Measuring tax efficiency: A tax optimality index |
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| Affiliation: | 1. Copenhagen Business School, CEPR, CESifo, and EPRU, Denmark;2. University of Sydney, Australia;1. Department of Chemistry, Shanghai Normal University, Shanghai 200234, PR China;2. Key Laboratory of Polar Materials and Devices, Ministry of Education, East China Normal University, Shanghai 200241, PR China;1. Muenster University of Applied Sciences, Department of Chemical Engineering, Stegerwaldstr. 39, 48565 Germany;2. On Leave from Volga State University of Technology, Department of Physics, Lenin-pl.3, Yoshkar-Ola 424000, Russia |
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| 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. This index is defined on the [0, 1] interval and measures the proportion of the optimal tax rates that will achieve the same welfare outcome as some arbitrarily given initial tax structure. We call this number the Tax Optimality Index. We also show how the basic methodology can be altered to derive a revenue equivalent uniform tax, which measures the tax burden implied by the public sector. A numerical example is used to illustrate the method developed, and extensions of the analysis to handle models with multiple households and nonlinear taxation structures are undertaken. |
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