M.A.

ECONOMICS PART-II PAPER : Eco-303

Academic Session: 2017-18 Paper-III : PUBLIC ECONOMICS
LESSON NO.12 AUTHOR : DR. ANIL KUMAR JAIN

THEORIES OF TAXATION
12.1 INTRODUCTION
In accordance with the spirit of the age, most of the countries are Welfare
State s and the f unctio ns and re s p onsib i lities of thes e go v ernm ents are
continuously expanding. The states cannot perform functions in the absence of
finance or revenue which can be raised from various sources such as taxes, loans,
creation of money, profits of public undertakings etc. As you have read in lesson
No. 7, of all these, most important source of revenue in modern times is taxation. It
is clearly a desired characteristic of taxes that they should be fair. Apart from the
ethical desirability of equity, there is need on practical grounds also, that taxes
should be acceptable to tax paying public, otherwise “the consequences may range,
from wide-spread evasion to revolution.”1 Mrs. Ursula Hicks has emphasized in
this connection that, “tax bankruptcy was an important contributory factor to the
fall of Roman Empire. Unjust and inefficient taxes set France aflame. An important
part of the explanation of Germany’s failure in the War 1914-18 was her antiquated
tax structure.....inefficient taxes helped to lose Britain the American colonies.”2
This explains that the burden of taxation should be just and equally
distributed.
There is no doubt that in a democracy taxes cannot be imposed unless they
meet the approval of a majority of the representatives of the people but once they
are levied and an individual falls within its range, he does not have the choice of
paying or not paying. “Because of this compulsory aspect, the collection of taxes
may have very significant effect upon the behaviour of the individuals and in the
functioning of the economy, which must be taken into consideration in the selection
of taxes, if tax structure is not to interfere with the attainment of economic goals of
society.”3Furthermore, if the goals of society are to be realised, the distribution of
tax burden among various persons must conform to the accepted standard of equity.
This depends upon value judgement relating to the overall pattern of income
distribution which is regarded as desirable by the society. In other words, the most
fundamental problem of taxation is the problem of justice. Everybody expects the
Finance Minister to so arrange his taxation proposals as to ensure that the burden
falls on those who can bear it.

1. Charles, M. Allan : The Theory of Taxation, Penguin Modern Economics, 1971, p.33
2. Mrs. Ursula Hicks : Public Finance, 1948, p. 10
3. John F. Due : Government Finance 1963, P-102.
 The welfare approach to distribution of tax burden grew out of the equity
view. The problem of equity has two major aspects :
The first is HORIZONTAL EQUITY that people in similar circumstances should
be treated similarly.
The other is VERTICAL EQUITY that people in dis-similar circumstances
should be treated differently.
There is almost unanimity among economists that persons in the same
circumstances should be taxed to the same extent, but the treatment of persons
in dissimilar circumstances poses complex problems. While vertical equity has
great merit as an ideal but it is very hard to achieve it in practice. This is because
there are many views held as to what is the appropriate degree of inequality with
which persons in dissimilar circumstances should be treated.
There are several approaches to the theory of taxation. The Benefit and
Ability to Pay approaches are the subject matter of this lesson.
12.2 The Benefit Approach or Voluntary Exchange Principle
In the Benefit Approach, the relation of taxpayer and government is seen
in quid-pro-quo term. Since the relation is one of exchange, the benefit approach
involves the application of the rules of one sector to the entire government sector.
Benefit principle is based on the idea that people should pay taxes based on the
benefits they receive from government services. It tries to make public goods similar
to private goods. The more you use, the more you pay. According to this theory, the
total tax burden should be so distributed among the people that each of them pays
that proportion of the total expenses, which his benefits bear to the total benefits of
the society. Adherents of this approach feel that equity is best served if the
beneficiaries of the government expenditure pay for these benefits through taxation
in proportion to the benefit they enjoy and it is unfair to make some persons pay for
what others get. The second advantage of the benefit approach is that it gives
simultaneous determination of the tax level and of the level of government
expenditure incurred. This happens in the same way as in the market where the
prices that people are willing to pay and the amounts that they are willing to buy
are determined simultaneously. So, this can be called a willingness to pay theory.
In other words, the benefit approach has the advantage of providing a simultaneous
determination of public service and the tax shown, thus combining both sides of
the budget process.4 In short, tax liability under the benefit approach depends
upon the taxpayer’s estimate of how much social goods are worth to them. The
taxpayer’s willingness to pay is determined by his desire for the social goods and
by his income. “To the extent that the rich are willing to pay more for the social
goods, the benefit approach encompasses an estimate of....the taxpayer’s estimate
of his true ability to pay.”5

4. Richard A. Musgrave : The Theory of Public Finance, International Student edition

5. Ibid.
Obviously, such a principle has in practice, serious limitations. Sometimes, those
who are least able-to-pay taxes need most of the state's aid.

