Taxes Linking Private Benefits to Social Costs — A Preliminary Thought

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In explaining the functions of taxes, I have expanded what is really only one point into two more points.

The generic point is that taxes ration purchasing power to regulate the relative availability of resources to government and the non-government sector, respectively. Taxes take money out of the non-government sector, reducing its ability to spend.

Two more aspects are related to this, being just special cases of the rationing function of taxes:

(1) By increasing or lowering taxes, the non-government sector may be left with more or less purchasing power. Thus taxes may be used to encourage economic activity, providing more purchasing power to support it. Equally, taxes may be used to put a break on economic activity by contracting purchasing power, curbing spending by the non-government sector and hence leaving less money to fuel the sales on which capitalism runs.

(2) A more sophisticated point, perhaps: There may be a divide between private benefits and social costs. For instance, government may  provide the means to build a road network, which, however, is largely used by owners of cars who derive a huge private benefit from it without having contributed to its provision. 

One might argue that a government with substantial fiscal space (leeway for spending to create full employment) might shoulder the cost of creating the road network without having to financially constrain any players of the non-governmental sector — in other words: provide a road network for free.

Why do governments in this position still charge members of the non-government sector with taxes like a petrol tax?

Functionally speaking, one may interpret a petrol tax as a means of limiting the purchasing power of some members of society according to the demands that they are making on social resources overall.

Taxes serve, among other things, to restrict purchasing power of the non-government sector so as to leave part of the pie of an economy's output for the state.

While government does not need tax to finance its spending, it does require taxes to hinder the non-government sector from buying all or too much of what the economy offers relative to the resources that government needs in order to fulfil its public purposes.

So one may ponder which groups of the nongovernmental sector deserve to be more heavily restrained in their ability to exercise purchasing power than others. Part of the answer might be: those who benefit privately from using the road network but do not incur corresponding private costs, may justly be required to accept a restraint on their purchasing power that those who do not benefit from the road network are not asked to put up with.

Creating a road network uses up social resources that cannot be employed for other purposes. So the beneficiaries of this social project are really being privileged at the expense of potential beneficiaries of social projects that had to be foregone. The beneficiaries may just as well be subjected commensurately to the purchasing power restraint that needs to be imposed on the non-government sector so that the state has sufficient resources to live up to its mandate.

We might argue that requiring members of society — some of them or all, as the case may be — to curb their purchasing power is a cost levied on society, i. e. a social cost. This social cost ought to be allocated, if possible, to those who benefit disproportionately from the benefits created by incurring the social cost.