“The systems of public finance should be based on the principle of maximum social advantage”. Discuss.
“The systems of public finance should be based on the principle of maximum social advantage”. Discuss.
Or
Explain the principle of ‘Maximum social advantage’ and point act its importance.
Principle of Maximum Social Advantage
The public finance plays an important role in every economy. Its chief objective is to gain maximum social advantage. It is to achieve this objective of public finance that Dr. Dalton and Pigou have propounded the Principle of Maximum Social Advantage. This principle takes into consideration both the aspects of public finance that is the government revenue or taxation as well as government expenditure. Since this principle has been propounded separately by Dalton and Pigou, it is also called the Doctrine of Dalton or Pigou. The Principle of Maximum Social Advantage is based on the fact that neither every tax is an evil nor every expenditure is good. There is need to balance the effects of taxation and public expenditure. So as to achieve maximum social advantage.
The principle of maximum social advantage is based on the following assumptions :
(i) Taxes are the major source of government revenue.
(ii) The law of diminishing marginal social advantage applies to the public expenditure.
(iii) The taxes are subject to increasing marginal social disutility. Conditions of Maximum Social Advantage
The main conditions of Maximum Social Advantage are as follows:
(i) The marginal social benefit from the rupee spent (MSB) on public expenditure should be equal to the marginal social sacrifice (MSS) from the last rupee collected by way of a tax. It implies that MSB = MSS.
(ii) Public expenditure should be so distributed among various schemes that benefit of last rupee spent on every scheme should be equal.
(iii) Tax should be levied in different directions such that sacrifice or disutility from last rupee collected from every direction should be equal.
Explanation
In all the activities related to public finance, transfer of wealth takes place. Government collects revenue from the public in the form of taxes and other forms, and transfers that revenue to the public in the form of public expenditure. The sacrifice that society has to make by paying taxes, is called social sacrifice. Similarly, the gains which society makes by government expenditure on education, health care, etc., is called social satisfaction or benefit. According to this doctrine, the government should strike a balance between the public revenue and public expenditure in such a way as could yield maximum satisfaction. This depends upon the Diminishing Marginal Utility and Equi-Marginal Utility. The maximum satisfaction is achieved when Marginal Social Sacrifice (MSS) due to taxation becomes equal to Marginal Social Benefit (MSB) due to expenditure. Thus, the position of maximum social advantage is achieved when,
MSS=MSB
(Here, MSS=Marginal Social Sacrifice; MSB Marginal Social Benefit)
(1) Marginal Social Sacrifice: When a tax is levied, people have to part with their money to pay the taxes. This causes monetary sacrifice. The loss of money results in reduction of purchasing power and the level of consumption. The marginal utility of money for the people increases with a reduction in their stock of money. Thus, every additional tax imposes a greater burden on the society than the preceding one. In other words, increase in marginal social sacrifice takes place. The MSS curve indicates the rising marginal social sacrifice with every increase in the taxes.
(2) Diminishing Marginal Social Benefits (MSB): When the government undertakes public expenditure, the society gets utility or benefits. But as more and more benefits are provided to the people, its utility to them goes on diminishing.
(3) Maximum Social Advantage: Since, the marginal social benefit goes on diminishing and marginal social sacrifice goes on increasing with every additional change in expenditure and taxes respectively, the government goes on comparing marginal social sacrifice with marginal social benefit while it imposes taxes or makes public expenditure. The conditions of maximum social advantage have been stated differently by different economists.
Significance of the Principle of Maximum Social Advantage
The doctrine of maximum social advantage is an improvement upon all other doctrines. Public expenditure and revenue both have been considered in it. Besides it, a long term policy of public finance has also been taken into account.
The practical significance of this doctrine depends upon how social welfare is to be measured. Only after determining it, we can make an estimate about the system giving maximum social benefit. Dalton has laid down the following standards of measurement in this regard-
(1) Increase in Production : Maximum social benefit depends upon what effect public finance is making on the country’s production. In order to maximise the social benefit, there should be such changes in the revenue and expenditure of the government as could stimulate production and could increase employment and exports. In Dalton’s opinion, increase in production depends on three factors – (a) such improvements are made in the production technique as a result of which production per worker goes up, (b) such improvements should be made in the production organization by which the minimum wastage of economic resources takes place, (c) the nature of Production should be improved so as to yield maximum benefit to the society.
(2) Equitable Distribution of Wealth : Maximum social benefit also depends upon the fact that there is a proper distribution of income in society. For it, the taxation process should be changed in such a way that more and more wealth is collected from the rich and the same is spent on providing more and more facilities to the poor.
(3) Political Stability: Social welfare and production efficiency are promoted when there is peace and order within and the country is protected against any external aggression.
(4) Economic Stability: By pursuing an appropriate Fiscal Policy, government should avoid economic fluctuations which is a precondition to achieve social welfare.
(5) Full Employment: Every government aims at achieving the goal of full employment through its fiscal policy. Full employment maximizes production and social welfare.
(6) Riture Consideration : It is the bounden duty of the government to safeguard the interests of the future generation also while utilizing the available natural resources in the present. In the words of Dalton, “The statesman is a trustee for the future, no less than for the. present. Individuals die but the community which they form part lives on. The statesman, therefore, should prefer a larger social advantage in the future to a smaller one today”.
