Traditional principles of Public Finance 7 The Fundamental

Traditional principles of Public Finance 7

The Fundamental Fiscal Asymmetry § The focus is on “principle of taxation” rather than § § § on “principle of expenditure”. How much tax load should be? How the total resources of the economy should be divided between the public and the private sector. Three principles of taxation: Principle of horizontal equity. The ability –to-pay principle. The benefit principle

Principle of Horizontal Equity § Equals should be treated equally. § Some difficulties with the application of this principle. § Individual with stronger preference for leisure bear light tax. §

The Ability –to-Pay Principle § Unequal should be treated unequally. § To what extent shall discrimination in tax rates among separate groups of population be accepted? § High income groups pay proportionately more than the lower income group. § justification of progressive tax: § Principle of minimum aggregate sacrifice

The benefit principle § Tax should be based on the benefits received from the enjoyment of public services. § The benefit principle of taxation should never be stated in total benefit. To do this is to confuse the value in use with value in exchange. § Taxes should be allocated among separate individual on the basis of marginal benefit received.