Not surprisingly the ability to pay and the benefits

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Not surprisingly, the ability to pay and the benefits received principles were quickly discovered. Ability to Pay
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This principle states that a taxpayer should pay according to his ability. Ability could be determine by income and if taxes were based solely on ability to pay, rich people would pay much higher proportions of their incomes to the IRS than middle class people, who, in turn, would be paying a much higher proportion of their incomes than poor people. Is this fair? Yes- if we are concerned only with people’s incomes. The rationale for the ability to pay principle is that successive income earned have diminishing income value and so would be used for less desirable consumption. The problem with this principle: What justification is there to punish a man who works hard and have a higher income and subsidize a lazy man with lower income. But, what if some people received more benefits from the proceeds of the tax dollars than other people? E.g. people receiving food stamps or welfare payments. The Benefit Principle It states that those people who benefit most publicly produced goods should pay for their provision, e.g. tolls, gasoline tax, etc. The problem with this principle? It is difficult to determine the benefits arising from the production of a certain good because people benefit without paying for “free riders”. We can’t, however, devise a tax based on both principles since they are apparently mutually exclusive. Unless we have a society in which everyone earn the same income and receives the same government benefits, we will have to do comparison. THE ECONOMIC ROLE OF GOVERNMENT One apparent fact is that the federal government and to a lesser degree, state and local governments have a tremendous impact on our economy. Our analysis, however, will now be confined to the federal government. Provision of Public Goods and Services Most of such goods can’t be provided by the private sector, why? Not profitable. States – public transportation/Federal – Defense Redistribution of Income Rich taxpayer poor welfare recipients or from huge corporations to unemployment benefit recipients. Stabilization Stable prices and low employment (G↑ in depression). The goal of high rate of economic growth.
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