Benefit Principle – Definition

Benefit Principle Definition

In taxation, the benefit principle is a principle based on the notion that those who benefit more from government expenditure or spending should pay more taxes that those that do not. This principle is one that outlines what government expenditure should be tailored at and those that should pay for them. Hence, individuals who are direct consumers of services provided through public financing are expected to pay more taxes than other people.

The benefit principle is sometimes compared to prices paid in private transactions because they serve similar purposes. Implementation of this principle would mean that resources allocated for public projects will be based on the response of consumers in terms of payment of taxes.

A Little More on What is the Benefit Principle

In a typical country arrangement, citizens do not see the need to pay for public services or projects funded by the government. Aside from the fact that the provision of social amenities is what citizens should enjoy, citizens lack the urge or natural tendencies to pay for these services. In fact, in some countries, if citizens are required to pay more taxes for the public services they enjoy, some citizens would prefer to be cut off or excluded from such services.

Given the above factors, implementing the benefit principle will be a complex task. However, the benefit principle is affected when road users are required to pay toll fee or highway levies.

Economic Efficiency

Economists maintain that the efficiency of a tax system depends on the nature of market economy operating at a particular time. Economic decisions relating to production, consumption and allocation of resources is done by the market or by market factors and this should not be interfered with by the tax system.

Hence, economists maintain that taxation should not interfere with means of production, production expenditures and consumption. This is due to the fact that economic decision making and processes are distorted by the Interference of taxation. Excess burden is also created in the economy when there is an unnecessary intervention from the tax system.

Compliance

The administration of the tax industry as well as compliance to taxes must be overseen by an accountable and trustworthy authority. This will aid the ease of administration and also enhance compliance to tax systems.

Developing or emerging countries need to consider an effective and efficient tax administration strategies which will also enhance good administration and compliance in the country.  Typically, for the administration of tax laws to be effective and efficient, there are four major requirements needed. They are;

  • Cost effectiveness
  • Stability and continuity
  • Convenience and
  • Clarity.

Clarity in the administration of tax laws means that all tax rules and regulations must not be vague, ambiguous or obscure to taxpayers. Rather, these rules and regulations must be easily understood or comprehensible for taxpayers. Not only should be rules and regulations be clear to taxpayers but also tax administrators that are to enforce the rules.

Ambiguity can mislead both the taxpayer and the tax administrator and this is not healthy for the economy. Clarity will reduce the amount of errors or oppression from tax administrators who are not even clear about the rules of the tax system.

However, countries have tax laws that are not understood by the public. This leads to disregard for the law and discrimination against weak, poor and uneducated citizens.

Stability in tax laws means that the laws must not be changed frequently. Rather, they can be adjusted at rare occasions and in ways that will not distort or upturn the tax system. If at all changes need to be made to tax laws and regulations, they must be done within the context of systematic tax reform.

Sudden and unnecessary changes in tax laws can cause confusion for both taxpayers and tax administrators. This will in turn reduce the compliance level of the populace to tax laws. Hence, every country must make room for coordinated and fair transition in situations where changes need to be made to tax laws.

Tax systems must ensure that taxation is cost effective. Cost effectiveness is a system of taxation is crucial to both developing and developed countries. The costs attributed to the control, collection and assessment of taxes must be effective and must also align to the goal of taxation.

However, while ensuring that taxes are cost effective, equity must not be neglected. Government expenses must be effectively managed, also, tax expenses for taxpayers should also be minimized. Exorbitant tax rates should not be levied in taxpayers, whether government employees or other citizens.

References for Benefit Principle

Academic Research on Benefit Principle

Tax competition, uniform assessment, and the benefit principle, Beck, J. H. (1983). Journal of urban Economics, 13(2), 127-146.

The principle of fairness and free-rider problems, Arneson, R. J. (1982). Ethics, 92(4), 616-633.

Why is cost-benefit analysis so controversial?, Frank, R. H. (2000). The Journal of Legal Studies, 29(S2), 913-930.

The interpretation of voting in the allocation of economic resources, Bowen, H. R. (1943). The Quarterly Journal of Economics, 58(1), 27-48.

A new principle of just taxation, Wicksell, K. (1958). In Classics in the theory of public finance (pp. 72-118). Palgrave Macmillan, London.

Tax competition, uniform assessment, and the benefit principle, Beck, J. H. (1983). Journal of urban Economics, 13(2), 127-146.

State-local business taxation and the benefits principle, Oakland, W. H., & Testa, W. A. (1996). ECONOMIC PERSPECTIVES-FEDERAL RESERVE BANK OF CHICAGO, 20, 2-18.

Tax compliance as the result of a psychological tax contract: The role of incentives and responsive regulation, Feld, L. P., & Frey, B. S. (2007). Law & Policy, 29(1), 102-120.

A new principle of just taxation, Wicksell, K. (1958). In Classics in the theory of public finance (pp. 72-118). Palgrave Macmillan, London.

theories of tax Justice: ruminations on the benefit, Partnership, and Ability-to-Pay Principles, Dodge, J. M. (2004). Tax L. Rev., 58, 399.

The Tax Benefit Rule, Bittker, B. I., & Kanner, S. B. (1978). The Tax Benefit Rule. UCLA L. Rev., 26, 265.

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