The economists have put forward many
theories or principles of taxation at different
times to guide the state as to how justice or equity in taxation can be
achieved. The main theories or principles in brief, are:
(i) Benefit Theory:
According to this theory, the
state should levy taxes on individuals according to the benefit conferred on
them. The more benefits a person derives from the activities of the state, the
more he should pay to the government. This principle has been subjected to
severe criticism on the following grounds:
Firstly, If the state
maintains a certain connection between the benefits conferred and the benefits derived. It will
be against the basic principle of the tax. A tax, as we know, is compulsory
contribution made to the public authorities to meet the expenses of the
government and the provisions of general benefit. There is no direct quid pro
quo in the case of a tax.
Secondly, most of the expenditure incurred by the slate is for the general
benefit of its citizens, It is not possible to estimate the benefit enjoyed by a
particular individual every year.
Thirdly, if we apply this principle in practice, then the poor will have to
pay the heaviest taxes, because they benefit more from the services of the
state. If we get more from the poor by way of taxes, it is against the principle
of justice?
(ii) The Cost of Service
Theory:
Some economists were of the
opinion that if the state charges actual cost of the service rendered from the
people, it will satisfy the idea of equity or justice in taxation. The cost of
service principle can no doubt be applied to some extent in those cases where
the services are rendered out of prices and are a bit easy to determine, e.g.,
postal, railway services, supply of electricity, etc., etc. But most of the
expenditure incurred by the state cannot be fixed for each individual because it
cannot be exactly determined. For instance, how can we measure the cost of
service of the police, armed forces, judiciary, etc., to different individuals?
Dalton has also rejected this theory on the ground that there s no quid pro qua
in a tax.
(iii) Ability to Pay
Theory:
The most popular and commonly accepted principle
of equity or justice in taxation is that citizens of a country should pay taxes
to the government in accordance with their ability to pay. It appears very
reasonable and just that taxes should be levied on the basis of the taxable
capacity of an individual. For instance, if the taxable capacity of a person A
is greater than the person B, the former should be asked to pay more taxes than
the latter.
It seems that if the taxes are levied on this principle as stated above, then
justice can be achieved. But our difficulties do not end here. The fact is that
when we put this theory in practice, our difficulties actually begin. The
trouble arises with the definition of ability to pay. The economists are not
unanimous as to what should be the exact measure of a person's ability or
faculty to pay. The main view points advanced in this connection are as follows:
(a) Ownership of Property: Some economists are of the opinion that ownership
of the property is a very good basis of measuring one's ability to pay. This
idea is out rightly rejected on the ground that if a persons earns a large
income but does not spend on buying any property, he will then escape taxation.
On the other hand, another person earning income buys property, he will be
subjected to taxation. Is this not absurd and unjustifiable that a person,
earning large income is exempted from taxes and another person with small income
is taxed?
(b) Tax on the Basis of Expenditure: It is also asserted by some economists
that the ability or faculty to pay tax should be judged by the expenditure which
a person incurs. The greater the expenditure, the higher should be the tax and
vice versa. The viewpoint is unsound and unfair in every respect. A person having a large family to support has to
spend more than a person having a small family. If we make expenditure. as the
test of one's ability to pay, the former person who is already burdened with
many dependents will have to' pay more taxes than the latter who has a small
family. So this is unjustifiable.
(c) Income as the Basics: Most of the economists are of the opinion that
income should be the basis of measuring a man's ability to pay. It appears very
just and fair that if the income of a person is greater than that of another,
the former should be asked to pay more towards the support of the government
than the latter. That is why in the modern tax system of the countries of the
world, income has been accepted as the best test for measuring the ability to
pay of a person.
Proportionate Principle:
In order to satisfy the idea of justice in taxation,
J. S. Mill and some
other classical economists have suggested the principle of proportionate in
taxation. These economists were of the opinion that if taxes are levied in
proportion to the incomes of the individuals, it will extract equal sacrifice.
The modern economists, however, differ with this view. They assert that when
income increases, the marginal utility of income decreases. The equality of
sacrifice can only be achieved if the persons with high incomes are taxed at
higher rates and those with low income at lower rates. They favor progressive
system of taxation, in all modern tax systems.
