- Maximum freedom of choice consistent with the freedom of others
- Optimum level of living standard in terms of available resources and technology in consistent with the consumer and factor owner’s preferences and
- Distribution of income in conformity with the standards of equity currently accepted by the society.
Strength of the Principle
- The principle is based on the assumption that benefit from government services justifies tax imposition.
- Since the principle considers both the income and expenditure of government, and so determine the size of government expenditure and tax shares on it at the time, making government cautious in maintaining fiscal balance as far as possible.
- The principle is practically applied in cases where benefit from government services can be individualized, and is in practice in the form of fees or charges.
Weaknesses or Limitations of the Principle
- Contribution to the government services on the basis of benefit is actually not a tax, rather it is like a price.
- In general cases, benefit from government services cannot be individualized.
- The principle does not incorporate the modern role of taxes in maintaining economic stability, promotion of economic growth and distributive justice.
- It is questionable to assume the income received by individuals is only because of the benefit from government services.
- It doesn’t incorporate the externalities of some public goods.
Ability-to- pay Principle
Index of Ability-to-Pay
- Property or Accumulated wealth: Prior to the industrial revolution and development of monetization, property or accumulated wealth was considered the best index of ability. Wealth was accepted as the better index than the income because wealth is not only the source of income but also an indicator of one's social status, power and economic security. Property reflects additional source of income. It is also accepted that the inherited property has a higher ability to pay tax than that from personal efforts. However, with the progress of industrial society and development of monetization, there has been a shift from property to income as the best index of ability.
- Income: Income is universally accepted as the best index of one’s ability. Musgrave emphasized that the relative welfare position on individuals should be measured in terms of their income, and sacrifice is a function of income surrendered for taxation. A family’s well being depends mainly on the income received in a specific time period. Generally, the net income after making allowances to maintain a family in a way as socially accepted is considered as an ability from the taxation point of view. The Classical writers defined taxable income as the clear income, which they meant the income above subsistence level. They advocated complete exemption of tax on low and middle income people and imposition of taxes on higher income people in a proportional rate. And also, imposition of higher rate on unearned income than the earned income, was suggested.
- Consumption expenditure: The pattern of consumption expenditure reflects one’s tax paying ability. So, taxes on consumption expenditure emphasized that the taxable capacity should be defined as the share of one’s consumption out of the national production.
Strengths of the Principle
- This principle is justified on three grounds. The first is the ability as the basis of taxation and is quite justifiable.
- The second is the equality in sacrifice by all taxpayers which is also quite justifiable.
- Thirdly, the principle is justified as an approach for promoting distributive justice in the society.