The Optimal Tax Rate, Efficiency and Technological Gap of Government in OECD Countries: Stochastic Meta-frontier Approach

In the last decades, many economists have tried to develop models for obtaining the optimal tax rate (OTR) to maximize economic growth. Aiming to contribute to these studies, this study presents a novel approach to determine the OTR based on stochastic meta-frontier analysis. To this end, the meta technical efficiency (MTE), group’s technical efficiency (TE), technology gap ratio (TGR), and OTR were determined for the period 1996-2018 in a selection of OECD countries. The countries were categorized into three groups, namely the Western European (WEU), Eastern European (EEU), and other members of OECD countries (OM). The average values of the OTR were then measured using coefficients of the estimated meta-frontier model and analyzing the optimal rates. The results indicated that the highest average TE belongs to the EEU countries and the highest average MTE and TGR belong to the WEU countries. The results demonstrated that Luxembourg with the highest average value of MTE as well as TE and TGR values higher than 0.9 and also the maximum amount of OTR can be considered as the reference for other countries. It was concluded that with 90% statistical confidence, the average real tax rates in some of the investigated countries are less than the balanced budget OTR during the studied period while actual tax rates in some WEU countries are more than the OTR.