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Measuring Tax Efficiency

Author

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  • Raimondos-Møller, Pascalis

    (Department of Economics, Copenhagen Business School)

  • Woodland, Alan D.

    (Department of Economics, Copenhagen Business School)

Abstract

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.

Suggested Citation

  • Raimondos-Møller, Pascalis & Woodland, Alan D., 2006. "Measuring Tax Efficiency," Working Papers 05-2004, Copenhagen Business School, Department of Economics.
  • Handle: RePEc:hhs:cbsnow:2004_005
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    File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7534
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    References listed on IDEAS

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    1. James E. Anderson & J. Peter Neary, 1996. "A New Approach to Evaluating Trade Policy," Review of Economic Studies, Oxford University Press, vol. 63(1), pages 107-125.
    2. 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, August.
    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, pages 1411-1428.
    4. J. Peter Neary, 2004. "Rationalizing the Penn World Table: True Multilateral Indices for International Comparisons of Real Income," American Economic Review, American Economic Association, pages 1411-1428.
    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, pages 3-21.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    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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