Design and validation of a tax sustainability index

Abstract Increasingly, indexes serve not only as descriptive but also as true decision support tools with the potential to influence important policies. These policies, however, may fail if based on a misinterpreted or doubted index. While a thorough index validation could significantly improve this situation, such validation is scarcely provided by socioeconomic studies presenting new indexes. The present study bridges this gap by providing a thorough index validation in the general case when a newly designed index (i) defines a new sustainability entity and (ii) serves not only as a relative but also as an absolute measure. We formulate the four-pillar tax sustainability concept based on which we design the tax sustainability index. To keep the index design objective, we employ official data only, limit professional judgments in the design process, and introduce an original technical weighting procedure. We verify the index design and develop a two-stage simulation-based validation. In particular, we validate (i) the compliance of the index with the tax sustainability concept and (ii) the tax sustainability thresholds and conditions. The suggested simulation procedures allow us to empirically validate the sustainability index despite limited data. The results show that tax sustainability cannot be achieved without sustainability in the institutional pillar. Hence, as thoroughly validated, the tax sustainability index may serve as a decision support tool enabling the implementation of sustainable tax practices at the national and EU levels.