Revisiting the Classical View of Benefit-based Taxation

Abstract

This article incorporates into modern optimal tax theory the classical logic of benefit-based taxation in which an individual's benefit from the activities of the state is tied to his or her income-earning ability. First-best optimal policy is characterised analytically as depending on a few potentially estimable statistics. Constrained optimal policy, with a Pareto-efficient objective that trades off this principle and conventional utilitarianism, is simulated using conventional constraints and methods. A wide range of optimal policy outcomes can result, including those that match well several features of existing policies. This analysis thereby contributes to the theory of positive optimal taxation.