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.