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Principles of taxation

Main article: Theory of taxation

The details of taxation are guided by two principles: the benefit principle and the ability to pay principle.

Benefit principle

Main article: Benefit principle

Under the benefit theory, tax levels are automatically determined, because taxpayers pay proportionately for the government benefits they receive. In other words, the individuals who benefit the most from public services pay the most taxes. In analyzing the benefit approach, two models have been discussed: the Lindahl model and the Bowen model.

Ability-to-pay

The ability-to-pay approach treats government revenue and expenditures separately. Taxes are based on taxpayers’ ability to pay; there is no quid pro quo. Taxes paid are seen as a sacrifice by taxpayers, which raises the issues of what the sacrifice of each taxpayer should be and how it should be measured.

Passages

There are two basic and diametrically opposed views of taxation. Those who favor the ability to pay approach view the state as a master, who extracts tribute from its subjects on the basis of how much they are able to pay. Those who take this first approach often also view the state as a benevolent father figure, who distributes tax benefits on the basis of need. In Karl Marx's words, "From each according to his abilities; to each according to his needs."

Those who take the cost-benefit approach view the state as the servant of the people. Government provides services and taxpayers pay for the services. Those who benefit the most from the services should pay the most. And those who do not use a particular government service should not be forced to pay for it. - Robert W. McGee, The Philosophy of Taxation and Public Finance

There are two fundamental principles which undergird most taxes and have different economic and political ramifications. These are the 'ability-to-pay' principle and the 'benefit' principle - Subhajit Basu, Global Perspectives on E-Commerce Taxation Law

The benefits-received principle and the ability-to-pay principle are two basic philosophies of taxation fairness. - Irvin B. Tucker, Macroeconomics for Today

Benefit principle…Along with the ability-to-pay principle, of the two major approaches for considering the fairness of taxation - Joseph J. Cordes, Encyclopedia of Taxation and Tax Policy

Taxes are typically based on either a benefit principle or an ability-to-pay principle. - W. Bartley Hildreth, Handbook on Taxation

Much of the public debate regarding taxation, as reported in the press, concerns the issue of equity. Are taxes fair? People are generally more likely to comply voluntarily with tax policies if they believe that the policies are reasonable and equitable. A fair tax system is usually regarded as one that is based on people's ability to pay taxes, although some contend that taxes should instead be based on how much people benefit from public expenditures. - Robert J. Carbaugh, Contemporary Economics: An Applications Approach

Two principles of taxation guide the national financing of public goods: the benefit principle and ability to pay - Todd Sandler, Financing Global and International Public Goods

In the literature on taxation, two criteria have been applied most frequently in judging equity - the benefit principle and the ability-to-pay principle. - Russell F. Settle and Burton A. Weisbrod, Financing Public Interest Law

Vertical equity is a matter of debate between the two schools of thought, which advocate either the ability-to-pay principle or the benefit theory. - B. J. Reed, John W. Swain, Public Finance Administration

"The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing" - Jean-Baptiste Colbert

Economists, who do not typically deal with geese, cite two criteria for designing a tax system. The first is based on the ability to pay taxes and the second focuses on the benefits they receive from particular government services. - Libby Rittenberg, Principles of Microeconomics

Traditonally, economists have used two different principles for evaluating how the tax burden ought to be allocated: the benefit principle and the ability-to-pay principle. - Joel Slemrod, Tax Progressivity and Income Inequality

We shall now show below that, even though the recommendations of the benefit principle maximize social welfare, it is not possible for the government to implement them. This is due to what we call the problem of 'preference revelation.' This problem consists in the fact that even though individuals want the government to produce the optimum quantity of G, G*, which maximizes social welfare, they are unlikely to communicate this information to the government. - Ghosh & Ghosh, Economics Of The Public Sector

There are three major approaches to this aspect of taxation, namely, the benefit principle, the ability to pay principle and the social welfare approach. - Ghosh & Ghosh, Economics Of The Public Sector

The equity of a tax system concerns whether the tax burden is distributed fairly among the population. According to the benefits principle, it is fair for people to pay taxes based on the benefits they receive from the government. According to the ability-to-pay principle, it is fair for people to pay taxes based on their capacity to handle the financial burden. - Joshua Gans, Stephen King, N. Gregory Mankiw, Principles of Microeconomics

The structure of a tax is often justified on the basis of one of two general principles. First, a tax could relate to the individual's ability to pay, so those with a greater ability pay more taxes. Income or property taxes often rely on this ability-to-pay tax principle. Alternatively, the benefits-received tax principle relates taxes to the benefits taxpayers receive from the government activity funded by the tax. For example, the tax on gasoline funds highway contruction and maintenance, thereby linking tax payment to road use, since those who drive more, pay more gas taxes. - Economics: A Contemporary Introduction, William A. McEachern

Economist and political philosophers have proposed two major principles for organizing a tax system: The benefit principle, which holds that individuals should be taxed in proportion to the benefit they receive from government programs. Just as people pay private goods like dollars in proportion to their consumption of private goods like bread, a person's taxes should be related to his or her use of collective goods like public roads or parks.

The ability to pay principle, which states that the amount of taxes people pay should relate to their income or wealth. The higher the wealth or income, the higher the taxes. Usually tax systems organized on the ability-to-pay principle are also redistributive, meaning that they raise funds from higher-income people to increase the incomes and consumption of poorer groups. - Paul Anthony Samuelson, Economics

The established public finance concepts of distribution provide two important approaches for the achievement of allocative efficiency. These concepts of distribution are "Benefits-Received' and 'Ability-to-Pay' canons of taxation in particular and of fiscal action in general. - Alan S. Blinder, The Economics of Public Finance

Equality or equity in turn was interpreted along two lines, i.e., that contributions should match benefits received, and should also reflect ability to pay. - R.A. Musgrave, A Brief History of Fiscal Doctrine

Thus, as Adam Smith saw it, the rich should pay more because they have more carriages to protect than the poor. But ability to pay enters once it is seen that the rich will value the benefit per carriage more highly than do the poor, as reflected in differential Lindahl prices. The later interpretation, and with it a linkage between benefit and ability to pay doctrines, also enters in the Wicksellian context where tax prices are needed for purposes of preference revelation. - R.A. Musgrave, A Brief History of Fiscal Doctrine

Equity refers to fairness, not equality. The main criteria for judging the fairness of a tax are the (1) ability-to-pay and (2) benefits-received principles. - John P. Blair, Michael C. Carroll, Local Economic Development: Analysis, Practices, and Globalization

Historically, the main alternative to the benefit principle has been the principle that tax should be levied in accordance with taxpayers' "ability to pay." - Liam B. Murphy, Thomas Nage, The Myth of Ownership: Taxes and Justice

Whilst there may be a case for public expenditure because of market failure, the revenue aspect of the public household is much less impressive. Basically, government may be paid for by means of benefit taxation, the ability to pay taxation or deficit spending besides lump-sum taxes. - Jan-Erik Lane, The Public Sector: Concepts, Models and Approaches