Working Paper: CEPR ID: DP4566
Authors: Pascalis Raimondos-Moller; 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 Efficiency; Optimal Tax Structure; Tax Optimality Index; Excess Burden
JEL Codes: H21; H41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax Rates (H29) | Welfare (I38) |
| Tax Optimality Index (TOI) (H21) | Welfare (I38) |
| Tax Optimality Index (TOI) (H21) | Efficiency (D61) |
| Higher Tax Optimality Index (TOI) (H21) | Higher Welfare (I39) |
| Tax Optimality Index (TOI) (H21) | Utility (L97) |