<P> Optimal tax theory or the theory of optimal taxation is the study of designing and implementing a tax that reduces inefficiency and distortion in the market under given economic constraints . Generally , this criterion consists of individuals ' utility and the optimization problem involves minimizing the distortions caused by taxation . A neutral tax is a theoretical tax which avoids distortion and inefficiency completely . Other things being equal , if a tax - payer must choose between two mutually exclusive economic projects ( say investments ) that have the same pre-tax risk and returns , the one with the lower tax or with a tax exemption would be chosen by a rational actor . Thus economists argue that taxes generally distort behavior . </P>
<P> Optimal tax theory or the theory of optimal taxation is the study of designing and implementing a tax that reduces inefficiency and distortion in the market under given economic constraints . Generally , this criterion consists of individuals ' utility and the optimization problem involves minimizing the distortions caused by taxation . A neutral tax is a theoretical tax which avoids distortion and inefficiency completely . Other things being equal , if a tax - payer must choose between two mutually exclusive economic projects ( say investments ) that have the same pre-tax risk and returns , the one with the lower tax or with a tax exemption would be chosen by a rational actor . Thus economists argue that taxes generally distort behavior . </P>
an optimal tax is one that minimizes the
an optimal tax is one that minimizes the
inefficiency and distortion in the market under given economic constraints
inefficiency and distortion in the market under given economic constraints