The Benefit IS the Ability-to-Pay
Why the Two Great Principles of Tax Justice Were Always the Same Idea
The modern American income tax was shaped by a small group of Progressive Era intellectuals who spent decades building the moral and political case for it. Led by the Columbia economist Edwin R. A. Seligman, and joined by Richard Ely, Henry Carter Adams, and others, these “ethical economists” did not merely theorize. They testified before Congress, wrote for popular audiences, corresponded with legislators, and forged the political coalitions that produced the Sixteenth Amendment and the Revenue Act of 1913. The intellectual foundation of the modern American fiscal state is substantially their creation.
Yet Seligman and his colleagues have largely vanished from contemporary tax policy discourse. Today’s debates invoke efficiency, revenue maximization, and optimal tax theory—technical frameworks that developed long after the system was built. The moral and civic foundations that Seligman labored to establish have been quietly dropped from the conversation, even though the structure those foundations produced is still the one we operate within. How did the architects of the income tax become so thoroughly forgotten?
This essay argues that their disappearance is connected to a conceptual error—one that Seligman himself helped create, with the best of intentions.
Every economics textbook presents two rival principles of tax justice. The first is the Benefit Principle: citizens should pay taxes in proportion to the benefits they receive from government. The second is the Ability-to-Pay Principle: citizens should pay in proportion to their capacity to bear the burden, which in practice means the wealthy pay more.1 Students of economics and the philosophy of taxation learn to contrast these as competing visions of fairness—the first rooted in exchange, the second in obligation.
Seligman and his generation attacked the Benefit Principle as a cramped, transactional idea that reduced citizenship to commerce, and championed Ability-to-Pay as the morally superior foundation for a new fiscal order. Their framing became dominant in academic and policy discourse. But in establishing that framing, they severed the link between what government does for individuals and what those individual citizens owe in return—and that severance has drained the moral content out of tax policy over time. Ability-to-pay, standing alone, offers a thin justification: we take from you because you have what we need and because we can. It positions government and citizen as adversaries in a zero-sum contest over resources. This is precisely the rhetoric that dominates American politics today—and it is the opposite of what Seligman wanted.
The thesis of this essay is that the rivalry between these two principles was always false—an artifact of defining “benefit” too narrowly. Once we properly understand what government actually provides, its proper function, the two principles converge on the same idea. And that convergence, far from reducing taxation to a transaction, restores exactly the civic, relational understanding of fiscal obligation that Seligman and his colleagues were reaching for but could not quite grasp.
Adam Smith’s Overlooked Unity
The supposed rivalry between benefit and ability-to-pay was not always taken for granted. Indeed, for more than a century before Smith, the benefit principle stood essentially unchallenged as the justification for taxation. Thomas Hobbes, in Leviathan (1651), argued that taxes were justified as the price of security—the benefit the sovereign provided in lifting subjects out of the state of nature. John Locke, in his Second Treatise of Government (1690), saw taxation as payment for the protection of property rights, which embodied the individual’s liberty. Ability-to-pay had not yet been articulated as a competing framework. Benefit was simply what taxation was for: it was payment for services rendered. As Justice Oliver Wendell Holmes would later put it, “Taxes are what we pay for civilized society”—a pure benefit principle statement, offered as common sense well after the academic economists had begun to abandon that idea.2
Smith was working within this benefit tradition when he stated his first canon of taxation in The Wealth of Nations (1776). But he did something that Hobbes and Locke had not done: he brought ability-to-pay into the picture and, in a single carefully constructed sentence, declared it identical to benefit:
The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.
The crucial phrase is “that is.” This is best read not as Smith contrasting two ideas, but rather equating them. A subject’s “respective abilities” (ability-to-pay) simply is the revenue that subject enjoys “under the protection of the state” (benefit received). Smith reinforced the point with an analogy: the expense of government is “like the expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate.” Smith viewed us all as shareholders or investors in society. Your interest in society and its government is simultaneously the measure of what you have gained from it and the measure of what you can afford to contribute toward its upkeep. Benefit and ability are not two principles but two descriptions of the same thing.
