#Benefit principle of taxation how to#

There are four general requirements for the efficient administration of tax laws: clarity, stability (or continuity), cost-effectiveness, and convenience. In discussing the general principles of taxation, one must not lose sight of the fact that taxes must be administered by an accountable authority. They face the difficulty that there is no scientifically correct distribution of income. Attempts have also been made to incorporate distributional considerations into this theory. Because it deals with highly stylized mathematical descriptions of economic systems, this theory does not offer easily applied prescriptions for policy, beyond the important insight that distortions do less damage where supply and demand are not highly sensitive to such distortions. Thus, an important postwar development in the theory of taxation is that of optimal taxation, the determination of tax policies that will minimize excess burdens. A more nearly neutral tax system would result in less distortion. The basic notion is that if goods worth $2 are sacrificed because of tax influences in order to produce goods with a value of only $1.80, there is an excess burden of 20 cents. It may be desirable, for example, to impose taxes on pollution as a means of protecting the environment.Įconomists have developed techniques to measure the “excess burden” that results when taxes distort economic decision making. This does not mean, of course, that major social and economic goals may not take precedence over these considerations. It should not discriminate in favour of, or against, particular consumption expenditures, particular means of production, particular forms of organization, or particular industries.

That is, taxation should entail a minimum of interference with individual decisions. Thus, they feel that tax policy should generally refrain from interfering with the market’s allocation of economic resources. Although there are many examples to the contrary, economists generally believe that markets do a fairly good job in making economic decisions about such choices as consumption, production, and financing. The requirement that a tax system be efficient arises from the nature of a market economy. Payroll taxes used to finance social security may also reflect a link between benefits and “contributions,” but this link is commonly weak, because contributions do not go into accounts held for individual contributors. The benefit principle is utilized most successfully in the financing of roads and highways through levies on motor fuels and road-user fees ( tolls). In fact, it is difficult to implement the benefit principle for most public services because citizens generally have no inclination to pay for a publicly provided service-such as a police department-unless they can be excluded from the benefits of the service. If this principle could be implemented, the allocation of resources through the public sector would respond directly to consumer wishes. Under the benefit principle, taxes are seen as serving a function similar to that of prices in private transactions that is, they help determine what activities the government will undertake and who will pay for them. SpaceNext50 Britannica presents SpaceNext50, From the race to the Moon to space stewardship, we explore a wide range of subjects that feed our curiosity about space!.Learn about the major environmental problems facing our planet and what can be done about them! Saving Earth Britannica Presents Earth’s To-Do List for the 21st Century.Britannica Beyond We’ve created a new place where questions are at the center of learning.100 Women Britannica celebrates the centennial of the Nineteenth Amendment, highlighting suffragists and history-making politicians.

#Benefit principle of taxation how to#

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