Benefits Principle

8 Key excerpts on "Benefits Principle"

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  eBook - ePub

  Studies in the History of Tax Law, Volume 9

  • Peter Harris, Dominic de Cogan, Peter Harris, Dominic de Cogan(Authors)
  • 2019(Publication Date)
  • Hart Publishing

    (Publisher)

  Although attentive to the interests of individual taxpayers, benefits taxation facilitates evaluation of the fiscal system as a whole by linking taxation and public services. This may provide grounds to justify or to criticise a tax as it focuses attention on both the benefits and the costs of particular policies. 43 Integration of tax burdens and public spending into a common analytical framework is a significant advantage for the benefits theory in relation to ‘ability to pay’ theories. ADVANTAGES OF BENEFITS TAXATION The Benefits Principle might be defended as a requirement of fair terms of cooperation between citizens or as a means of ensuring fair relations between the state and its citizens. The classical Benefits Principle is most obviously aimed at the first notion of fairness, and the modern Benefits Principle at the second. However, both principles may be defended in either way. I will first consider the Benefits Principle as a norm of fair distribution of tax burdens and then consider how the principle might be defended in terms of broader considerations of political economy. Tax Fairness as Proportionality The classical Benefits Principle is founded on an intuitive notion of fairness in exchange that is aimed at balancing the benefits and burdens of cooperation. Contributions to the state reflect the benefits that one receives in return. From those to whom much is given, much is expected, and those who receive little might be expected to contribute little in return. Fiscal exchange under the classical principle is not based on market pricing, but instead requires that tax obligations reflect a taxpayer’s ordinal position in terms of benefits from the state, so that those who receive greater benefits bear greater burdens

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  Basic Economic Principles

  A Guide for Students

  • David E. O'Connor, Christophe Faille(Authors)
  • 2000(Publication Date)
  • Greenwood

    (Publisher)

  But how do governments determine which taxes are the “fairest”? The fairness of taxes is one important element in the larger goal of economic equity (see chapter 2). While everyone can agree that government needs to raise revenues through taxation, there is considerable debate about what each person’s “fair share’’ of the tax burden should be. To help societies decide which taxes are most fair, two principles of taxation are considered—the benefitsreceived principle and the abilitytopay principle. The benefitsreceived principle of taxation states that people who directly benefit from the use of certain public goods or services should be the ones who pay for them. For example, the tax receipts from the excise tax on gasoline and from toll plazas typically are used to build and repair the highways. Thus, people who directly benefit from the highways are paying for them. Supporters of the benefitsreceived principle argue that this is a fair arrangement because it resembles the way free markets work. That is, people are free to choose which public goods they wish to use, and then pay for these goods. Critics of the benefitsreceived principle counter that it is impossible to determine each person’s “benefits” from many public goods and services. For instance, how would you calculate each person’s benefit from national defense, or police or fire protection at the local level? The abilitytopay principle of taxation states that people with more income or wealth should pay more taxes. Note that the abilitytopay principle can be based on income or wealth. The personal income tax is a good example of a tax based on the abilitytopay based on income. Page 154 As a progressive tax, the personal income tax takes a higher percentage of income from upperincome households than lowerincome households.

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  Public Sector Economics

  • Richard W Tresch(Author)
  • 2021(Publication Date)
  • Bloomsbury Academic

    (Publisher)

  THE ABILITY-TO-PAY PRINCIPLE As it happens, there is a long-standing alternative mainstream view of equity in taxa-tion that dates from the writings of Adam Smith and John Stuart Mill in the late 1700s and early 1800s, almost 150 years before Bergson and Samuelson formulated their social welfare function. It is called the ability-to-pay principle , and Smith and Mill conceived of it strictly as an equity principle, without reference to the efficiency costs of raising taxes. Smith and Mill’s ability-to-pay principle has more than merely survived as an alternative to the social welfare view of tax equity. It is their ability-to-pay principle, not the social welfare view, that most often informs public discussions of equity in taxation in all the developed market economies. In Smith and Mill’s time, the benefits-received principle was the only widely accepted principle of equity in taxation. It dated from the feudal societies of Europe in the 14th and 15th centuries, when the noblemen would pay a tax to the king in return for protection of their fiefdoms from foreign invaders. By the late 1700s, however, the feudal societies had broken apart, population had grown and spread geographically, and governments were P U B L I C S E C T O R E C O N O M I C S 252 providing a wide range of public services. Smith and Mill realized that the link between taxes and public services was no longer tight enough to rely solely on the benefits-received principle. They saw the need for a second principle of equity in taxation based on the notion that people simply had to be willing to sacrifice for the common good. They should no longer expect a specific quid pro quo for their tax payments. Their sacrifice view of taxa-tion gave rise to the notion of taxes as a necessary evil. The question was how to ask people to sacrifice for the common good. Their answer: in accordance with people’s ability to pay.

