Abstract

This article tests the new measure of tax efforts following Dalamagas et al (2019) who  argued that in the context of the Arrow-Debreu economy, with fixed labour supply  and no savings, disposable income is equal to private consumption, a utility function  with two arguments, income, and government spending, is maximised concerning  direct and indirect tax rates. The optimal level of tax revenue is derived from a utility  maximisation process and is shown to be equal to the difference between income and  consumption. As a robustness check, the results of the utility maximisation function  were compared to the findings of the stochastic frontier model. Each model records  very near results for tax effort, tax potential, and tax gaps. The empirical findings  revealed that Ethiopia has a large tax gap and poor tax effort, which is primarily due  to policy choices and enforcement procedures.