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Measuring Tax Efficiency: A Tax Optimality Index

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  • Pascalis Raimondos-Møller
  • Alan D. Woodland

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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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1236.

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

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

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  1. J. Peter Neary, 1996. "Rationalising the Penn World Table - True Multilateral Indices for International Comparisons of real Income," Working Papers, School Of Economics, University College Dublin 199622, School Of Economics, University College Dublin.
  2. James Anderson & J. Peter Neary, 1998. "The mercantilist index of trade policy," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 20242, London School of Economics and Political Science, LSE Library.
  3. Auerbach, Alan J., 1985. "The theory of excess burden and optimal taxation," Handbook of Public Economics, Elsevier, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 2, pages 61-127 Elsevier.
  4. Diamond, P. A. & McFadden, D. L., 1974. "Some uses of the expenditure function in public finance," Journal of Public Economics, Elsevier, Elsevier, vol. 3(1), pages 3-21, February.
  5. J Anderson & J.P. Neary, 1993. "A New Approach to Evaluating Trade Policy," CEP Discussion Papers, Centre for Economic Performance, LSE dp0173, Centre for Economic Performance, LSE.
  6. Cornes,Richard, 1992. "Duality and Modern Economics," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521336017.
  7. Diewert, W. E., 1985. "A dynamic approach to the measurement of waste in an open economy," Journal of International Economics, Elsevier, Elsevier, vol. 19(3-4), pages 213-240, November.
  8. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(3), pages 1079-1095, 08.
  9. Kay, John & Keen, Michael, 1988. "Measuring the inefficiences of tax systems," Journal of Public Economics, Elsevier, Elsevier, vol. 35(3), pages 265-287, April.
  10. J. Christophe Bureau & Nancy H. Chau & Rolf F”re & Shawna Grosskopf, 2003. "Economic Performance, Trade Restrictiveness, and Efficiency," Review of Development Economics, Wiley Blackwell, Wiley Blackwell, vol. 7(4), pages 527-542, November.
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