents, who dislike commuting and have preferences for consumption and place of residence. Wages, housing cost and commuting cost determine how subsidising or taxing commuting affects behaviour and social efficiency. A subsidy encourages commuting and induces agents to choose a more favourable living place. The analysis clarifies the circumstances in which the behavioural responses alleviate or exacerbate the tax distortions, also where housing is tax favoured, as is often the case in practice. A central purpose is to develop a framework that lends itself to empirical application. An empirical illustration based on Norwegian data shows how one can infer efficiency effects of responses to subsidies on commuting. JEL Classification: H21, H24