Traditional principles Traditional principles of Public Financeof Public Finance

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The Fundamental The Fundamental Fiscal AsymmetryFiscal Asymmetry

The focus is on “principle of taxation” rather than The focus is on “principle of taxation” rather than on “principle of expenditure”.on “principle of expenditure”.

How much tax load should be?How much tax load should be? How the total resources of the economy should How the total resources of the economy should

be divided between the public and the private be divided between the public and the private sector.sector.

Three principles of taxation:Three principles of taxation: Principle of horizontal equity.Principle of horizontal equity. The ability –to-pay principle.The ability –to-pay principle. The benefit principleThe benefit principle

Principle of Horizontal EquityPrinciple of Horizontal Equity

Equals should be treated equally.Equals should be treated equally. Some difficulties with the application of Some difficulties with the application of

this principle.this principle. Individual with stronger preference for Individual with stronger preference for

leisure bear light tax.leisure bear light tax.

The Ability –to-Pay PrincipleThe Ability –to-Pay Principle

Unequal should be treated unequally.Unequal should be treated unequally. To what extent shall discrimination in tax To what extent shall discrimination in tax

rates among separate groups of rates among separate groups of population be accepted? population be accepted?

High income groups pay proportionately High income groups pay proportionately more than the lower income group. more than the lower income group.

justification of progressive tax:justification of progressive tax: Principle of minimum aggregate sacrifice Principle of minimum aggregate sacrifice

The benefit principleThe benefit principle

Tax should be based on the benefits received Tax should be based on the benefits received from the enjoyment of public services.from the enjoyment of public services.

The benefit principle of taxation should never be The benefit principle of taxation should never be stated in total benefit. To do this is to confuse stated in total benefit. To do this is to confuse the value in use with value in exchange.the value in use with value in exchange.

Taxes should be allocated among separate Taxes should be allocated among separate individual on the basis of marginal benefit individual on the basis of marginal benefit received. received.