A New Approach to Measuring Tax Effort

Basil Dalamagas, Panagiotis Palaios and Stefanos Tantos
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Basil Dalamagas: Department of Economics, National and Kapodistrian University of Athens, 1, Sofokleous & Aristidou str., 105 59 Athens, Greece
Panagiotis Palaios: Department of Economics, National and Kapodistrian University of Athens, 1, Sofokleous & Aristidou str., 105 59 Athens, Greece
Stefanos Tantos: Department of Economics, National and Kapodistrian University of Athens, 1, Sofokleous & Aristidou str., 105 59 Athens, Greece

Economies, 2019, vol. 7, issue 3, 1-25

Abstract: This paper attempts to extend the theoretical and empirical methodology employed in previous literature, by proposing a utility maximization process to estimate the optimal tax revenue from a sample of 30 countries. It is shown that an optimal tax system is defined solely by two crucial determining factors: The productive capacity of the country (GDP) and consumers’ preferences (consumption spending). All the other variables can be disregarded, as macroeconomic determinants (GDP, consumption) tend to capture the impact of all the remaining factors on tax revenue. It is also shown that our utility maximization method generates tax-effort indices which do not differ significantly from those of IMF and World Bank studies. The actual tax burden for most of the sample countries is shown to be below its optimal level. As expected, the tax-effort performance of each of the sample countries appears to be affected by the variety of approaches employed throughout the text.

Keywords: tax effort; tax capacity; utility maximization; optimal tax revenue (search for similar items in EconPapers)
JEL-codes: E F I J O Q (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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