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Measuring Tax Efficiency: A Tax Optimality Index

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Author Info
Pascalis Raimondos-Moller ()
Alan D. Woodland ()

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Abstract

This paper introduces an index of tax optimality that measures the distance of a current tax structure from the optimal tax structure in the presence of public goods. In doing so, we derive a [0,1] number that reveals immediately how far the current tax configuration is from the optimal one and, thereby, the degree of efficiency of a tax system. We call this number the Tax Optimality Index. We show how the basic method can be altered in order to derive a revenue equivalent uniform tax, which measures the size of the public sector. A numerical example is used to illustrate the method developed.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 1236.

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Date of creation: 2004
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Handle: RePEc:ces:ceswps:_1236

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Related research
Keywords: tax optimality index; excess burden; distance function;

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Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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  1. Diewert, W. E., 1985. "A dynamic approach to the measurement of waste in an open economy," Journal of International Economics, Elsevier, vol. 19(3-4), pages 213-240, November. [Downloadable!] (restricted)
  2. J. Peter Neary, 1996. "Rationalising the Penn World Table - True Multilateral Indices for International Comparisons of real Income," Working Papers 199622, School Of Economics, University College Dublin. [Downloadable!]
    Other versions:
  3. Diewert, Erwin, 2007. "Index Numbers," UBC Departmental Archives diewert-07-01-03-08-17-23, UBC Department of Economics, revised 31 Jan 2007. [Downloadable!]
  4. Alan J. Auerbach, 1986. "The Theory of Excess Burden and Optimal Taxation," NBER Working Papers 1025, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Nancy H. Chau & Rolf F”re & Shawna Grosskopf, 2003. "Trade restrictiveness and efficiency," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(3), pages 1079-1095, 08. [Downloadable!] (restricted)
  6. Anderson, James E & Neary, J Peter, 1996. "A New Approach to Evaluating Trade Policy," Review of Economic Studies, Blackwell Publishing, vol. 63(1), pages 107-25, January. [Downloadable!] (restricted)
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  7. Diamond, P. A. & McFadden, D. L., 1974. "Some uses of the expenditure function in public finance," Journal of Public Economics, Elsevier, vol. 3(1), pages 3-21, February. [Downloadable!] (restricted)
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