In: Economics
Compare and contrast the following and offering your opinion on which one of each pair of tax strategies is the most appropriate. a. The “ability to pay” or the “benefits received” taxation principles b. “Progressive” taxes or “regressive” taxes
a) The benefit received principle sees the relationship between the government and the consumers as being in an exchange relationship. The government provides goods and services while the people pay in accordance to the benefits received by them. This principle ignores the concept of equity in distribution and its form changes with the changes in the expenditure structure of the economy. Hence it is a tax expenditure policy. It is also difficult to calculate the benefit received as people may not show their true preferences.
Ability to pay principle focuses on the aspect of equity in distribution. It requires the individuals to pay according to their ability to pay. The abilitycan be calculated on the basis of income, consumption or wealth. It can be horizontal equity where people with same income may pay same prices, or it could be vertical equity where people with different income levels pay different taxes. This is a better taxation principal than the benefit received theory.
b) Progressive taxation is a tax in which the tax rate increases as the taxable amount increases. In regressive taxation the tax rate decreases as the taxable income increases. Progressive taxation is considered superior to regressive taxation as it leads to less burden on the poor.