In analysing the benefit approach, several models have been developed and
the important among them being : 1. Lindahl Model and 2. Bowen Model have been
discussed here:
12.2.1 The Lindahl (1989)Model
Lindahl tries to solve three problems :
- Extent of state activity
- Allocation of the total expenditure among various goods and services.
- Allocation of tax burden.
This model makes four assumptions. First, that there is one social good.
Secondly, that the social good is enjoyed by two tax-payers A and B. Thirdly, the
distribution of income is ideal, and fourthly, that the social good is produced under
conditions of constant costs.

Units of Social Goods

In Fig (1) on the horizontal axis, we measure the quantity of social good. On the left
vertical axis we measure the percentage of total cost contributed by person A and
on the right vertical axis, we measure the percentage of total cost contributed by
person B. The curve aa is A’s demand schedule.
Taxpayer A is willing to pay cent percent for output OG : he is willing to pay
half of the cost for output OC and so forth. The curve bb is a similar demand schedule
for person B. The schedule bb may be viewed as B’s demand schedule for social
goods or as supply schedule of social goods to A. Thus, B is willing to contribute
cent per cent for output OU, which amount is available free to A. Similarly, B is
willing to contribute 75 percent for OF which amount is available to A at 25 percent
of the cost, and so forth.
The equilibrium output remains at OE, where aa and bb intersect, and both
shares add up to cent per cent. Here A contributes ED percent and B contributes
DH percent. For any amount in excess of OE, the combined cost shares fall short
For output OC, for instance, the combined contribution falls short of the total by
JM percent. The amount OC cannot be supplied and output must be reduced. For
any supply below OE, both A and B are willing to offer better than that the other
demands. At ON, for instance, total offer exceeds cost by RX percent. If A contributes
fraction NR, supply ON will be available to B at T, even though he would be willing
to pay TX if needed. If B contributes TX, A will purchase this amount for NX, even
though he would be willing to contribute NR. If A contributes NX, and B contributes
TR, both pay less than they would be willing to contribute. From this Lindahl
concludes that both parties will be ready to pay for larger amount until OE is
determined by a competitive process similar to that which applies in the private
market. Equilibrium is reached at point D on a voluntary exchange basis.
Lindahl assumes that this entire process occurs against the background of a
given proper state of distribution. His concern is with the problem of the allocation
branch only. Given a proper distribution of income to begin with, Lindahl holds,
that resulting equilibrium at OE is an optimum solution, one that complies with
both the benefit and ability-to-pay principles. The benefit principle is met because
each tax payer equates his marginal rates of substitution between goods supplied
for the satisfaction of social and private wants and total utility derived from public
service is maximized thereby. The ability-to-pay principle is satisfied because each
taxpayer purchases social goods at a different price, reflecting his particular ability
to pay. This seems to Musgrave a misleading interpretation. In his view the most
that can be said is that this solution is compatible with the ability-to-pay principle,
since the resulting act of prices is based on the proper distribution.
12.2.2 The Bowen (1943) Model
The Bowen Model is perhaps simpler. It has the virtue of easy adoption to
show what happens under the likely conditions when social goods foregone. This
is illustrated in Fig. (2).

