![]() This chapter considers these principles and concludes that the ability to pay criterion is the most widely used. Yet another method is optimal taxation that emphasises the efficiency criterion with built-in subsidies for the poor primarily through the expenditure side of the budget. Another method is taxing according to the ability to pay of a taxpayer that results in higher taxation as incomes rise. It does not recognise equity as a principle but has certain advantages such as transparency. Under the benefit principle, taxes are seen as serving a function similar to that of prices in private transactions that is, they help determine what activities the government will undertake and who will pay for them. One is the benefit principle, that is, a tax should be collected from a taxpayer in reflection of the benefit he derives from a public service. The benefits-received principle of taxation refers to a theory of income tax fairness whereby citizens who use or benefit from certain government goods and services pay taxes for them in equal. ![]() There are alternative criteria behind how taxes are imposed. The design of taxes should prevent worsening the prevailing distribution of income in the population. This indicates that the tax suffers from ‘vertical inequity’. Also, a tax may exacerbate the inequity that already exists in the income distribution in the economy. Thus, a tax could be inequitable across different consumers and producers in the economy, that is, it may suffer from ‘horizontal inequity’. ![]() Entities equally placed prior to the imposition of a tax may find themselves to be unequally affected by the imposition of the tax.
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