AP MicroeconomicsPublic Finance & Taxation
Benefit Principle vs. Ability-to-Pay Principle
The benefit principle taxes people according to the public services they use; the ability-to-pay principle taxes them according to their capacity to bear the burden.
These are the two main equity rationales for how to distribute taxes. The benefit principle (e.g., gasoline taxes funding roads) links payment to consumption of a public good, but fails for services like welfare whose users can least afford to pay. The ability-to-pay principle (e.g., progressive income tax) bases liability on income or wealth and underlies the ideas of horizontal equity (equal treatment of equals) and vertical equity (more from those with greater means).