A
 Fig. 2 may be adopted to conditions of constant cost changing the principle
of Lindahl's arguments.
Here we have one social good and two taxpayers/consumers A and B. The
demand curves of consumers A and B respectively for social goods are represented
by a and b and the curve a + b is the total demand curve for social goods, the sum
of a and b. The supply curve of social good is represented by SS showing that
these goods are produced under conditions of increasing costs. But the cost of
producing social goods is the value of the private goods foregone to make their
production possible. This means that the curve a + b although being the supply
curve of social goods, is also the demand curve of private goods.
The intersection of the cost and demand schedules for social goods at T
gives us the determination of how a given national income, OK, should, according
to the consumer-tax payer’s desires, be divided between the social goods and
private goods. There should be OE of the social goods and EK of private goods.
But simultaneously, the tax shares of A and B are determined according
to the consumer’s own valuation of the benefits they receive from social goods.
The total tax requirement is represented by area ATEO in Fig. 2. The shares of A
and B are found by reference to a and b. At the level of provision of social goods,
A is willing to pay GCEO and B is willing to pay FDEO. But ATEO = GCEO + FDEO.
Musgrave also favours the Bowen Model because of its easy generalization of the
real world.
To sum up, the great virtue of the benefit approach is the simultaneous
determination of both tax shares and extent of the provision of social goods. This is
thought desirable by many, as it means the consumers/tax payers' preferences are
the important criteria and the discretion of political decision-makers is eliminated.
However, if we look at the benefit principle as an equity rule, there remains the
vital question of just how benefits are to be determined. If we think that benefit
principle is implemented by the market mechanism, we have to make the unrealistic
assumption that the principles of voluntary exchange are applicable to the
satisfaction of public wants.6 In fact, the benefit principle is contrary to the whole
philosophy of the welfare activities of the government where the main objective is
to increase the economic well-being of the lower income group people. If the benefit
rule is followed, it would lead to regressive taxation, as the poor are more in need
of protection.
Limitations of Benefit Approach
Practical application of the benefit approach to taxation also poses a number
of problems. First, the benefit approach limits the scope of government activities.
The government can neither support the poor nor take steps to stabilise the
economy. This implies that many of the services now rendered by the government
should be done away with. Secondly, the benefit theory can be applied only where

6. Richard A. Musgrave : The Theory of Public Finance. P. 63.

the beneficiaries can be clearly identified. This is not true of most public services.
How can we quantify the benefits of national defence or education which give rise
to externalities. Thirdly, the problem of getting people to reveal their preference is
a difficult work. If consumers cannot reveal their preference either because of
ignorance or due to deliberate intention, they must be guessed and this leaves the
authorities with a lot of discretionary power. Fourthly, as Arrow (1963) has pointed
out even if all preferences were revealed willingly, it would still be possible to derive
a social welfare function only if there is transitivity between choices open to them
differently. Fifthly, taxation, strictly in accordance with the benefit principle, would
leave the distribution of real income unchanged.
It follows from the above discussion that the benefit cannot operationally
be used as the basis for taxation, in a world with public goods and externalities
because it is impossible to determine who benefits from most public expenditures
and upto what amounts, apart from the fact that the benefit principle neglects
distributive justice. Only in the case of local authorities; gathered together, some
local rates can be imposed on this benefit theory since beneficiaries can be
identified. This implies that the general benefit tax has theoretical value, but the
specific benefit taxes like tax on petrol, property tax, social security, etc., can be
imposed on goods and services, which are in the nature of private goods, i.e.,
where consumption is wholly rival. But such cases are few and far between. It is,
therefore, agreed that the benefit approach is inadequate in the fiscal system
