Meaning of Maximum Social Advantage
Principle of maximum social advantage is a key principle governing public finance. It aims at maximizing the economic welfare of people by controlling the financial activities of the government. Maximum social advantage principle was given by “Hugh Dalton”, a British economist. Public finance consists of public expenditure and public revenue. Expenditure by the government creates benefits or utility.
Concept of Maximum Social Advantage
On the other hand, when government-imposed taxes it results in sacrifice or disutility. According to the maximum social advantage principle, public revenues and expenditures should be adjusted in such a way that surplus of utility is maximized and disutility is minimized.
It is attained at a point where marginal utility of expenditures equates the marginal disutility of tax imposed. This principle says that the government should spend on the basis of Equi-marginal principle and fix taxes in such a way that marginal utility of money paid as tax shall be the same for all taxpayers.
Principles of Maximum Social Advantage
Various principles of maximum social advantage are as follows:-
- All expenditure by government creates benefits whereas taxes imposed by governments lead to sacrificing.
- Government has no source of income other than taxation.
- The government have a balanced budget which means there is no surplus or deficit of funds.
- Marginal social benefit created due to public expenditures keeps on diminishing as these are incurred on the basis of the law of diminishing marginal utility.
- Taxes are subject to increasing marginal social sacrifice.
Limitations of Maximum Social Advantage
Limitations of maximum social advantage principle are discussed in points given below:-
Principle of maximum social advantage is impractical in nature because utility is subjective in nature. It cannot be measured in quantitative terms which make it impossible to equate marginal utility and disutility. Marginal utility created by public expenditure and marginal disutility arising out of public revenue cannot be measured precisely.
This principle is based on unrealistic assumption that public expenditures will always result in benefits and public revenue create disutility for people. Huge expenditure by government on defense is unproductive in nature as it does not create any assets which could provide benefit to people. Whereas, heavy taxation on alcoholic and tobacco products is beneficial for public health.
Ignores Non-tax Revenues
Principle of maximum social advantage neglects non-tax revenue sources of government. It assumes that taxation is the only means available to government for generating revenue. There are various other means such as public borrowings, imposition of fees, penalties and profits from public sector companies which generates sufficient amount of funds.
Highly Unrealistic Restrictions
This principle considers that government should always have balanced budget. It is a quite difficult scenario that government does not have any surplus or deficit of funds. Many times government expenditure is more than its revenue due to which it borrows funds from various means for meeting its requirements.
Misuse of Government Funds
Maximum social advantage principle assumes that government funds are efficiently utilized for creation of social benefits. Public funds are many times misused for non-productive which do not result in any benefit to community. Also, a major part of these funds are loss due to rampant corruption in various government departments.
Large Budget Size
Government budgets are huge in size as it comprises of large disbursement of funds in the form of public expenditure and large collection of funds in the form of taxes. For measuring the marginal utility and disutility, it is difficult for officials to evaluate the effect of small additional amounts on society.