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  Studies in the History of Tax Law, Volume 7

  • Peter Harris, Dominic de Cogan, Peter Harris, Dominic de Cogan(Authors)
  • 2015(Publication Date)
  • Hart Publishing

    (Publisher)

  This is essentially the spirit of benefit taxation. Ideally, the voting process would be one where all conceivable cost distributions (tax-prices payable by various individuals) would be matched with all conceivable public service programs, but this is hardly feasible. Selected expenditure and tax programs must be considered and tax programs must be expressed in terms of generally applicable tax formulae, rather than as a set of individual tax-prices. 107 Governments have gone a long way down this path of disaggregating the state into separate goods and services; the modern practice for hypotheca-tion of revenues to particular expenditures, at least in political rhetoric, con-tinues this process. When benefit can be linked directly to specific services, a tax-price can be ascertained and this is generally accepted as an appropriate use of the benefit theory. 108 105 Spoerer, n 33 above, 108. 106 L Neal, ‘The Monetary, Fiscal, and Political Architecture of Europe’ in J Cardoso and P Lains (eds), Paying for the Liberal State: the Rise of Public Finance in Nineteenth-century Europe (New York, Cambridge University Press, 2010) 299. 107 Musgrave, n 4 above, 58. 108 Duff, n 77 above. 506 Miranda Stewart The benefit theory also underpins development of the big ‘tax and wel-fare’ states of the twentieth century, which taxed workers so as to fund insurance and protection for families, disability, unemployment or old age. This was sometimes done directly with social security or insurance con-tributions, but the analysis holds even in countries, such as Australia or Sweden, where funding for the welfare state came out of consolidated revenue. The broad theory of benefit justified broadening the tax base to the mass of worker-voters who paid income tax, social security tax and VAT in exchange for government. Ultimately, it is a fallacy to conceive of government as an additive set of separate goods or services.

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  Fundamentals of Environmental Economics

  • Kumar, A(Authors)
  • 2021(Publication Date)
  • Daya Publishing House

    (Publisher)

  Chapter 15 Ability-to-Pay Principle A principle of taxation in which taxes are based on the income or resource-ownership ability of people to pay the tax. The income tax is one of the most common taxes that seeks to abide by the ability-to-pay principle. In theory, the income tax system is set up such that people with greater incomes pay more taxes. Proportional and progressive taxes follow this ability-to-pay principle, while regressive taxes, such as sales taxes and Social Security taxes, don’t. The logic behind the ability-to-pay principle is that taxes are collected by the government to finance public goods that provide benefits to all members of society. And because taxes are a diversion of resources from the household to the government sector, it makes sense to tax, or divert income away from, the people who actually have the income. Absolute Advantage : The ability of a producer to produce a higher absolute quantity of a good with the productive resource available. Abundance: A term that applies when individuals can obtain all the goods they want without cost. If a good is abundant, it is free. Accelerator: The causal relationship between changes in consumption and changes in investment. Acid Rain: The precipitation of dilute solutions of strong mineral acids, formed by the mixing in the atmosphere of various industrial pollutants – primarily sulphur dioxide and nitrogen oxides – with naturally occurring oxygen and water vapor. Aquifer: Underground source of water This ebook is exclusively for this university only. Cannot be resold/distributed.

