Question

Assess the following four tax policies in terms of the benefits principle versus the ability-to-pay principle. a. A tax on gasoline that finances maintenance of state roads b. An \(8 \%\) tax on imported goods valued in excess of \(\$ 800\) per household brought in on passenger flights c. Airline-flight landing fees that pay for air traffic control d. A reduction in the amount of income tax paid based on the number of dependent children in the household.

Short answer

Answer: Policy C: Airline flight landing fees for air traffic control is considered fair according to both the benefits principle and the ability-to-pay principle.

Step-by-step solution

Policy A: Gasoline tax for road maintenance

Following the benefits principle, this tax policy seems fair because those who use the roads more (and consume more gasoline) will pay more in taxes, which in turn funds the maintenance of those roads. In terms of the ability-to-pay principle, it may not be as fair since people with lower income might rely more on driving and use more gasoline, causing them to pay a larger share of their income in taxes.

Policy B: 8% tax on imported goods valued over $800

Under the benefits principle, this tax policy might not align well since all consumers may not receive equal benefits from the tax on imported goods. However, according to the ability-to-pay principle, this policy can be considered fair because wealthier households are more likely to spend more on imported goods and would, therefore, pay a higher tax.

Policy C: Airline flight landing fees for air traffic control

This tax policy is in line with the benefits principle because those who use air travel (and indirectly create the demand for air traffic control) will bear the cost associated with it. In terms of the ability-to-pay principle, it is somewhat fair as well, since air travel is generally more expensive and utilized by individuals with greater financial resources.

Policy D: Income tax reduction based on the number of dependent children

From the perspective of the benefits principle, this policy may not be as fair since the number of dependent children in a household doesn't directly relate to the benefits they receive from public goods and services. However, according to the ability-to-pay principle, this policy is fair because households with more dependents often have greater expenses, and the tax reduction helps to reduce the financial burden on those families. In conclusion, each tax policy can be viewed from both the benefits principle and the ability-to-pay principle perspectives. Some policies align better with one principle than the other, and it's essential to consider both principles when assessing the fairness of tax policies.