Finance

Cost of Service Theory of Taxation and Its Criticisms

In a democratic country, the policies of the Government should be based on the principle of justice otherwise the people will protest against the unjust policies of the Government. The taxation policy of the Government should be based on justice and equity. How justice can be achieved is a very crucial element of taxation system. A number of theories have been put forward by different economists explaining how justice in taxation can be achieved among which Cost of Service Theory of Taxation is an important theory and is discussed as follows-

Cost of Service Theory of Taxation:  This theory implies that the Government should tax the citizens according to the cost of service rendered by it. The Government renders certain services to citizens and the cost of such services should be collectively met by the citizens The tax, an individual should bear, must be equal to the cost of benefit be receives.

Criticisms of Cost of Service Theory or Taxation: The theory is also subjected to several criticisms by many economists-

 Firstly, finding out total cost of services rendered by the Government is very difficult and therefore, the question of distribution of total cost among citizens is not so easy to solve.

 Secondly. if we presume that the total cost of services can be determined, the next difficulty is how to divide the cost of the services among individuals.

 Thirdly, if this theory is followed in the modern welfare state, the poorer will have to pay more taxes because they enjoy more benefits. Hence, it is opposite to the principle of justice.

 Fourthly and Finally, the cost of the services rendered depends very much on the efficiency of the administrator. If the administrator is efficient, the cost would be lower and if the administrator is inefficient, the cost of the benefit would be higher.

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