What Is the Benefits Received Rule?

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The benefits received rule is a tax system wherein the amount an individual or business pays is based on how much they benefit from something public.

The benefits received rule is a form of taxation based on the benefits a taxpayer receives from public expenditures. In other words, the more someone benefits from a public good or service, such as a public park, the more tax they pay. However, this system is not always easy to implement, as calculating such benefits can be imprecise.

Learn more about how the benefits received rule works.

Definition and Examples of the Benefits Received Rule

The benefits received rule is a tax system wherein the amount an individual or business pays is based on how much they benefit from something public. Under this principle, the more a taxpayer benefits from a road, schools, the military, or any other public space or service, the more taxes they would pay.

The benefits received rule is sometimes used when there’s a clear way to tax based on usage. For example, tolls for bridges or tunnels are based on the benefits received by the drivers who use them.

However, even in those cases, such a tax principle can still be complicated, as the tax money used to initially build this infrastructure was likely not based on benefits received. After all, the government could not tax based on benefits received if no one had yet received benefits—the structure had not yet been built.

Instead, governments often use the ability-to-pay principle. This system levies taxes based on one’s ability to make such payments, not on the benefits they receive (although there may be some overlap). Under an ability-to-pay system, those with the highest incomes would pay more in taxes than those with the lowest incomes.

These higher-income taxpayers might benefit more from public services such as police, fire departments, and the military. For instance, if they have high-value property, they would gain more value from the protection of those departments than someone with a low-value property (or no property at all). Still, the taxes aren’t based on these benefits, but rather the taxpayer’s ability to pay.

How Does the Benefits Received Rule Work?

The benefits received rule works by taxing individuals or businesses based on how much they use a public service or good. For example, paying a toll accounts for how much someone drives over a certain road or through similar infrastructure. The more frequently you drive that road, the more often you’ll pay the toll.

Other taxes, such as fuel taxes, are also somewhat based on benefits received. After all, the more you drive, the more gas you need to purchase. Each time you purchase gas, you pay a gas tax of 18.4 cents per gallon. That revenue is then distributed to states and used to fund highways and other infrastructure.

However, many other taxes, such as the property taxes used to pay for public schools, are not based on benefits received. If you own a home you have to pay property taxes whether or not you have school-age children. If this tax was based purely on benefits received, only the parents of school-age children would have to pay.

Even if a tax situation doesn’t directly benefit you as a taxpayer, you may find yourself benefiting indirectly. As a homeowner, for example, the improved property values that accompany well-funded school districts could boost your own property value.

Tax Fairness

The benefits received rule may sound fair at first glance, but not everyone agrees.

For one thing, trying to determine how much someone benefits from a public space or service can be hard, if not impossible, to quantify.

Consider this exercise: Does a person earning $100,000 per year benefit twice as much from the national defense system as someone earning $50,000 per year? And if so, does that mean they should pay twice as much in taxes that go toward the military? What if the person earning $50,000 per year lives in a community with a military base, which helps support the local economy? Do they then need to pay more in taxes? How much?

Governments may opt not to use the benefits received principle in favor of a tax system that allows them to at least partially redistribute wealth. Such a system may give lower-income taxpayers a better chance of improving their financial situation because less of their income would go toward taxes. This type of system also provides services for those who are too poor to pay.

For example, suppose a low-income person uses public transportation to get to work much more often than a wealthy person does. If that low-income person has to pay significantly more in taxes to support the public transit system, they might not have enough take-home pay to support anything beyond basic needs. That makes it much more difficult for them to save money, improve their financial situation, and move upward into the middle class. This change would also decrease their buying power, which affects the economy.

The same amount of taxes would be a much lower burden on the wealthy person, who would still have plenty left over to fund their lifestyle, save for a rainy day, and invest for the future. 

The wealthy individual still benefits from the public transit system in indirect ways, even if they don’t ride it. For instance, they may enjoy less-congested roadways, as buses lead to fewer cars in traffic, plus less wear-and-tear on their vehicle. Or perhaps the wealthy person owns a company. The public transit system may make for a bigger, better hiring pool for their firm, as more people would be able to get to that location reliably.

Benefits Received vs. Ability to Pay

 Benefits Received  Ability To Pay
Taxes are based on how much the taxpayer benefits from a public good or service Taxes are based on the taxpayer’s ability to pay, with higher-income individuals paying more in taxes
Can be hard to quantify benefits, especially indirect ones Doesn’t directly account for benefits received
May be viewed as fair because it attempts to account for usage May be viewed as fair because it gives lower-income people a chance to move up the economic ladder, as taxes account for a smaller proportion of their income
May be viewed as unfair when taxpayers with less income end up paying more in taxes May be viewed as unfair to tax someone more for things that they don’t use 

The main difference between the two forms of taxation is what is taxed. The benefits-received approach taxes the benefits an individual receives from a public good or service, while the abiliy-to-pay approach taxes you based on what you earn.

Key Takeaways

  • The benefits received rule is a way to tax based on how much a taxpayer benefits from something public, such as infrastructure or defense.
  • Paying tolls when driving is an example of the benefits received rule: the more you use that toll road, the more you pay.
  • Many governments primarily use an ability-to-pay system instead of benefits received, as calculating precise benefits can be difficult, if not impossible.

Article Sources

  1. IRS. "Worksheet Solutions: Tax Fairness," Page 1. Accessed Nov. 30, 2021.

  2. Department of Transportation. "Motor Fuel Data and the Highway Trust Fund." Accessed Nov. 30, 2021.