Taxation

Jamaica Taxation

Question

Explore the Ability to pay vs. the benefit principle of taxation and the two concepts of equity which arise from the ability to pay approach

The Ability to pay

The ability-to-pay principle is one of many competing, all argumentative, concepts of a "fair" taxation system. In taxation it maintains/states that taxes should be levied according a taxpayer's ability to pay. This progressive taxation approach places an increased tax burden on individuals, partnerships, companies, corporations, trusts and certain estates with higher incomes. The theory is that individuals who earn more money can afford to pay more in taxes.

Example

In the United States in 2010, a tax rate of 10% applied to incomes between $0 - $8,375; the tax rate increased incrementally up to 35% for those whose incomes were $373,651 or greater. Critics of ability-to-pay taxation state that the progressive tax reduces the incentive to earn more money, and penalizes those whose hard work and ingenuity have helped them earn higher incomes.

Whether this is actually fair, especially as there is no reason to believe the person with the higher income uses more public services and in fact probably uses less, or if it also works as a disincentive for people to try and better themselves more, can be considered.

The benefit Principle

The benefit principle of taxation is based on two ideas. The first and foremost is that those who benefit from services should be the ones who pay for them. The gasoline tax for instance can be used to justify using the benefit principle. In some countries gasoline tax are used to build and maintain roads, because those who buy gasoline are the ones who use the road and at such is a fair way to pay for the service. Secondly, people should pay taxes in proportion to the amount of services or benefits they receive. In such an instance wealthy people should pay higher taxes than poorer people, this is simply because wealthy people benefit more...