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What is an ‘optimal’ tax system?

Published online by Cambridge University Press:  01 June 2010

James Alm
Affiliation:
Department of Economics, University of Colorado at Boulder, Boulder, CO 80309-0256
Joel Slemrod
Affiliation:
University of Michigan, Ann Arbor
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Summary

Abstract - A central issue in public economics is the appropriate design of a tax system. This paper argues that previous attempts to derive an “optimal tax system” are largely irrelevant to practical tax design, because they typically ignore a range of considerations reflecting fiscal and societal institutions that are essential elements in the normative and positive analysis of taxation. In particular, the standard optimal taxation methodology often ignores the equity and efficiency effects that arise because taxes must be collected, at some cost both to the tax agency and the taxpayer, and this collection must be enforced, again at some cost to the agency and the individual. However, the paper also argues that there are ways in which many of these relevant institutional features can be incorporated into a framework more general—but also more cumbersome, at least in its most general form —than that characteristic of the optimal taxation methodology. Such a framework will never be able to capture all of the incredible complexity that characterizes the real world and that must be considered in the actual design and reform of tax systems. However, the suggested framework can enhance our understanding of appropriate tax policy in several ways: it can illuminate and quantify with a common yardstick the various trade-offs that taxes necessarily create, it can highlight the areas that require additional research, and it can provide specific guidelines that tax policies should take in particular country circumstances, guidelines that seem often likely to be significantly different than those that emerge from the optimal taxation approach.

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Publisher: Cambridge University Press
Print publication year: 1999

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  • What is an ‘optimal’ tax system?
    • By James Alm, Department of Economics, University of Colorado at Boulder, Boulder, CO 80309-0256
  • Edited by Joel Slemrod, University of Michigan, Ann Arbor
  • Book: Tax Policy in the Real World
  • Online publication: 01 June 2010
  • Chapter DOI: https://doi.org/10.1017/CBO9780511625909.024
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  • What is an ‘optimal’ tax system?
    • By James Alm, Department of Economics, University of Colorado at Boulder, Boulder, CO 80309-0256
  • Edited by Joel Slemrod, University of Michigan, Ann Arbor
  • Book: Tax Policy in the Real World
  • Online publication: 01 June 2010
  • Chapter DOI: https://doi.org/10.1017/CBO9780511625909.024
Available formats
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Save book to Google Drive

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Google Drive.

  • What is an ‘optimal’ tax system?
    • By James Alm, Department of Economics, University of Colorado at Boulder, Boulder, CO 80309-0256
  • Edited by Joel Slemrod, University of Michigan, Ann Arbor
  • Book: Tax Policy in the Real World
  • Online publication: 01 June 2010
  • Chapter DOI: https://doi.org/10.1017/CBO9780511625909.024
Available formats
×