Theories of optimal taxation and the possibilities of empirical measurements

Abstract

During the reform of the tax system several, often contradicting aspects (distorting effect, social justice, etc.) need to be considered. The theoretical taxation models used in economics help us understand the trade-offs between the various aspects, and can contribute to the creation of the optimal tax system under the given circumstances. However, the optimal system also depends on the conduct of the economic players (e.g. the elasticity of labour supply) and the choice of value of such players (e.g. their need for equality), therefore it is impossible, or at least very difficult to elaborate an auspicious tax reform. This study provides a brief overview of the economic theory of the optimal tax system, and outlines the possibilities and difficulties of empirical measurements. Emprical analyses published in this topic are not presented, however a brief reference is made to the most important Hungarian results.