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Explore traditional principles of Public Finance focusing on taxation over expenditure. Analyze tax load division in the economy, with principles of horizontal equity, ability-to-pay, and benefit. Delve into tax discrimination, high income groups, and the benefit principle.
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The Fundamental Fiscal Asymmetry • The focus is on “principle of taxation” rather than on “principle of expenditure”. • How much tax load should be? • How the total resources of the economy should be divided between the public and the private sector. • Three principles of taxation: • Principle of horizontal equity. • The ability –to-pay principle. • The benefit principle
Principle of Horizontal Equity • Equals should be treated equally. • Some difficulties with the application of this principle. • Individual with stronger preference for leisure bear light tax.
The Ability –to-Pay Principle • Unequal should be treated unequally. • To what extent shall discrimination in tax rates among separate groups of population be accepted? • High income groups pay proportionately more than the lower income group. • justification of progressive tax: • Principle of minimum aggregate sacrifice
The benefit principle • Tax should be based on the benefits received from the enjoyment of public services. • The benefit principle of taxation should never be stated in total benefit. To do this is to confuse the value in use with value in exchange. • Taxes should be allocated among separate individual on the basis of marginal benefit received.
