NBER WORKING PAPER SERIES UNDERSTANDING DIFFERENT APPROACHES TO BENEFIT-BASED TAXATION

The normative principle of benefit-based taxation has exerted substantial influence on many areas of public finance, but it has been largely set aside in the modern theoretical approach to optimal income taxation, where welfarist objectives dominate. A prerequisite for that gap to close is the clarification of what benefit-based income taxation would mean, specifically in a first-best setting. This paper seeks to provide clear, accessible descriptions and novel graphical representations of four major approaches to first-best benefit-based taxation, explain how these approaches relate to each other, and apply them within the Classical Benefit-Based framework for optimal income taxation of Smith (1776). Robert Scherf Harvard Business School Soldiers Field Boston, MA 02163 rscherf@hbs.edu Matthew Weinzierl Harvard Business School 277 Morgan Soldiers Field Boston, MA 02163 and NBER mweinzierl@hbs.edu A data appendix is available at http://www.nber.org/data-appendix/w26276 Understanding Different Approaches to Benefit-Based Taxation Robert Scherf Matthew Weinzierl∗