Benefit Principle of Taxation or Benefit Theory of Taxation

Benefit Principle of Taxation:

According to the benefit theory, the burden of taxation should be divided among the people in proportion to the benefits received from the State. The persons receiving equal benefits from the State should pay an equal amount as taxes, and those who received greater benefits should pay more as taxes than those getting fewer benefits. The benefit principle is very much similar to the cost of service principle, the former looks at the problem from the side of demand while the latter looks at it from the side of supply. Here, also the government acts just like a businessman. People pay to the businessman according to the amount of commodities purchased from him, similarly, they should pay the government according to the goods and services received.

The benefit approach to taxation was accepted widely among the political theoreticians of the 17th century. Taxation as a price for service rendered seemed to be a natural complement to the contract theory of the State. The view was held by German writers, including Grotius and Pufend. It was also accepted by writers such as Aobbes, the Physiocrats, and Locke. Subsequently, the benefit view was adopted by 18th-century writers such as Hume and Rousseau.

But throughout, the notion of contract, benefit remained the basis of organized society, and protection appeared as a major objective of the contract. Taxes accordingly were considered as a price to be paid for the protection to life and property by the members of the organized society.

Criticism of the Benefit Principle of Taxation:

Most earlier writers, who supported the benefit principle, argued in terms of protection and concluded in favor of proportional taxation. Generally, it was held that the need for protection should be measured in proportion to income or wealth or in some cases; in proportion to the expense.

But all have not shared this conclusion. Rousseau, for instance, maintained that the wealthy benefitted more from protection. Sismondi argued that they must purchase the acquittance of the poor; the need for protection increases more rapidly than income and progressive taxation are called for by others. Joan Stuart Mill maintained that protection is more urgently needed by the poor indeed. Mill rejected the benefit view because it would lead to regressive taxation. Finally, mention may be made of de Viti de Macro’s contribution, who assumes that each citizen uses public services in proportion to his income. He, however, concludes taxation should be progressive, because, the taxed money is worthless to the rich than to the poor, the former’s marginal income utility being lower. If charged the same price (proportionate taxation) from the rich and the poor both, the rich man would reap an “undeserved” surplus. Hence, the rule of a single price can not be applied in the market for public services, and a progressive rate of taxation is required.

There are several other reasons due to which it is extremely difficult to apply in practice the principle of benefit theory as the basis of taxation. For instance, it is difficult to estimate the benefit that an individual receives from the expenditure of the government, for example- how much as benefit an individual receives from the army, police, and educational institutions, cannot be exactly estimated. Moreover, the danger is that the benefits enjoyed by individuals may be arbitrarily determined for tax purposes, and only primary beneficiaries may be taxed. And, therefore, the burden of taxation may not be equitable. Hence, this theory may be rejected.

It is also not desirable to apply the private sector commercial rule to the public sector because the latter performs those functions which the private sector cannot undertake. The objective of the private sector is profit while that of the public sector is social and economic welfare. And, hence, social and economic welfare cannot be maximized, if the motive of the public sector remains the same as that of the private sector.

If the basis of taxation is a benefit, then the poor will have to pay higher taxes than the rich, because, the poor derive greater benefits than the rich from the expenditure of the government, for example, the poor may be more benefitted by the provision of free medical service and free education. And, therefore, on this ground also, this theory cannot be accepted as the basis of taxation.

Again, the rich people have more capacity to pay taxes than the poor; but according to this principle, the per capita tax burden upon the rich and the poor is the same. This means regressive taxation. But regressive taxation is not desirable. Moreover, if this principle is followed, the pensioners will have to return all the money they get as a pension from the government. Hence, this theory cannot be accepted as a principle for the equitable distribution of taxes.

If this principle is followed, the government may fail to achieve the objective of social welfare in a Welfare State, because it may not undertake several welfare activities which are generally performed by the government for the social welfare of the people, for example, poor relief, free medical and education, as the poor may not be able to pay taxes on the basis of benefit. Moreover, the government may not undertake any activity for the economic and social welfare of poor people, because they may not be able to pay taxes on the basis of benefit.

These days taxation is not only used as a means of raising revenue but for removing inequalities of income and distribution. This objective cannot be achieved, if the benefit principle is followed as the basis of taxation. It is, therefore, clear that the benefit principle cannot ensure just distribution of the burden of taxation among different sections of society practically, as well as theoretically.

Usefulness of the Benefit Theory of Taxation:

However, the benefit principle may be favored from the point of view of incentive. The alternative principle, i.e., the ability to pay principle may discourage economic incentives; as it penalizes those, who successfully earn high incomes and accumulate a large amount of wealth. The benefit principle may not create such a situation.

The benefit principle may be used to determine the price of certain goods and services provided by the government in some situations, for example, electricity, transport services, etc., where the benefits obtained by the individual can be measured without any difficulty. In fact, the benefit principle can be used to determine the prices of goods manufactured by the government or to determine fees rather than taxes.

The benefit principle may be used by local government to determine special assessments from the owners of the properties which are benefitted from the local public works.

In spite of all these considerations, the benefit principle can not be used as the basis for framing the tax structure, because in a Welfare State, it is not desirable that the poorer sections of the people should be benefitted from the service in proportion to their incomes, of their tax payments.