today.
12.3 The Ability-to-pay Approach
The most important principle of taxation is the Ability-to-pay approach and
it is a progressive taxation principle which treates revenue and expenditure of the
government separately. The government would decide independently about the
size of its expenditure in any year and this would determine what the appropriate
amount of revenue would be. In this case, taxation is not imposed on the basis of
benefit derived by the people, but on the basis of their ability-to-pay. Here there is
no quid-pro-quo relationship between the tax payer and the public authority.
The idea that just taxation is according to faculty or ability-to-pay, is very
old. The argument for progressive taxation, based on faculty, may be traced back
to an essay by Guicciardini published in the first half of the sixteenth century.7
Towards the end of the sixteenth century, Bodin propounded a case for proportional
taxation on the basis of faculty. Since the benefit approach was found to be
theoretically incorrect and practically unworkable, the idea grew that a quite different
principle of taxation was needed and the principle should be such as to treat all
equally under the law. J.S. Mill rejected the benefit principle of taxation as it would
mean that the poor would have to pay most of the taxes since they receive the
major portion of the benefits of the government expenditure. It came to be argued
that “equality in taxation means equality of sacrifice8. Thus, the more or less objective
concept of faculty or ability to pay, as advanced by earlier writers was translated
into the strictly subjective concept of equal sacrifice. Thus, ability-to-pay theory
came to occupy both objective and subjective aspects. Objective aspect consists in
7. Richard A Musgrave : The Theory of Public Finance, International Student edition,
P-191.
8. John Stuart Mill : Principles of Political Economy, ed. W.J. Asoley, 1921- P-804.
deciding by what objectives index ability to pay can be measured. ‘Equal’ in the
equal sacrifice principle needs to be defined in more precise manner and a choice
has to be made about the concept of sacrifice which will be most suited to the rule
of equity in taxation.
Index of Ability-to-pay
The earlier version of the ability-to-pay was formulated in terms of faculty
rather than income. Accordingly, the term ‘faculty’ or ‘ability’ referred in
Elizabethan poor law to the property, and same was the case in the early
legislation passed in the American Colonies.”9 However, with the progress
of the industrial society and increasing monetization, income came to be
regarded generally as a proper index of ability-to-pay. No doubt, debate still
goes on whether proper index of ability-to-pay is given by wealth, consumption
or income. But there is almost unanimity amongst economists that income
is by far the most satisfactory objective index of ability-to-pay, though at
times it needs to be supplemented by other indices as well as to achieve
equity. The concept of income has been developed at length by Henry Simons,
William Vickery and other economists. However, Professor R.M. Haig’s
definition of income as “the money value of the net accretion to economic
power between two points of time”10 may be regarded as a very satisfactory
theoretical definition of income. According to the definition, income is the
algebric sum of.....(1) the person's consumption during the period, and (2)
increase in the net worth.
Concepts of Equal Sacrifice
The Ability-to-pay principle is conceived in terms of sacrifice on the part
of tax-payers. When a tax-payer pays some tax, he sacrifices some utility. The
questions are, what should be the sacrifice of each tax-payer and how should this be
measured? A fair system of taxation based on the ability-to-pay approach is defined as
one where the sacrifices of utility by all tax-payers are equal. In other words, tax-payers
are said to be treated equally if these tax payments involve an equal sacrifice or loss of
welfare. The loss of welfare, in turn, is related to loss of income. If the level of welfare is
a function of income the so-called income utility schedule is the same for all tax-payers,
the equal sacrifice rule calls for people with equal incomes (or ability-to-pay) to contribute
equal amount as tax. Further, people with different incomes should pay different
amounts. The requirements of equal taxes for people in equal positions is also referred
to as ‘horizontal equity’ while the proper pattern of unequal taxes among people with
unequal incomes referred to as “vertical equity” 11. Both are a part of the same principle
of equal treatment, i.e., the taxes should be imposed on the basis of equal sacrifice.

