Theories of taxation

Governments at all levels (national, regional and local) need to raise revenue from a variety of sources to finance public-sector expenditures.

Adam Smith in The Wealth of Nations (1776) wrote: In modern public-finance literature, a whole economy of the tax system has developed (tax system economics), which can be defined as "the overall management of public revenue of a state or integration grouping's public revenues and expenditures in order to shape smart economic policies that stimulates economic growth and development and safeguards against functional risks for present and future generations.

Lindahl approached the financing of public goods through the lens of individual benefits, ensuring that the total marginal utility equated to the marginal cost of their provision, thereby addressing the number of public goods.

The necessary and sufficient conditions for such an equilibrium are: Lindahl was deeply influenced by his professor and teacher Knut Wicksell and proposed a method of financing public goods that shows that consensus politics is possible.

In the Lindahl model, if SS’ is the supply curve of state services it is assumed that production of social goods is linear and homogenous.

Equilibrium is reached at point P on a voluntary-exchange basis.The Lindahl equilibrium proposes that individuals pay for the provision of a public good according to their marginal benefits in order to determine the efficient level of provision for public goods.

The Lindahl equilibrium price is the resulting amount paid by an individual for his or her share of the public goods.

The significance of the Lindahl equilibrium is that it satisfies Samuelson's rule and is therefore said to be Pareto efficient, even though there are public goods.

Now consider the demand curve of another person, let’s call it Y. Y sees the vertical axis reversed, with the full price at the bottom and the percentage decreasing as you go up.

Lindahl's tax system must ensure the Pareto optimum of the production of public goods.

If the tax paid by an individual is equivalent to the utility he receives, and if this link is sufficiently good, then it leads to a Pareto optimality.

This means folks near the tower, valuing extra powerlessness, get a better deal, while those away get a worse one because they'd pay more.

The supply curve is shown by a'+b', indicating that goods are produced under conditions of increasing cost.

Although simple in its application, the benefit theory has difficulties:[9] The ability-to-pay approach treats government revenue and expenditures separately.

Taxes are based on taxpayers’ ability to pay; there is no quid pro quo.