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Measuring Tax Efficiency: A Tax Optimality Index


  • Pascalis Raimondos-Møller
  • Alan D. Woodland


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.

Suggested Citation

  • Pascalis Raimondos-Møller & Alan D. Woodland, 2004. "Measuring Tax Efficiency: A Tax Optimality Index," CESifo Working Paper Series 1236, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_1236

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    References listed on IDEAS

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    8. Auerbach, Alan J., 1985. "The theory of excess burden and optimal taxation," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 2, pages 61-127 Elsevier.
    9. Cornes,Richard, 1992. "Duality and Modern Economics," Cambridge Books, Cambridge University Press, number 9780521336017, March.
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    More about this item


    tax optimality index; excess burden; distance function;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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