Basic Structure of the Model:

The literature consists of a wide range of models that focus on particular aspects of the tax system. However, these models share three basic features. First, each model specifies a set of taxes the government wants to levy and revenue the government wants to collect. The second feature is the specification of the economic agents, individuals and the firms in terms of their responsiveness  towards taxes, preference pattern of the individuals about goods and leisure, technology of the firms and how do they interact in a market structure, often in the context of perfect competition.

Third, the government has an objective function which specifies what does the government intend to achieve. In a simple model, the objective of the government is to minimise excess burden subject to a given amount of revenue.