Smith saw no tension here. But his formulation introduced the vocabulary that made the later conflict possible. By articulating both ideas so clearly and in such close proximity, he gave future readers two phrases that could be pulled apart and treated as alternatives rather than as the equivalence he intended.
The real break came with John Stuart Mill. In his Principles of Political Economy (1848), Mill developed ability-to-pay as a freestanding principle grounded in equal sacrifice theory—the idea that taxation should impose an equal loss of utility on each taxpayer. This was a powerful and influential framework, but it was detached from any account of the benefit government provides to individual tax payers. Mill made it possible to discuss what citizens owe without asking what government does for them. Ability-to-pay became an independent principle, no longer merely a proxy for benefit as it had been in the tradition from Hobbes through Smith.
Seligman’s generation then completed the separation by explicitly attacking the benefit principle as inadequate. But the seeds of the false rivalry were planted the moment readers began treating Smith’s unified sentence as containing two separable ideas.
Lindahl’s Unworkable Framing
The Swedish economist Erik Lindahl, writing in 1919, explicitly argued that there was no necessary contradiction between the principles of benefit and ability-to-pay. Ability to pay, Lindahl suggested, could often serve as a reliable indication of the benefit an individual derives from public expenditure.3
But Lindahl did not leave the convergence as a simple observation. He proposed a mechanism for measuring benefit: personalized “Lindahl prices,” a conceptual auction in which each citizen would reveal their willingness to pay for public goods. In this equilibrium, every individual would consume the same quantity of public goods but face a different price, reflecting their personal valuation of the individually quantifiable benefits of government.
The mechanism was elegant but immediately recognized as impractical. When the only source of information about marginal benefits is the individuals themselves, they have every incentive to understate their valuations—the classic free-rider problem. The conceptual auction requires honest preference revelation, and honest preference revelation is precisely what public goods make impossible.
But the deeper problem with Lindahl’s approach was not merely practical. By framing benefit as the sum of an individual’s valuations of specific, separable government services, Lindahl’s mechanism implicitly reduced the benefit of government to an atomistic accounting exercise. The whole was treated as nothing more than the sum of its parts—my valuation of roads, plus my valuation of courts, plus my valuation of defense. This atomistic framing loses sight of the aggregate benefit provided by the institutional order as a whole, the order within which all economic life takes place. The value of the institutional ecology is not the sum of the values of its individual components, any more than the value of a functioning body is the sum of the values of its individual organs.
Lindahl asked the right question: Can benefit be measured? But his answer—however elegant in theory—did lasting damage to the question itself. By reframing benefit as something that could, or should, be determined through an impractical mechanism of individual preference revelation, Lindahl left later critics reasonably skeptical of the benefit principle’s utility as an implementable idea. The baby went out with the bathwater: when the measurement mechanism was rejected, the convergence of benefit and ability-to-pay was rejected along with it. Yet as Linda Sugin has argued, “Even if everyone agrees that a tax is impractical and impossible to administer, it should still be examined if it embodies the ultimate measure of fairness in taxation. If it is the best ideal, then actual tax systems should be evaluated against it.”4 The benefit principle’s measurement difficulties were real, but they were grounds for finding a better proxy—not for abandoning the principle.
Musgrave’s Fateful Separation
Richard Musgrave, arguably the most influential public finance theorist of the twentieth century, came closer than anyone to preserving Smith’s unity—and then deliberately abandoned it.
In The Theory of Public Finance (1959) and later in Public Finance in Theory and Practice (1980, with Peggy Musgrave), Musgrave acknowledged the connection between the two principles. Benefits, the Musgraves wrote, could be “viewed in terms of protection received and are thus related to income which, in turn, is also a measure of ability to pay.” The convergence was right there on the page.
