In its simplest form, the theory states that the cost of supplying public service should be covered by taxes voluntarily contributed by the beneficiaries, just as they pay voluntarily for any commodity purchased from private market. (ii) Modern Views on Benefit Theory – Voluntary Exchange Approach:Ī modern approach to the benefit view of taxation comes from the famous Swedish economist Erik Lindahl in his voluntary exchange theory in 1919. When each citizen uses public service in proportion to his income, he concludes that taxation should be progressive. He tried to introduce an element of progressive taxation in the benefit theory. Accordingly rich, person’s capacity to pay for public service is comparatively higher than a poor person, even though both receive the same amount of public service. As such income of the consumer reflects the index of demand for public service. He advocates that every individual is a consumer of public services. The Italian economist de Viti de Marco in 1888, advocated that “citizens duty to pay taxes should be matched by the states duty to supply public services”. Wicksell argues that since taxes are paid in accordance with the benefit received, no question of unjust compulsion of contribution to public services arises. Wicksell’s justification is that benefit theory of taxation is just, because it is in conformity with democratic spirit of individual freedom.
Taxes came to be viewed as a price for public service in line with taxpayer demand. They joined in an effort to integrate the determination of taxes and expenditures with the allocation of resources in the market. Musgrave argues that Smith shrewdly inserted an ability element into the weak link of the benefit rule.Ī renaissance of the benefit approach took place in the hands of Pantaleoni, Mazzola and de Viti de Marco in Italy and Sax in Austria. That is the revenue which they respectively enjoy under the protection of the state. This rule, according to Adam Smith, is provided by taxing individuals “in proportion to their respective abilities”. Since there is no practical way of doing this, a general rule of thumb is needed in place of individual imputation. But the problem is how we can measure individual benefit and cost. V of Wealth of Nations there appears a clear cut rule that the cost of public expenditure should be allocated according to benefit and that general contribution should be used only where expenditure cannot be allocated on a benefit basis.Īccording to Smith, everyone is benefited from public services and everyone should contribute to the cost of sustaining them. This raises some doubt whether Smith should be placed in the benefit camp. According to this principle, only those public services are justified for which the public is capable of bearing the cost. It imposes undesirable limitation on the scope and scale of the public services. A tax is not a price tax has no quid-pro-quo. This principle is not In conformity with the definition of tax. It is difficult to find out any precise measurement of the costs and sharing of such costs in most of the indivisible public service such as defence, police etc.
It is not easy to estimate the cost of government service or social goods made available to each individual taxpayer. Hence the cost of service principle to taxation was applicable only to a feudal regime, where feudal payments were considered as the legitimate dues of the sovereign in return for the service of protection provided by them. This notion was prevalent in medieval times when everything was regarded as a payment for service rendered-justice, defence, administration etc. Since these services are of special character, they should be made the basis of a special payment, according to cost of service approach. rendered to particular individuals who get a direct benefit out of these. Thirdly there are certain special services such as education, building of highways, the recording of mortgages etc. Protection of business and possession of property involve some cost, which should be recovered through a property tax. Further the owners of property benefit by appreciation in the value of their property. Secondly those who possess property and own industry get certain additional benefit under the protection of the state. These should be made the basis of a personal tax. These services are provided to rich and poor alike. For example, defence, law and order, maintenance of public health etc. Firstly, there are certain services of the state which confer uniform benefit to all. Von Hock considered the services provided by the state, falling in three categories.