The benefit principle is a concept in the

theory of taxation Several theories of taxation exist in public economics. Governments at all levels (national, regional and local) need to raise revenue from a variety of sources to finance Public expenditure, public-sector expenditures. Adam Smith in ''The Wealth ...

from

public finance Public finance refers to the monetary resources available to governments and also to the study of finance within government and role of the government in the economy. Within academic settings, public finance is a widely studied subject in man ...

. It bases taxes to pay for public-goods expenditures on a politically-revealed willingness to pay for benefits received. The principle is sometimes likened to the function of prices in allocating

private good Private or privates may refer to: Music * "In Private", by Dusty Springfield from the 1990 album ''Reputation'' * Private (band), a Denmark-based band * "Private" (Ryōko Hirosue song), from the 1999 album ''Private'', written and also recorded ...

s. In its use for assessing the

efficiency Efficiency is the often measurable ability to avoid making mistakes or wasting materials, energy, efforts, money, and time while performing a task. In a more general sense, it is the ability to do things well, successfully, and without waste. ...

of taxes and appraising

fiscal policy In economics and political science, fiscal policy is the use of government revenue collection ( taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variab ...

, the benefit approach was initially developed by

Knut Wicksell Johan Gustaf Knut Wicksell (December 20, 1851 – May 3, 1926) was a Swedish economist of the Stockholm school. He was professor at Uppsala University and Lund University. He made contributions to theories of population, value, capital and mon ...

(1896) and Erik Lindahl (1919), two economists of the Stockholm School. Wicksell's near-unanimity formulation of the principle was premised on a just

income distribution In economics, income distribution covers how a country's total GDP is distributed amongst its population. Economic theory and economic policy have long seen income and its distribution as a central concern. Unequal distribution of income causes e ...

. The approach was extended in the work of

Paul Samuelson Paul Anthony Samuelson (May 15, 1915 – December 13, 2009) was an American economist who was the first American to win the Nobel Memorial Prize in Economic Sciences. When awarding the prize in 1970, the Swedish Royal Academies stated that he "h ...

, Richard Musgrave,Bernd Hansjürgens, 2000. "The Influence of Knut Wicksell on Richard Musgrave and James Buchanan", ''Public Choice'', 103(1/2), pp
95
116. and others. It has also been applied to such subjects as tax progressivity, corporation taxes, and taxes on property or

wealth Wealth is the abundance of valuable financial assets or physical possessions which can be converted into a form that can be used for transactions. This includes the core meaning as held in the originating Old English word , which is from an ...

. The unanimity-rule aspect of Wicksell's approach in linking taxes and expenditures is cited as a point of departure for the study of

constitutional economics Constitutional economics is a research program in economics and constitutionalism that has been described as explaining the choice "of alternative sets of legal-institutional-constitutional rules that constrain the choices and activities of econom ...

in the work of

James Buchanan James Buchanan Jr. ( ; April 23, 1791June 1, 1868) was the 15th president of the United States, serving from 1857 to 1861. He also served as the United States Secretary of State, secretary of state from 1845 to 1849 and represented Pennsylvan ...

Overview

:Thus, considered in themselves, in their own nature, in their normal state, and apart from all abuses, public services are, like private services, purely and simply acts of exchange. - Frédéric Bastiat The benefit principle takes a market-oriented approach to taxation. The objective is to accurately determine the optimal amount of revenue that should be spent on public goods. * More equitable/fair because taxpayers, like consumers, would "pay for what they get" * Taxes are more akin to prices that people would pay for government services * Consumer sovereignty - specific rather than general...charges are more direct...so the preferences of taxpayers, rather than government planners, are given more weight * More efficient allocation of limited resources...it is less likely that funds will be overinvested in low priority programs. * There's no such thing as a free lunch - taxpayers would have a better understanding of the costs of public goods * Provides the foundation for voluntary exchange theory.

Examples

Here are a few of the public services that are currently funded, in some part, on the basis of the benefit principle... * Public college tuition (only paid by the people who attend public colleges) * National park admission fees (only paid by the people who visit public parks) * Fuel taxes (only paid by the people who purchase fuel) * Bus fares (only paid by the people who take the bus) * Bridge tolls (only paid by people who use the bridge)

Passages

:Until people are made to bear the full costs of their decisions, those decisions are unlikely to be socially sound, in this as in other areas of public policy. - Bird, Richard M. (1976). ''Charging for Public Services: A New Look at an Old Idea'' :The doctrine of consumer sovereignty is applied to the provision of social goods in so far as the consumer buys national defence, police service, fire protection and electricity or water supply from the public sector of his own choice and according to the benefits received just as he buys food, clothes, fuel, tooth brushes and automobiles from the private producers. - P.C. Jain (1989), The Economics of Public Finance, 2nd ed., v. 1, p
63.

Criticism

The

free-rider problem In economics, the free-rider problem is a type of market failure that occurs when those who benefit from resources, public goods and common pool resources do not pay for them or under-pay. Free riders may overuse common pool resources by not ...

is the primary criticism given for limiting the scope of the benefit principle. When information about marginal benefits is available only from the individuals themselves, they tend to under report their valuation for a particular good, this gives rise to the preference revelation problem. Each individual can lower his tax cost by under reporting his benefits derived from the public good or service. One solution would be to implement

tax choice In public choice theory, tax choice (sometimes called taxpayer sovereignty, earmarking, participatory taxation or fiscal subsidiarity) is an emerging type of citizen sourcing in which individuals or groups of taxpayers decide how to allocate par ...

. If taxpayers had to pay taxes anyway, but could choose where their taxes went (without the possibility of secret rebates or similar), then they would have no incentive to hide their true preferences.The Economics of Earmarked Taxes
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References

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Overview

Examples

Passages

Criticism

See also

References

Further reading