But Musgrave chose not to build on it. Instead, he separated the functions of government into three distinct “branches” of the public budget, each with its own principle for how taxes should be structured: an allocation branch, which would tax according to the benefit principle to fund the efficient provision of public goods; a distribution branch, which would tax according to ability-to-pay to handle the equitable sharing of tax burdens; and a stabilization branch, responsible for maintaining full employment and price stability. Notably, Musgrave assigned the allocation and distribution branches each a principle for distributing the tax burden, but the stabilization branch received only a macroeconomic target—no principle for who should pay. Musgrave’s analytical separation became a major source of the textbook separation that later hardened into orthodoxy and is largely responsible for the “false rivalry” that persists in economics education today.
Yet the stabilization function—the government’s role in maintaining employment and price stability—is itself one of the most significant benefits government provides. A stable currency, manageable inflation, and an economy operating near full employment are preconditions for nearly all private economic activity. Musgrave’s own framework, by assigning stabilization to a separate branch, obscured the fact that stabilization is a massive, continuous benefit of the institutional order—one that is reflected in every citizen’s economic position.
Why did Musgrave separate what Smith had unified? The answer lies in a revealing phrase: “protection received.” When Musgrave described the benefit of government, he framed it in terms of protection—a narrow, minimalist conception that implies government’s role is to stand guard over wealth that individuals generate autonomously. Under this framing, the two principles really do seem to pull in different directions: protection is roughly equal for everyone (or at most proportional to holdings), while ability-to-pay is inherently progressive. The separation seemed necessary because the definition of benefit was too thin to do the work Smith had asked of it.
Murphy and Nagel: The Foundation Without the Conclusion
In The Myth of Ownership (2002), the philosophers Liam Murphy and Thomas Nagel mounted what may be the most powerful philosophical argument about taxation in recent decades. Their central claim is that pretax income has no moral significance. Private property, they argued, is not a natural right that precedes government; it is a legal convention constituted by the institutional order. Without government—without courts, contracts, currency, police, regulatory frameworks—there is no market and no meaningful sense in which either any income or property is “yours.” What we have is ours only because of a comprehensive set of public policies and institutions. To speak of the government “taking” our money through taxation is to misunderstand the nature of property itself.
This is the correct philosophical foundation for the convergence of benefit and ability-to-pay. If the entire system of property and exchange is constituted by the institutional order, then everything an individual accumulates above the baseline of no institutional order—Hobbes’ state of nature—is, in a meaningful sense, enabled by that order. The benefit of government is not some discrete service that can be individually priced—it is the whole framework within which economic life occurs.
Murphy and Nagel came remarkably close to seeing this. Unlike the economists who dismissed the benefit principle’s measurement problem as insoluble, Murphy and Nagel identified the right baseline and the right proxy. “The benefit of government services,” they wrote, “must be understood as the difference between someone’s level of welfare in a non-government world and their welfare with a government in place.” They even proposed that “we can use people’s actual levels of welfare, with government in place, as a rough measure of the benefit conveyed to them by government.”5 This is the Hobbesian baseline, correctly identified.
But they concluded that the benefit principle was nonetheless unworkable as a guide to tax design, because translating measured benefit into a fair tax schedule requires knowledge of how the marginal utility of income declines—“how steeply marginal utility of income declines, and of how much the rate of decline varies from person to person.”6 Since marginal utility is an unobservable psychological quantity that varies across individuals, the principle could not be implemented. They raised additional objections as well—that the benefit principle provides no guidance on the level of government expenditure, that it does not determine whether taxes should be progressive or regressive, and that strict application would prevent government from aiding the indigent.7 But the decisive obstacle was the measurement problem: the benefit principle foundered on the impossibility of interpersonal utility comparisons.