9. E.R.A. Seligman : Essays in Taxation, 1921, Chapters 1 and 2

10. R. M. Haig : "Concept of Income-Economic and Legal Aspects" in Readings in the
Economics of Taxation, p-190, p. 54-79.
11. Richard A. Musgrave : op. cit., pp. 69-79.
 But equal sacrifice can be interpreted in three different ways :
(i) Equal absolute or equal total sacrifice.
(ii) Equal proportional sacrifice.
(iii) Equal marginal or the least ag g re gate or m inim um s acrifice
principle.
(i) Equal Absolute Sacrifice version requires adjustment of tax rates in such
a manner that the sacrifice to be done by all persons should be the same. In other
words, every tax-payer should give up the same quantity of utility. Under this
approach the rich man pays more money in taxes than the poor man but both must
find it equally unpleasant or both should sacrifice same total utility.
(ii) Equal Proportional Sacrifice version suggests that sacrifice should
be proportional to income rather than equal at all income levels. The rationale
behind the equi-proportional doctrine is that persons with greater income receive
more benefit from society and thus should sacrifice more from their income rather
than persons with small incomes. In other words, the equal proportional sacrifice
approach suggests that a fair system of taxation according to ability-to-pay implies
that the rich should pay not only more money in taxes but they should also lose
a greater absolute amount of utility. Each should give up the same proportion of
his total utility in such way that :
Sacrifice of tax-payer A Sacrifice of tax-payer B
Income of A Income of B
(iii) Equal Marginal (Least Aggregate) Sacrifice version suggests that
people should be taxed in such a manner that the total sacrifice for the society as
a whole, would be kept to the minimum possible figure. This is possible only
when the disutility arising from the payment of the last rupee of tax would be the
same for all persons. In other words, the equal marginal sacrifice approach
suggests that the rich should not only pay a greater amount as taxes but should
also sacrifice a greater proportion of utility than the poor.
To illustrate these concepts, we accept the necessary assumption that inter-
personal utility comparisons are admissible. Without this assumption, the entire
discussion breaks down. Moreover, we begin the convenient assumption of identical
taxes; so that the same income utility schedules (marginal and total) may be applied
to the tax-payers. Further, there is no difficulty in identifying, or at any rate
correlating units of income with units of utility or satisfaction. It has to be postulated
that the utility for income has a downward slope. As income increases total utility
increases but at decreasing rate, i.e., the marginal utility of income varies inversely
with income.
The three types of equal sacrifice principles have been clearly demonstrated
by Musgrave through the help of Fig. (3).
 On the horizontal axis of Fig. (3) we measure income, where OZ and DC are
the amounts required for subsistence. On the vertical axis from O up we measure
marginal utility and from D up, we measure total utility of income, leaving the utility
of subsistence income undefined. CE is the total income utility curve and CF is the
marginal income-utility curve. Now suppose that tax-payer A has income above
subsistence equal to ZG while tax-payer B has income that equals ZH. The total
utility received by A equals IE and B equals JK, and marginal utility of A equals GQ
and B equals HL.
An income tax yielding MG is introduced. Under equal absolute sacrifice, A
will pay NG and B will pay TH, where NG + TH = MG. The amounts NG and TH are
obtained so as to equal the total loss of utility by A or EP with that by B or KF.
Under equal proportional sacrifice, A pays RG and B pays SH, where RG + SH =
MG. The shares are arranged so that EW/EI = KU/KJ. Under equal marginal
sacrifice A pays VG and B pays VH, where VG + VH = MG; the marginal sacrifice
for bot h is equ al t o VV1. Aggregate sacrifice, or EX + KY, is at a minimum.
Stated mathematically, conditions are as follows :
Concept Term
Equal Absolute Sacrifice = U(Y)– U(Y–T) of A = UY–U(Y-T) of B
Equal Proportional Sacrifice = U(Y–T)/U(Y) of A = U(Y–T)/U(Y) of B
Equal Marginal Sacrifice = U(Y–T) U(Y–T)
of A = of B
(Y–T) (Y–T)
Y = Income; T = Amount of tax paid; U(Y) = Total utility obtained from Income Y.
The relative tax liability and the relative progressiveness of the tax structure
under the different sacrifice principles may be summarised in the following table :
Tax Liability
Principles
of Sacrifice Rich Man Poor Man Relative Progressiveness
of tax structure
(i) Equal Absolute Least Most Least
Sacrifice
(ii) Equal Proportional More Less More than under(i)
Sacrifice but less than under (iii)
(iii) Equal Marginal Most Least Most
Sacrifice
It should be carefully noted that the third column of the above table shows
only the relative progressiveness of the tax structure under different sacrifice
principles.
Which Equality of Sacrifice ?
You have read three possible versions of equal sacrifice : equal absoulte,
equal proportional and equal marginal sacrifice. The question now arises how
do we choose between these three versions.
We have already seen that taxation, by definition, involves some type of
compulsion, as “the essence of a tax....is the absence of a direct quid-pro-quo
between the tax-payer and the public authority”. As the payment of tax reduces
the disposable income of the tax payers, it imposes sacrifice on them. “The tax-
payers derive no direct benefits in paying taxes, except for the negative advantage
that they would not be punished for violating taxation laws of the state.”12 Burke
rightly pointed out, “it is difficult to tax, and to love and be wise.” Modern
Government being a welfare government should, therefore, tax in such a way
that the sacrifice imposed upon the community is kept to the minimum level.
The aggregate sacrifice of the community is minimum when the marginal
sacrifice of individual tax-payer is equal or as nearly as equal as possible. If this

