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Department of Economics, Copenhagen Business School Working Paper Series, Department of Economics, Copenhagen Business School

No 05-2004:
Measuring Tax Efficiency

Pascalis Raimondos-Møller and Alan D. Woodland

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.

Keywords: Tax optimality index; excess burden; distance function; (follow links to similar papers)

JEL-Codes: H21; H41; (follow links to similar papers)

31 pages, August 30, 2006

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