Traditional principles of Public Finance

1. Traditional principles of Public Finance 7

2. The Fundamental Fiscal Asymmetry • The focus is on “principle of taxation” rather than on “principle of expenditure”. • How much tax load should be? • How the total resources of the economy should be divided between the public and the private sector. • Three principles of taxation: • Principle of horizontal equity. • The ability –to-pay principle. • The benefit principle

3. Principle of Horizontal Equity • Equals should be treated equally. • Some difficulties with the application of this principle. • Individual with stronger preference for leisure bear light tax.

4. The Ability –to-Pay Principle • Unequal should be treated unequally. • To what extent shall discrimination in tax rates among separate groups of population be accepted? • High income groups pay proportionately more than the lower income group. • justification of progressive tax: • Principle of minimum aggregate sacrifice

5. The benefit principle • Tax should be based on the benefits received from the enjoyment of public services. • The benefit principle of taxation should never be stated in total benefit. To do this is to confuse the value in use with value in exchange. • Taxes should be allocated among separate individual on the basis of marginal benefit received.