Discuss the approach of Equity in taxation

Tax equity refers to fairness of tax system. It is borne out of a feeling that each citizen of a
country should contribute fairly to the cost of government. The difficulty, however is to know
precisely what constitutes fairness in taxation. The discussion of tax equity has produced two
opposing approaches to this problem. These are the benefit principle and the principle of
ability to pay.

The benefit principle of equity
The benefit principle argues that equity in taxation requires that taxes to be paid in
accordance with the benefits received from government expenditures. If tax burdens are
allocated on any other basis such as ability to pay, then tax payers who have little or no
ability to pay will continue to enjoy the consumption of public goods even through they have
contributed little or nothing to their financing. People should pay for what they get,
disregarding whether what they buy is produced in the public or the private sector. This
approach dates back to the days of Adam Smith, Locke, Bentham and Hobbe. Most of them
belonged to utilitarian school of thought, which emphasized the need to tax people according
to benefits they derive from consumption of Public goods.

The Weakness of the benefit principle
The benefit approaches requires that the expenditure benefits of each taxpayer be known. As
was seen earlier, much of government spending consists of public goods, the benefits of
which are indivisible. Such goods cannot be parceled out among individuals and sold at a
price that reflects the marginal satisfaction obtained by the taxpayer – consumer.
(iv)It is generally difficult to establish the degree of benefit that a person derives from the use
of public goods and services, since the consumer would not voluntarily reveal how highly
they value the public services.
(v) Given that most public goods consumption is non-rival and that one-person benefit
doesn‘t restrict consumption of another the benefit tax becomes very difficult to collect.

-However, although there are many problems associated with collection of benefit taxes they
are still used in many countries. This varies from tolls paid by motorists on highways to
finance the construction and maintenance of roads to fees charged for the collection of waste
materials (service charge). Levy can also be placed on the use of sports grounds in order to
finance for more recreational facilities or to help pay off loans used in constructing such
facilities. The question is under what conditions can such direct charges on the beneficiaries
be made?

-Benefit taxes works well where goods and services to be taxed have many properties of
private good (rival in consumption, carry a price and benefits are internalized) the consumer
is then taxed according to amount used like in licensing vehicle, in charging hospital fees, in
charging rent for municipal houses etc. where product is completely rival and there is a
significant amount of competition among consumer, the benefit taxes can be charged in same
way private firms charge price.

-In other instances where imposition of direct charges is desirable but too costly a tax on a
complementary product may be used in Lieu of Charges. For example taxes to finance
highway construction are often fixed on petroleum products used by road users. They may
also be fixed on the cars used or being bought.
Another area where taxes are paid in lieu of use is on property ownership and use. In this case
tax is collected in form of stamp duty on purchase of houses, on certain documents of titles
during certain financial translation or in general, property tax may be fixed to finance certain
public services that are associated with certain or specified properties (e.g. Security, street
lights, schools etc)

-In conclusion benefit taxes are considered to be suitable because the tax burden is placed on
the shoulder of the persons who benefit from the use of a specified good or services.

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NatalieR answered the question on June 22, 2022 at 09:31