Scandinavian Working Papers in Economics

Working Papers,
Copenhagen Business School, Department of Economics

No 05-2004: Measuring Tax Efficiency

Pascalis Raimondos-Møller and Alan D. Woodland
Additional contact information
Pascalis Raimondos-Møller: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark
Alan D. Woodland: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark

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

JEL-codes: H21; H41

31 pages, August 30, 2006

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