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  Public Finance

  A Normative Theory

  • Richard W. Tresch(Author)
  • 2002(Publication Date)
  • Academic Press

    (Publisher)

  The U.S. federal personal income tax will serve as the primary applica-tion throughout the chapter. Of all the broad-based taxes, it is the tax most closely grounded in the ability-to-pay principle. The Smith±Mill ability-to-pay principle and the Bergson±Samuelson interpersonal equity conditions of W rst-best theory are also compared and contrasted. The older ability-to-pay principle would appear to bear a close kinship to the newer interpersonal equity conditions. The taxes and transfers implied by the interpersonal equity conditions surely depend on individuals' economic well being, that is, on their ability to pay. Even so, the two principles are not as closely related as one might think. They derive from fundamentally di V erent views of taxation and, as such, they do not necessar-ily imply that the government should collect the same tax revenues from individuals or even use the same taxes. ABILITY TO PAY: THEORETICAL CONSIDERATIONS Smith and Mill recognized the limitations of the bene W ts-received principle as public expenditures became more varied and their bene W ts more di V used throughout the population. They reacted by introducing the concept of taxes as a necessary evil, a sacri W ce that individuals have to make for the common good to support desired public expenditures. Given their perspec-tive, they saw the fundamental question of tax equity as being one of how the government should ask people to sacri W ce for the commonweal, the common good. Their answer was that people should be asked to sacri W ce in accordance with their ability to pay. In addition, the pattern of sacri W ce should honor the two principles of horizontal equity and vertical equity . Horizontal equity says that equals should be treated equally. Two people judged to have equal ability to pay should bear the same tax burden.

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  Handbook of Public Economics

  • Martin Feldstein, A.J. Auerbach(Authors)
  • 1985(Publication Date)
  • North Holland

    (Publisher)

  3.1. The benefit doctrine The benefit approach to tax equity was congenial to the political philosophers of the enlightenment, such as Hobbes, Grotius, and Locke. With legitimacy vested in the hand of the governed, the contracterian model would call upon them to pay the state for protection received. Under the Lockean concept of entitlement, each person had property in the fruits of h s labor [Locke (1690, p. 327)], an entitlement compatible with taxation as payment for services rendered but not with state-taking on other than a quid-pro-quo basis. Smith’s (1759) grand design for the human condition, as painted in his earlier work, squarely fitted this pattern. The first of his famous maxims of taxation states the rule of tax equity as follows [Smith (1776, vol. 11, p. 310)]: “The subject of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expense of government to the individuals of a great nation, is like the expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective Ch. I : A Brief Histoty of Fiscal Doctrine 17 interests in the estate. In the observation or neglect of this maxim consists, what is called the equality or inequality of taxation.” While the maxim begins with ability to pay, its thrust is in the direction of a benefit rule. As stated in the bottom line, equality in taxation calls for payment in proportion to one’s interest in the public estate. Placing Smith in the benefit camp, while somewhat controversial, also matches h s repeated call for fee-finance in the expenditure chapters, including a timely admonition that professors be paid in line with student attendance [Smith (1776, vol. 11, p. 249)].

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  Tax Policy

  Principles and Lessons

  • Robin Boadway, Katherine Cuff(Authors)
  • 2022(Publication Date)
  • Cambridge University Press

    (Publisher)

  This resource-based emphasis distinguishes it from the utilitarian approach, where tax liabilities are based on utility as determined by individual behaviour. Second, tax liabilities are not related to the uses to which the taxes are put, especially to the benefits one receives from public goods and services. This distinguishes the ability-to-pay principle from benefit taxation associated with Wicksell (1896), according to which taxes are assigned based on benefits received. The benefit principle is challenging to implement and eschews any redistributive role for taxation. Two operational issues confront the ability-to-pay principle: how should ability-to-pay be measured, and how should taxes vary with ability-to-pay? The standard measure of ability-to-pay is comprehensive income developed by Schanz (1896), Haig (1921) and Simons (1938). Comprehensive income paral- lels Hicks’ (1946) notion of income, which is defined as the maximum individ- uals could consume annually without changing their wealth, or Y ¼ C þ ΔA, where Y is income, C is consumption and ΔA is the change in assets or saving. This definition is based on the sum of the uses of income, and through the individual’ s budget constraint, it is equivalent to the sum of the sources of income, since Y ¼ E þ rA þ I , where E is earnings, rA is capital income assuming a rate of return of r and I is net inheritances. Some conceptual issues in the definition of Y are worth highlighting. First, consumption and income include items that involve market transactions: they do not include household production, leisure or items obtained by barter. Consumption also includes consumption services obtained from consumer durables that have been purchased. Thus, consumer durables are not included in asset wealth W, and the return on consumer durables is treated as consump- tion rather than asset income. Similarly, human capital is not included in asset wealth, and the returns to human capital are included in earnings.

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