The irony is that this impossibility is a problem with the utilitarian framework Murphy and Nagel inherited, not with the benefit principle itself. The convergence of benefit and ability-to-pay does not require knowledge of anyone’s marginal utility. It requires only the observation that each person’s economic position above the Hobbesian baseline—their actual outcome within the institutional order—is simultaneously the measure of benefit received and the measure of ability to pay. The marginal utility problem arises only if one insists on translating benefit into subjective welfare before constructing a tax schedule. If instead one measures benefit by the observable proxy that Murphy and Nagel themselves identified—actual welfare levels within the institutional order—the obstacle they found decisive dissolves.8
Seligman, Fiscal Citizenship, and the Rejection of Benefit
The Progressive Era economists who built the case for the income tax had a different objection to the Benefit Principle—and in some ways a deeper one than the measurement problem.
Edwin Seligman championed what he called the “faculty theory”—his term for ability-to-pay—while allies like Richard Ely and Henry Carter Adams mounted parallel arguments for progressive taxation grounded in a positive conception of the state.910 All three were trained in the German Historical School and co-founded the American Economic Association in 1885. But while Adams and Ely moved on to other pursuits, Seligman devoted his entire career to public finance and became what Mehrotra calls “the Dean of American taxation.”11 As the legal historian Ajay K. Mehrotra has documented in Making the Modern American Fiscal State (2013), Seligman contended that the benefit theory supported an outmoded, individualistic theory of citizenship—one that reduced the relationship between citizen and state to a commercial transaction. “You pay for what you get” might describe a visit to the grocer; it should not describe the obligations of a citizen’s membership in a political community.
Seligman’s theory of taxation was not individualistic. He conceived of the individual as a member of society, which led to what Mehrotra calls a new concept of “fiscal citizenship.” This was not merely an economic argument—it was a moral one. Seligman, deeply shaped by Felix Adler’s Ethical Culture movement, spoke of developing “the feeling of civic obligation” and believed that taxation should express something about what it means to belong to a political community. The Progressive economists championed ability-to-pay precisely because it promoted an active role for the state and supported what Mehrotra describes as “the reconfiguration of civic identity”—goals the transactional benefit principle could not serve.
Their concern was legitimate. If taxation is merely payment for services rendered, then once you have paid your bill, you have discharged your obligation. You owe nothing further to the community. The benefit principle, as then understood, could not sustain a vision of shared civic responsibility.
But there was an unintended cost to Seligman’s strategy. By discarding the benefit principle entirely in order to escape its transactional implications, Seligman severed the link between what government does and how citizens’ fiscal obligations are distributed—between taxation and the purpose of government. This severance is precisely what Musgrave later formalized with his separate budget branches, and it created the intellectual conditions under which taxation and government expenditure could be discussed as entirely separate topics.
The consequences of that severance have been profound. Ability-to-pay, stripped of any connection to what government provides, becomes an essentially amoral principle: we take from you because you have what we need and because we can. There is no account of why the community may properly distribute fiscal burdens, no story about what government does that justifies the claim. The taxpayer is positioned as the victim; the government as the extracting agent. Every dollar taxed is a dollar confiscated.
This is precisely the rhetoric that dominates American political discourse today: “It’s your money and the government uses coercive power to taking it.” “Taxation is theft!” The adversarial framing—citizen versus state, producer versus parasite—is the opposite of what Seligman wanted. He wanted citizens and government engaged in a shared civic project. But by severing taxation from government’s function, he inadvertently provided the raw material for the adversarial framing he was trying to escape.
The consequences extended beyond rhetoric. Once ability-to-pay was severed from any account of what government does, the remaining questions about taxation became purely technical. How should rates be structured to minimize economic distortion? What is the optimal trade-off between equity and efficiency? How do taxpayers respond to marginal rate changes? These are important questions, but they are engineering questions, not moral ones. They can be answered with mathematics, econometrics, and behavioral models. They do not require—and have no use for—a theory of fiscal citizenship, an organic conception of social relations, or an account of the duties that flow from membership in a political community.
