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August 17, 2018 

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LEVERAGED BUYOUT: A method of corporate takeover or merger popularized in the 1980s in which the controlling interest in a company's corporate stock was purchased using a substantial fraction of borrowed funds. These takeovers were, as the financial-types say, heavily leveraged. The person or company doing the "taking over" used very little of their own money and borrowed the rest, often by issuing extremely risky, but high interest, "junk" bonds. These bonds were high-risk, and thus paid a high interest rate, because little or nothing backed them up.

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BENEFIT PRINCIPLE:

A taxation principle stating that taxes should be based on the benefits received. The benefit principle works from the proposition that those who receive the greatest benefits should pay the most taxes. The benefit principle is commonly used for near-public goods such as highways, libraries, college, and national parks. This is one of two taxation principles. The other is the ability-to-pay principle, which states taxes should be based on income or the ability to pay taxes.
The benefit principle states that taxes should be based on the benefits received, that is, those who receive the greatest benefits should pay the most taxes. On the surface, this principle is quite logical and easily justified. The people who benefit from public goods are logically the ones who should pay for their provision. Drivers should pay for highways, library patrons should pay for libraries, students should pay tuition, camping enthusiasts should pay for national parks, and the list goes on.

However, the benefit principle does not work well for the efficient provision of public (and near-public) goods. Due to nonrival consumption, such goods are efficiently allocated with a zero price. If those who benefit directly from a public or near-public good pay a price equal to the value derived, as would be the case for private goods, then the "quantity demanded" declines and so too does the overall level of benefit generated. This is not efficient.

From the Market Side

The benefit principle is consistent with the market side of resource allocation, and is thus quite appealing to both economists and the general public. If Duncan Thurly never uses the Shady Valley Municipal swimming pool, then why should he pay for it?

This principle of tax fairness is most often applied to near-public goods that are characterized by nonrival consumption and the ability to exclude nonpayers, such as turnpikes, college education, and public parks. Because nonpayers can be excluded from consuming near-public goods, tax payments (entrance fees, tuition, etc.) can be based on the benefits received. It seems reasonable and fair that if nonpayers CAN be excluded from consumption, then they SHOULD be excluded. It seems reasonable and fair that those who benefit most from government services, those who are willing to pay for government services, should be the primary source of paying for these services.

What About Efficiency?

There is, however, a major problem with the benefit principle. It does not work well for the efficient provision of either public or near-public goods. Due to nonrival consumption, both public and near-public goods are efficiently provided at zero cost, at zero price, to members of society. Just because governments CAN charge for near-public goods, doesn't mean they should. If those who benefit directly from a public or near-public good pay a price equal to the value derived, as would be the case for private goods, then according to the law of demand the "quantity demanded" declines and so too does the overall level of benefit generated. This is not an efficient outcome.

While the benefit principle is commonly used for near-public goods, taking this approach for public goods is exceedingly difficult. Due to the inability to exclude nonpayers from consuming public goods, identifying the benefits received, which would then be the basis for setting the amount of the tax, is virtually impossible. While everyone benefits from national defense, does everyone benefit equally? If not, then who benefits more? And can this be translated into different tax payments?

Ability-to-Pay Principle

An alternative to the benefit principle is the ability-to-pay principle, which states that taxes should be based on the ability to pay taxes, that is, those who have more income should pay more taxes. This principle also makes a great deal of sense, especially for the provision of public goods that are consumed by all. If everyone benefits from public goods, without exclusion, then everyone should pay. However, not everyone CAN pay, so those who CAN afford to pay, need to bear the burden.

Because taxes are a means of transferring the purchasing power of income to governments, the ability to pay is based on income. Those who have more income can afford to pay more taxes, that is, they have a greater ability to pay.

<= BEHAVIORAL ALTERNATIVESBILATERAL MONOPOLY =>


Recommended Citation:

BENEFIT PRINCIPLE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: August 17, 2018].


Check Out These Related Terms...

     | tax equity | ability-to-pay principle | taxation principles | taxation basics | horizontal equity | vertical equity | tax proportionality | proportional tax | progressive tax | regressive tax | tax effects | revenue effect | allocation effect | tax efficiency | tax incidence | tax wedge | deadweight loss |


Or For A Little Background...

     | taxes | government functions | efficiency | equity | distribution standards | public finance | allocation | normative economics | economic goals | public goods | near-public goods | consumption rivalry | nonpayer excludability |


And For Further Study...

     | public choice | good types | market failures | public goods: demand | public goods: efficiency | tax multiplier | personal tax and nontax payments | transfer payments |


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