Optimal Tax Theory, Econometric Evidence, and Tax Policy

Abstract

A renewed interest in the theory of optimal taxation has emerged in recent years. The theory of optimal taxation generally has followed two disparate paths: the theory of optimal commodity (or indirect) taxation and the theory of optimal income (or direct) taxation. Only occasionally have attempts been made to integrate or compare these two approaches. While each has an interesting history in economics, much important work is of recent origin and, I shall argue below, much remains to be done if we are to use optimal tax theory as a guide to the formulation of tax policy.