Any tax system has to be equitable.
Each taxpayer should contribute his fair share to the cost of the provisions made by the government.
How to define this fair share?
Two lines of thought :
1.principle of benefit
2. Principle of ability to pay.
A tax payer pays equal to the benefits received. This makes tax system equitable.
This equitable tax system will be different with different expenditure structure.
The benefit criterion is of tax- expenditure policy and not of tax policy alone.
Aggregate benefit= the collective sacrifice.
Thus the purpose of taxation is to pay for the government or the state services. Taxes are to
be paid in proportion of the benefits received from the government spendings.
Those who derive maximum benefit are to pay the highest and those who don't at all needn't
pay any tax.
The government therefore will be required to estimate the benefits received by various
individuals and groups and set the tax/rates accordingly.
Expenditure benefits for each individual must be clearly calculated n known.
Because of this the principle is not easy to interpret or implement.
The authority has to look into How much it should provide and Who should pay for it and how much?
Yet most of the publicly available g/s cannot be covered by the principle.
There would be some g/s made available by the government that has exclusive and rival characteristics
of the private goods. Benefits from such cases can be computed easily . (It is like setting price for the use
of the product based on its demand and supply. )
However when the government is arranging for pure public goods then it is difficult to measure the
benefits derived and therefore the principle becomes unimplementable.
Moreover the state privides numerous public goods. Collection of the detailed information to enable the
levying of appropriate taxes may be too expensive.
Once the public goods come to exist, people may not have the urgency to reveal their preferences.
Many a times they may under value their preferences. So free riders emerges.
People may assert that they want little or none of the products. On the other hand, they may declare
the harmfulness of the product and demand subsidies instead.
For instance, how much benefit an individual tax payer derives from providing for national defence ,
education and maintaining law and order by the Government , cannot be measured with any objective
criterion. Secondly, most of the Government expenditure is incurred on common indivisible benefits so
that the division of benefits of Government expenditure is not possible.
Thus, those who declares their preferences and benefits derived, will be accordingly taxed and the
others become free riders.
Higher the number of free riders lower the availability of public goods. This is something that cannot be
endorsed and allowed.
Due to the inability of assessing people's true preferences and benefits derived, the principle of benefit
is hardly used in practice.
Further, the benefits received theory militates against the very notion of a tax. A tax is defined as a
payment for general purposes of the State and not in return for a specific service. The benefit theory can
have meaning if the benefits of the Government services to the community as a whole are
considered.But this will only indicate how much total tax revenue the community should pay to the
Government. This will not help us in dividing the tax liability among various individuals comprising the
community. It may be noted that most important common benefits are peaceful enjoyment of life,
liberty and property.
Difficulty level quite formidable. Moreover ,cannot cover the entire function of tax policy.
It allocates that part of the taxbill that manages the cost of public services. However leaves out the
financing of the transfer payments and redistributive activities. A proper state of distribution is assumed
to be already in place.
The benefit principle is applicable only in cases where the beneficiaries can be clearly identified. Thus
benefit principle is applied to the collection of road tax from vehicle owners. This is also applied when
local bodies collect special levies for the services , such as construction of sewers and roads , they render
to the people of their locality. The benefit principle is also applied to social security programmes for
workers.
In reality, taxes cannot be seperated for public services and distribitive justice.
Yet it has its importance ,however limited , in designing an equitable tax structure.
A taxstructure which is agreeable to most people and preferable to alternative arrangements.
