Benefit Theory of Taxation and Its Limitations

Benefit Theory of Taxation: This theory explains that every citizen should be called upon to pay taxes in proportion to the benefits derived by him from services provided by the Government. It is implied that the state provides certain facilities to its civilians who should, therefore, contribute to the cost or value of these facilities in proportion to benefits received by them. The more the benefit a citizen derives, the more taxes he should bear, is the main assumption of the theory.

 The Benefit Theory of Taxation justifies the payment of taxes. It also measures benefits received by the individuals in the case of certain special taxes such as petrol tax, betterment tax etc.

 Limitations of Benefit Theory of Taxation. The theory has been subjected to various criticisms.

 (1) Firstly. the assumption that the tax should be paid by an individual in proportion to benefits conferred by the State on that individual, is quite unrealistic because the benefits derived cannot be correctly measured in terms of money. Benefit is purely a subjective matter and there is no scientific way to measure the magnitude of benefit and its money value.

 (2) Secondly. if benefits accrued to an individual is the basis of taxation, the poor must pay higher taxes because in a welfare State the poor get more benefits than the rich from the expenditure of the Government. This is clearly unjust and as such an unacceptable proposition.

 (3) Thirdly. it is also very difficult to determine under this theory what proportion of the general benefits accrue to particular individuals. Government is for civilized existence and there is, therefore, no basis for valuing the services which the State renders.

 (4) Fourthly. most of the services provided by the State are indivisible and beneficiaries are unidentified. For example, it is not possible to divide the benefits of national defence, etc.

 (5) Fifthly. certain benefits accrue only to definite persons and in definite proportion. If this principle is followed, the whole of the benefit, they should return to the State as taxes. For example; pension paid to retired servants, definite and clear enough and therefore, they should offer the whole of their pension as taxes.

(6) Finally, the equitable distribution of wealth, the main objective of most of the modern Governments, will be defeated if this principle is followed.

The above description makes it amply clear that the benefit principle cannot ensure justice in the distribution of burden of taxes among different sections of the society.

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