What are taxes even for? And how is the decision made as to how much someone has to give in taxes? Some think it’s a simple process where everyone gives a similar amount, whereas others think that taxes negatively affect a certain group of people disproportionately. Here, the main two principles of taxation are going to be introduced, as well as a comparison and a contrast, examples, and more. Keep reading on to learn more!
Principles of Taxation in Economics
What are the principles of taxation in economics? Let’s start from the beginning.
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Taxation is by far the most significant generator of revenue for the government. Taxpayers are obligated to make particular contributions, irrespective of their own preferences or wants. No tax is desirable, yet taxes are unavoidable if the government is to generate cash to cover its expenses. The government makes an effort to satisfy the majority of taxpayers by guaranteeing that taxes are sensible and fair. As far as the U.S. is concerned, there are two principles of taxation that taxes are based on – the benefit principle and the ability-to-pay principle.
The Two Principles of Taxation Defined
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It’s not an easy task to define the two principles of taxation. There are several strongly accepted notions regarding what constitutes a fair allocation of tax loads among taxpayers. The two main ones are: the benefit principle and the ability-to-pay principle.
The benefit principle holds that there should be some equivalency between what an individual ends up paying and the advantages they get as a result of government actions. The ability-to-pay principle is the view that taxes should be levied dependent on a person’s means to pay.
The Two Principles of Taxation: Compared and Contrasted
The primary distinction between the two principles is what is getting taxed. The benefits principle taxes the benefits that someone gets from a public product or service, whereas the ability-to-pay method charges you based on your earnings. They both are similar in the sense that they’re both attempting to make tax as “fair” as possible. Unfortunately, both principles have their shortcomings and that’s what makes them similar. In their attempt to be fair, they are ironically seen as unfair in their own ways.
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The benefit principle is seen as unfair because taxpayers who have lower incomes may actually end up paying more in taxes than those with higher incomes. This affects them disproportionately and would actually negatively impact the economy. And the ability-to-pay principle is seen as unfair because in many circumstances, just because someone has more money would mean that they would have to pay more in taxes. This would result in people paying for things or services that they don’t even use!
Ability-to-Pay Principle of Taxation
The ability-to-pay taxation principle states that people with greater earnings should give a higher percentage of their income in taxes than those with lower earnings. The principle behind ability-to-pay taxation is that everybody should make an equal contribution when it comes to paying taxes, and because individuals with more wealth have less need for a dollar, giving more in taxes doesn’t really inflict a bigger strain.
This principle is founded on two considerations. One, we can’t always quantify the benefits of government expenditure. Two, it presumes that individuals with greater incomes are less bothered by paying taxes than those with lower incomes.
The ability-to-pay concept should be used to establish taxes if the government’s goal is to redistribute money. Nevertheless, measuring ability is challenging. Overall, there are three kinds of ways to measure ability to pay: salary, spending, and property.
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