Abstract - A central issue in public economics is the appropriate design of a tax system. This paper argues that previous attempts to derive an “optimal tax system” are largely irrelevant to practical tax design, because they typically ignore a range of considerations reflecting fiscal and societal institutions that are essential elements in the normative and positive analysis of taxation. In particular, the standard optimal taxation methodology often ignores the equity and efficiency effects that arise because taxes must be collected, at some cost both to the tax agency and the taxpayer, and this collection must be enforced, again at some cost to the agency and the individual. However, the paper also argues that there are ways in which many of these relevant institutional features can be incorporated into a framework more general—but also more cumbersome, at least in its most general form —than that characteristic of the optimal taxation methodology. Such a framework will never be able to capture all of the incredible complexity that characterizes the real world and that must be considered in the actual design and reform of tax systems. However, the suggested framework can enhance our understanding of appropriate tax policy in several ways: it can illuminate and quantify with a common yardstick the various trade-offs that taxes necessarily create, it can highlight the areas that require additional research, and it can provide specific guidelines that tax policies should take in particular country circumstances, guidelines that seem often likely to be significantly different than those that emerge from the optimal taxation approach.