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Do Countries Really Deviate from the Optimal Tax System?

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  • Cristian F. Sepulveda

Abstract

One of the main goals of the literature on optimal tax systems is to reduce the gap between the highly stylized theory of optimal taxation and the practice of fiscal policy reform. Unfortunately, however, we know little about the extent to which the international experience follows the policy prescriptions derived from economic theory, or how those policy prescriptions would change with economic development. Based on the standard theory of optimal tax systems, this paper predicts the possible effects of economic development on the optimal level and composition of tax revenue and empirically tests these predictions with yearly data on three tax instruments from countries at different stages of development. In average, as countries develop, they are shown to collect more tax revenue and switch from regressive tax instruments like the value added tax, to more progressive taxes that become more productive with development, like the personal and corporate income taxes.

Suggested Citation

  • Cristian F. Sepulveda, 2023. "Do Countries Really Deviate from the Optimal Tax System?," Public Finance Review, , vol. 51(1), pages 76-131, January.
    • Handle: RePEc:sae:pubfin:v:51:y:2023:i:1:p:76-131
    DOI: 10.1177/10911421221132670
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    References listed on IDEAS

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    1. Boadway, Robin, 2012. "From Optimal Tax Theory to Tax Policy: Retrospective and Prospective Views," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262017113, December.
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    1. Gjonlleshaj, Gjon K. & Kamberaj, Altina, 2025. "Fiscal Reform in Taxation: What is an Optimal Taxation System for the Republic of Kosovo?," Proceedings of the ENTRENOVA - ENTerprise REsearch InNOVAtion Conference (2024), Hybrid Conference, Dubrovnik, Croatia, in: Proceedings of the ENTRENOVA - ENTerprise REsearch InNOVAtion Conference, Hybrid Conference, Dubrovnik, Croatia, 5-7 September, 2024, pages 105-125, IRENET - Society for Advancing Innovation and Research in Economy, Zagreb.

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