Richard Musgrave’s formalization of the separation made this explicit. His allocation branch became the domain of welfare economics and cost-benefit analysis; his distribution branch became the domain of optimal tax theory, culminating in the work of James Mirrlees, Peter Diamond, and Emmanuel Saez. These are sophisticated and valuable contributions. But they operate entirely within a technical framework that has no place for the moral vocabulary that Seligman, Ely, and Adams spoke. The question “what does justice in taxation require?” was replaced by the question “what rate schedule maximizes social welfare subject to incentive constraints?” The ethical architects of the income tax had designed themselves out of the conversation.
Mirrlees and the Completion of the Displacement
The displacement of moral reasoning by technical reasoning did not happen all at once. Mill introduced equal sacrifice as a formal criterion in 1848, which was already a step toward mathematizing a moral intuition. Edgeworth and Pigou then developed the utilitarian framework of diminishing marginal utility, turning sacrifice theory into a calculus problem. Musgrave’s separation into budget branches in 1959 created the institutional architecture within which technical questions could be pursued independently of moral ones. But it was James Mirrlees’s 1971 paper, “An Exploration in the Theory of Optimum Income Taxation,” that completed the displacement and made the moral vocabulary formally irrelevant.12
Mirrlees reframed the question of tax design as a constrained optimization problem. In his framework, the government seeks to redistribute income to maximize some social welfare function, but it cannot directly observe each person’s innate ability—it can only observe income, which is a product of ability and effort. If high earners are taxed heavily, some will choose to work less, producing deadweight loss. The optimal tax schedule is the one that balances gains from redistribution against losses from reduced effort. After Mirrlees, one could derive an entire tax schedule from first principles without ever mentioning justice, fairness, civic obligation, or benefit.
Two features of the Mirrleesian framework matter enormously for the argument of this essay. First, ability is treated as exogenous—innate, endowed, existing prior to and independent of government. The institutional order plays no role in determining anyone’s productive capacity. Government enters the picture only as a redistributor, not as an enabler. Second, the theoretical ideal toward which the framework aspires is endowment taxation: the optimal tax would be levied directly on the income a person is capable of producing, regardless of what they actually earn. The income tax, in this framework, is merely a second-best approximation of the endowment tax the government would impose if it could observe ability directly.
Endowment taxation—taxing people based on their capacity to produce rather than their actual achievement within the institutional order—raises moral objections that go beyond its practical impossibility. Legal scholars have identified serious liberty concerns: John Rawls objected that an endowment tax “would force the more able into those occupations in which earnings were high enough for them to pay off the tax.”13 The objection is commonly illustrated by the hypothetical “beachcomber” who opts for leisure over income, but the problem is sharper with more realistic examples. Consider a surgeon who chooses to work for Doctors Without Borders at a fraction of her potential private-practice income. Under endowment taxation, she would be taxed on what she could earn, not what she actually earns. Rawls’s objection is thus not only that people might be forced into occupations they do not prefer—it is also that they would be forced to choose employers and assignments that maximize income rather than social contribution. The tax system would punish her for choosing to serve.
But the deeper problem is not coercion—it is the conception of the person that the framework embeds. When the state looks at a citizen and asks “what is this person capable of producing, and how much can we extract from that capacity to produce?” it treats the citizen’s abilities as a resource available for collective use. The citizen becomes a productive asset to be optimized. This violates what Kant identified as a fundamental moral principle: “Act so that you treat humanity, whether in your own person or in that of another, always as an end and never merely as a means.”14 Endowment taxation instrumentalizes the citizen—it treats human capacity as a means to the state’s fiscal ends rather than treating the citizen as an end whom government exists to serve.
