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Benefit Principle of Taxation (All You Need To Know)

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What is the benefits received principle in simple terms?

How does it work?

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What Is The Benefit Principle of Taxation

The benefit principle of taxation is a taxation theory stating that those who receive the benefits from government expenditure should pay more taxes to reflect the additional benefit they received.

This notion makes sense as it requires that those who “benefit” from governmental expenditures should “pay” taxes in proportion to the benefits they received.

For example, if the government funds the construction of roads or highways, it could have users pay toll fees when using the service to pay for the construction cost.

In this fashion, those who benefit from the service are the ones paying for the cost of the project.

There are two common philosophies that are usually discussed when looking at how must pay taxes:

  • Benefit received principle
  • Ability to pay principle 

The ability to pay principle is the theory where the tax burden should be greater on those who have higher income or more wealth as they have the ability to pay.

On the flip side, the old, the sick, the unemployed will not have the same ability to pay as the rich and wealthy.

The beneift received principle is a philosophy or idea that says that those who receive the benefit of public goods and services should pay for the tax the same way as a private person would be required to pay for the goods and services they buy in private transactions.

Benefit Principle of Taxation Definition

According to Investopedia, the benefits received rule or benefits-received principle is defined as follows:

The two definitions are: (1) The Benefits Received Principle, which is a theory of income tax fairness that says people should pay taxes based on the benefits they receive from the government. (2) A tax provision that says a donor who receives a tangible benefit from making a charitable contribution must subtract the value of that benefit from the amount claimed as an income tax deduction.

As you can see, there are two definitions of the benefits received principle.

The first definition of the benefit received principle is based on the taxation theory of “tax fairness”.

The tax fairness principle is that those who receive benefits from the government should pay in proportion to the benefit they receive.

The second definition of the benefits received principle is more technical representing a “tax provision” relating to how much a taxpayer can deduct (tax deductions) when making charitable donations.

How Benefits Principle of Taxation Works

Let’s see how the benefits principle of taxation works.

The benefits principle of taxation is a principle that views taxation in a similar way as how private individuals and entities establish prices in private transactions.

In a private transaction, companies will undertake business projects that can generate an adequate rate of return, will allocate resources to profitable projects, and will set prices that the market is willing to pay.

Similarly, taxes should serve a similar function as prices in private transactions where governments allocate resources based on how much the project may cost, how much they can collect in taxes, and who will pay for it.

For most public services such as funding the police department, firefighting services, public schools and so on, consumers and taxpayers will not necessarily want to pay for those services (unless they are cut-off from those services somehow).

As a result, it may be difficult for the government to impose specific taxes or levies on public services.

However, if the government finances the building of roads and highways, then it may be easier to use the benefits principle of taxation to specifically charge the users of those roads and highways (toll fees).

Benefits Received Principle Example

Let’s look at benefit principle of taxation examples to better illustrate the concept.

Motor Fuel Levies

The first example of the benefits received tax principle applies to motor fuel taxes.

In essence, those who use their cars as means of transportation will have to pay levies on their motor fuel consumption.

This type of tax is charged to the consumers of motor fuel who are directly receiving the benefits of the motor fuel consumption.

Road-User Fees

Another great example of the benefit principle is when the government charges user toll fees for using a particular highway or road.

In essence, the government funds the building of a highway and charges taxes of those who end up using the highway.

In this fashion, the highway users who are directly receiving the benefit of the new highway will end up funding its construction cost.

Payroll Taxes

Payroll taxes used to finance social security programs can also be viewed as another program where the benefits of the social security program are linked to the amount of money paid by employees.

The link between the individual contributions and the benefits may be weak but you can argue that employees will generally benefit from the social security programs implemented by the government.

Benefits Received Principle Takeaways 

So there you have it folks!

What is the benefits-received principle in simple terms?

In taxation, the benefit principle is the idea that those who benefit from government spending should pay taxes to compensate for the government’s expenditure.

In practice, it’s not easy to apply this principle in regard to all government projects and expenditures.

In essence, most will not be inclined to pay for public services such as the police department and public schools.

Also, some in society will not necessarily have the ability to pay the taxes such as the old, those who are ill, or unemployed (this is a second tax theory referred to as the Ability To Pay Principle).

I hope I was able to answer your question relating to what is the benefits received principle, how it works, and why it’s important.

Good luck!

Now, let’s look at a summary of our findings.

Understanding Benefit Principle of Taxation

  • The benefits principle of taxation is the idea that taxes should be imposed on those who receive the benefits of public goods and services
  • The same way prices are determined in private transactions to those who benefit from the purchase of goods and services, taxes should serve a similar function for public goods and services
  • This benefits principle economics can be contrasted with the “ability to pay principle” which is the idea that those who have more income or wealth should assume a larger share of the tax burden
  • Although the benefits principle of taxation is not easy to apply to all government expenditures and projects, some are quite effective like gasoline taxes and highway toll fees
Ability to pay principle 
Alcohol tax 
Bridge tolls
Bus fares
Consumption tax
Economic growth 
Environment tax 
Flat tax 
Free-rider problem 
Fuel tax
Poll tax
Preference revelation problem 
Public college tuition 
Rational ignorance 
Supply and demand 
Tax choice 
Tax policy 
Tobacco tax 
Toll fees
User charge 
Variable tax 
What are payroll taxes
Willingness to pay
Accelerated deposit rule
Allocation of resource
Charitable donations
Club good
Constructive receipt
Continuity of interest doctrine
Corporate minimum tax
Decentralized knowledge
Dollar voting
Economic inequality
Foot voting
Holding period 
How is excise tax different than sales tax
Opportunity cost
Private foundation 
Progressive taxes
Proof of charitable donations
Regressive taxes 

Editorial Staffhttps://lawyer.zone
Hello Nation! I'm a lawyer and passionate about law. I've practiced law in a boutique law firm, worked in a multi-national organization and as in-house counsel. I've been around the block! On this blog, I provide you with golden nuggets of information about lawyers, attorneys, the law and legal theories. Enjoy!


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