Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

15.1.2 The Cost of Service Principle
This principle suggests that the cost incurred by the 
government in providing public goods to satisfy social wants should 
be regarded as the basis of taxation. 
The cost of service principle implies that every people should 
contribute in taxes the actual cost of public services by which he is 
benefited. Thus, taxes are paid as the cost of services provided by 
the government.
 
Limitations: 
1. Difficulties in measurement of costs and sharing: It is not 
so easy to estimate the cost of government service or social 
goods made available to each individual tax-payer. It is 
difficult to find any exact measurement of the costs and 
sharing of such costs in most of the indivisible public 
services such as defence, police, etc. 
2. No Conformity: It is not in conformity with the definition of 
tax. A tax is not a price. Tax has no quid-pro-quo. 
3. Tax avoidance: The principle seems to apply that the 
people has freedom to refuse the public services offered to 
him and avoid tax payment. 
 
4. Limited scope: According to this principle, only those public 
services are justified for which the public is capable of 
bearing the cost. Hence, this theory, in effect, does not 
justify many social welfare programmes of the government 
such as, the relief works during famines or floods, free 
education, etc., because the beneficiaries of these being 
poor cannot afford to bear their costs.  
 
5. It goes against the norms of welfare. If cost is the base of 
taxation, government cannot provide free education and 
medical care to the poor people. 
15.1.3 The Benefit Principle 
This principle suggests that the burden of taxes should be 
distributed among the tax-payers in relation to the benefits enjoyed 
by them from government services or social goods. In other words, 
those who get more benefits from public goods should pay more 
taxes than others. 
The benefit theory contains the value of service principle. It 
implies that every people should pay tax in proportion to the utility 
he derives from the public goods and services. Thus, those who 
receive more benefits or utility from social goods should pay more 
than others. 

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The benefit approach to taxation was accepted widely 
among the political theorists of the 17
th
century. Taxation was seen 
as a price paid for the protection of life and property. Most of the 
earlier writers accepted the benefits principle and state that the tax 
should be in proportion to the benefit the people derives by way of 
protection. The classical economists considered taxation, especially 
Ricardo, considered public expenditure a wasteful phenomenon 
and supported that: ―The very best of all plans of finance is to 
spend little.
‖ 
At the end of the 19
th
century, the benefit principle was 
revived and reformulated. Taxes were once again regarded as the 
price for public services. For the efficient allocation of resources, 
thus, it was thought that tax should be determined in accordance 
with the benefits received. It was considered that the revenue-
expenditure process of government as a phenomenon of economic 
value and price, on par with the Walrasian system of general 
equilibrium. 
The main difference between the classical and the neo-
classical benefit approach is that while the former postulated 
taxation according to benefit as a standard of justice, the latter 
interpreted the benefit principle, as a condition of equilibrium. In the 
new approach to benefit principle the taxes are to be formulated in 
view of the voluntary tax shares contributed by each tax-payer on 
the basis of his own subjective evaluation of the benefit conferred 
by the public goods.