Why is a cash expense deducted but an expense in-kind not?

Question

Say I am self employed and want a website for my business.

If I pay someone for the service I can, in most cases, deduct this from my profit to reduce my tax burden.

If I forego billable hours or I work more to produce the website I cannot deduct the "expense".

To me, these look exactly the same, from a "theory of value" perspective. I'm trading something valuable (cash, time) in exchange for a service/capital good which constitute an investment. One has an extra step involving a taxable economic actor being brought in.

What is the rationale for this distinction (I would imagine very common in most countries tax code)?

Answer 1

Two possible reasons for treating these cases differently are:

1. It is much more straightforward to evidence a cash expense. Allowing deductions for billable hours forgone could easily lead to disputes as to whether those hours really would otherwise have been worked.
2. If billable hours are reduced, the likely consequence is that profit will be reduced (relative to what it would otherwise have been) and so tax will already be reduced (relative to what it would otherwise have been) in many circumstances and under many tax regimes. Where this is so, to allow deductions for billable hours forgone would result in a double tax benefit.

Answer 2

It is primarily because the the cost of building the website by yourself is unverifiable private information. Government can easily observe how much you paid for external work from accounting but not your private opportunity cost of time.

However, this being said some governments do recognize this and in many countries small businesses are simply allowed to directly write of some portion of revenue as expense. For example, in Slovakia small proprietors with revenue below 20000 euro can just record 60% of that revenue as an expense (see here), since these small proprietors typically just do everything in house this is thought to represent their labor expense. Many different countries have similar allowances for very small businesses, for example in Czech Republic it's between 30-60% depending on type of business.

I am not aware of this practice in Anglo-Saxon countries but there smaller business are often taxed at lower rate. In any case the answer is simply that it is not possible. If it would governments would actually (presumably) wanted to allow for it as it would eliminate some distortions and thus reduce deadweight burden of taxation. Nonetheless, that is not possible and the above mentioned practice in some countries comes with its own problem as it creates distortions of its own since of course not every small business would have their own work expenses equal to some $x\%$ if they would be observable.