Benefit Principle

Meaning

According to this principle, the burden of taxation should fall on the people according to the
benefit received by them from the state. Every citizen should be called upon to pay the taxes
in proportion to the benefits derived by him from the services rendered by the government.
The idea behind this principle is this that the public pays taxes in the form of return of the
benefits conferred upon them by the government. The principle naturally proclaims the
justice of do not take than to give. In other words, the collective payment of taxes by the
public should not exceed the value of benefits conferred upon them by the government. It is
for the collective benefit that the taxes are levied, not for the individual benefit. The benefit
approach has two implications : firstly, benefit is used as a justification for taxation and
secondly, it serves as a standard for apportioning tax burdens.

Advantages or Merits

The advantages or merits of the benefit principle of taxation are as follows :

(i) The basic merit of the benefit principle is that it is based on the assumption that
the benefits conferred by the public services justify the imposition of taxes to pay
for them.
(ii) The benefit principle combines both the income and expenditure sides of the
budget processes and thus determines simultaneously both the public services as
well as tax shares.
(iii) Benefit principle is applicable to those cases where the benefit received by an
individual can easily be measured, e.g., electricity, transport services etc.
(iv) Benefit principle may be favoured from the point of view of incentive. The
alternative principle, i.e., ability to pay principle may discourage economic
incentive; as penalises those who successfully earn high incomes and accumulate
large amount of wealth. The benefit principle may not create such situation.
(v) The benefit principle may be used by local government to determine special
assessment from the owners of the properties who are benefited from the local
public works.

Disadvantages or Criticism

In spite of the above merits, the benefit principle has been criticised on the following
grounds:

(1) There is no accurate measurement of the benefit conferred upon the people. How could
we measure the benefit conferred upon us by the government ? For example, how much
benefit an individual receives from army, police, educational institutions, roads etc. cannot be
exactly estimated.

(2) In a modern welfare state, the poorer sections benefit more than the richer sections from
the government services. If this theory is to be accepted, it would imply that the poorer

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sections should bear a heavier burden of taxation than the richer sections because the former
benefit more than the latter from government services. This is clearly unjust and cannot be
acceptable.

(3) The rich people have more capacity to pay taxes than the poor; but according to this
principle the per capita tax burden upon the rich and the poor is the same. This means
regression taxation. But regression taxation is not desirable. Moreover, if this principle is
applied, pensioners will have to return all the money that they get as pension from the
government. Hence this principle cannot be accepted.

(4) If this principle is applied, the government may fail to achieve the objective of social
welfare in a welfare state, because it may not undertake several welfare activities which are
generally performed by the government for the social welfare of the people, e.g., free medical
aid, free education, poor relief works etc. as the poor may not be able to pay taxes on the
basis of benefit. From this point of view also this principle is not justified and hence not
applicable.

(5) The benefit principle cannot solve the problem of distribution and stabilisation which are
the important aspects of public economy. For example, taxation based on benefit principle
cannot be used to bring about a better distribution of income or stabilise the economy.

From the above study, we conclude that the benefit principle cannot be used as the basis for
framing taxation structure, because in the modern welfare state it is neither desirable nor
justified that the poor people should be benefited from the service in proportion of their
incomes to their tax payments. Buchler has rightly remarked, “It must be concluded,
therefore, that the benefit principle, however unsatisfactory it may be as a standard by which
to apportion taxes, does leave an important influence on taxation.”