V1

Income
Figure-3
point was not attained, shifting of tax burden from some persons to others would
reduce the sacrifice of some persons more than it would increase the sacrifice of
others, and thus lessen aggregate sacrifice. To take an example,13, let us suppose
that there are only four tax-payers A, B, C and D and let us suppose that the
sacrifices imposed by different rupees on A, B, C and D are as follows :
Sacrifice imposed (in units)
A B C D
In paying the lst rupee 3 4 6 7
In paying 2nd rupee 4 5 7 9
In paying 3rd rupee 6 7 9 11
In paying the 4th rupee 7 8 12 14
In paying the 5th rupee 9 10 14 17
In paying the 6th rupee 11 13 18 19
We know the law of diminishing marginal utility that as the stock of a
commodity goes on increasing with the consumer, the marginal utility goes on
declining. From this, it logically follows that as the stock diminish, the marginal
utility would increase. Now when a person has to pay only one rupee as tax, he
will pay his last rupee—the rupee which has least utility to him. If he is asked to
pay the second rupee, his disutility to sacrifice in payment of rupee will increase.
It is clear from the above example that if the state has to raise one rupee, it should
be realized from A in order to make the sacrifices least. The second rupee should
be collected from either A or B and so on. So if the state has to raise ten rupees, the
tax on A, B, C and D should be 4, 3, 2 and 1 rupees, respectively. Here the marginal
sacrifice of each tax payer is the same and is 7 units. But if 2 rupees are realized
from D and only 3 from A, the increase in sacrifice of D is 9 units, whereas the
decrease in A’s sacrifice is only 7, so that the aggregate sacrifice will go up by 2
units, and it will not be the least.
Emphasising the importance of this principle, Professor Pigou opines that
the principle of the least aggregate sacrifice is the only second principle of taxation
whose claim to superiority is undisputed.
On the basis of the assumptions made in the sacrifice principle, it can be
concluded that the principle of least aggregate sacrifice leads to progressive taxation.
Inadequacies of the Sacrifice Approach
The principle of the least aggregate sacrifice has been criticised by several
economists on many grounds. Criticizing the assumption of measurability of
utility, Sir Josiah Stamp writes, “It is very difficult for a man to say that one boot
pinches three times as much as the other. Even when both are his own and much
more difficult it is for one man to say that his boot pinches twice as much as of
another’s. 14 But such an accurate measurement of utility is not at all required
12. R. N. Bhargava-The Theory and Working of Union Finance in India, 1974, P. 39.
13. Ibid.
14. Sir Josiah Stamp, The Fundamental Principles of Taxation pp. 53-54.
for our purpose. We need to know only the fact that the common marginal utility
curve is downward sloping and not the precise rate at which it declines.
Sir Sidney Chapman 15 has criticised the assumption of diminishing marginal
utility of income. “It is reasonable to assume”, writes Richard A. Musgrave, “that
successive units of commodity become less useful related to commodity which is
held constant; also it is reasonable to assume that successive increments of X and
Y should become less useful relative to leisure, holding leisure constant.”
Economists also do not agree that inter-personal comparisons of utility can
be made. In this connection, A.R. Prest points out that “the comparability of
satisfaction between individuals does not command itself today as an acceptable
procedure. If introspection is the only means of demonstrating that two people
with equal incomes derive equal satisfaction from their income, most economists
would not feel they could rely heavily on this line of approach.” It is true that it
cannot be scientifically proved that the utility of an additional or marginal rupee
is less to a rich man than to poor man yet, there is surely such a thing as utility
from the receipt of income. Evidence on measurable characteristics of people—
physical, mental or emotional lends credence to the assumption that there is a
fair degree of similarity among individuals living in a given society. If this is the
case, it may not be unreasonable to expect that a similar situation prevails with
regard to satisfaction derived from income. Since individual differences on
measureable traits follow a more or less systematic pattern of distribution. It
would not be surprising to find the same hold with regard to satisfaction derived
from income.
It is clear, therefore, that there are three interpretations of equal sacrifice.
In a mixed economy equal absolute sacrifice or equal proportional sacrifice would
command considerable support for attaining vertical equity rather than equal
marginal sacrifice which implies equalisation of all post-tax income. But if it is
considered from the point of view of aggregate utility of income that can be derived
after equal marginal sacrifice is considered best, next come equal proportional
sacrifice. This is ‘possible’ because as long as there is a difference between the
marginal unity of income from the rich man and giving it to the poor man. This
implies that when the principle of equal marginal sacrifice is employed, no
reallocation of the tax burden will be capable of producing an increase in the total
utility of the community.
Equal marginal sacrifice, then emerges as the best principle on ground of
minimising the total burden of taxation. A.C. Pigou has, therefore, rightly said
that equal marginal sacrifice is the only acceptable rule on welfare grounds,
because, it is equitable and derived from the basic utilitarian principle of
maximum welfare.

15. The utili ty of Inc ome a n d P rog res siv e Tax a tion" in the Readings in the
economics of taxation, E.,. pp 3-12.