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Measuring Tax Efficiency: A Tax Optimality Index

  • Raimondos-Møller, Pascalis
  • Woodland, Alan D

This Paper introduces an index of tax optimality that measures the distance of some 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 C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4566.

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Date of creation: Aug 2004
Date of revision:
Handle: RePEc:cpr:ceprdp:4566
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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.
  2. Anderson, James E & Neary, J Peter, 1996. "A New Approach to Evaluating Trade Policy," Review of Economic Studies, Wiley Blackwell, vol. 63(1), pages 107-25, January.
  3. J. Peter Neary, 2004. "Rationalizing the Penn World Table: True Multilateral Indices for International Comparisons of Real Income," American Economic Review, American Economic Association, vol. 94(5), pages 1411-1428, December.
  4. Anderson, James E & Neary, J Peter, 1998. "The Mercantilist Index of Trade Policy," CEPR Discussion Papers 2044, C.E.P.R. Discussion Papers.
  5. 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.
  6. 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.
  7. 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.
  8. J. Christophe Bureau & Nancy H. Chau & Rolf F”re & Shawna Grosskopf, 2003. "Economic Performance, Trade Restrictiveness, and Efficiency," Review of Development Economics, Wiley Blackwell, vol. 7(4), pages 527-542, November.
  9. repec:cup:cbooks:9780521336017 is not listed on IDEAS
  10. Kay, John & Keen, Michael, 1988. "Measuring the inefficiences of tax systems," Journal of Public Economics, Elsevier, vol. 35(3), pages 265-287, April.
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