The benefits received principle is a theory that, at its core, states that one should only pay tax based on what the government provides or what benefits are received from the government. So, according to this theory someone with more benefits received from the government should be paying more in taxes than someone who, in comparison, is receiving fewer benefits from the government, regardless of either taxpayer’s income. Another definition of benefits received in terms of tax deductions states that when taking a deduction in a tax return for a charitable contribution in which one receives a service or product in return, the fair market value of that service or product must be subtracted from the total amount spent. That difference then is the amount that can be claimed on a tax return as a tax deduction. In order words, the benefits received cannot be claimed as a tax deduction.
Prescott lives in Country A which has an ‘ability-to-pay’ taxation system but wants to move to Country B which has a ‘benefits received’ tax policy. In Country A, Prescott is paying the government according to his income, regardless of benefits received, whereas in Country B, he only pays the amount dictated by the government for any services that have been provided. In a second example, Contessa donates $175 at a silent auction and receives a $25 gift certificate as a prize. Subtracting $25 for benefits received, Contessa can claim the remaining $150 as a tax deduction on her tax return.