There is an irony here worth noting. The Mirrleesian framework is understood by its practitioners as the sophisticated, modern, market-friendly approach to taxation within a liberal, democratic, capitalist order. But its foundational aspiration—to tax individuals based on what they are capable of producing for the collective—resonates uncomfortably with the logic of central planning.15 The framework asks the same question a central planner asks: “What is this person capable of? How can we best deploy that capacity for the social good?” Government was made for man, not man for government—but endowment taxation reverses that relationship.
The benefit-as-ability framework avoids this entirely. It does not ask “what are you capable of producing for the collective?” It asks “what economic position has the institutional order enabled you to achieve?” The direction of the question is reversed. The first treats the individual as a source of value for society. The second treats society as a source of value for the individual—and then asks the individual to contribute to maintaining that source in proportion to how much they have benefited from it. Under endowment taxation, the anti-government instinct is justified: government really is a predatory force extracting value from citizens’ capacities, and the rational response is resistance. Under benefit-as-ability, the civic instinct is justified: government is the people acting collectively, and taxation is how citizens maintain their own institutional order.
Remarkably, the convergence of benefit and ability-to-pay has recently begun to reassert itself even within the Mirrleesian tradition. The Harvard economist Matthew Weinzierl has shown that once one makes a simple modification to the standard setup—allowing individual income-earning ability to be a function of both endowed talent and public goods—benefit-based reasoning re-enters the framework naturally.16 If your productive capacity is partly a product of the institutional order, then those who have achieved more within that order have realized greater benefit from public goods, and the benefit principle and ability-to-pay converge. The government does not ask what you are capable of—only what you have actually achieved within the institutional order. A surgeon who chooses to work for Doctors Without Borders at a fraction of what she could earn in private practice has high ability but a modest economic position, and under benefit-as-ability owes proportionally less—not because she has used less of the institutional ecology, but because she has converted less of its value into personal economic benefit. Weinzierl identifies this as the classical idea of “benefit-as-ability” and observes that it “was not further explored, while benefit-based and ability-based reasoning were developed as separate ideas.” This essay attempts to explain why that exploration was abandoned—and to join Weinzierl in resuming it.
Weinzierl’s finding means that we need not reject Mirrlees’s mathematics—only what motivated it. The calculations that emerge from a model where ability depends on public goods produce the same tax schedules as those that emerge from the convergence of benefit and ability-to-pay—in a world where everyone achieves according to their full endowed capacity. But the two frameworks differ profoundly in what they ask of the taxing authority and of the state. Under endowment taxation, the government must somehow observe each citizen’s innate capacity and extract accordingly. Under benefit-as-ability, the government need only observe what each citizen has actually achieved—and it bears a responsibility for having enabled that achievement. What changes is not the calculation but the justification—and as we shall see, the justification matters profoundly for the kind of citizens the tax system produces.
As Weinzierl points out, Franklin Roosevelt understood the convergence as governing policy. In 1935, he stated: “With the enactment of the Income Tax Law of 1913, the Federal Government began to apply effectively the widely accepted principle that taxes should be levied in proportion to ability to pay and in proportion to the benefits received. Income was wisely chosen as the measure of benefits and of ability to pay.”17 Barack Obama echoed the same intuition in 2011: “It’s a basic reflection of our belief that those who’ve benefited most from our way of life can afford to give back a little bit more.”18 As Weinzierl observes, “Modern tax theorists will find the normative arguments underlying these quotations both familiar and strange.” Familiar because the intuition is sound; strange because the academic tradition abandoned them.
This is why the Progressive Era thinkers have disappeared from contemporary tax discourse. Not because their scholarship was forgotten or their contributions were unimportant, but because the conceptual framework they helped create rendered their deepest concerns irrelevant to the ongoing discussion. Today, Seligman, Ely, and Adams are of interest to historians of the Progressive Era, not to the economists and philosophers who debate tax policy and tax design. The principles they championed—the principles that founded the American income tax—no longer speak to the terms in which taxation is discussed. The false rivalry they helped construct between benefit and ability-to-pay displaced the moral foundations of taxation with a technical apparatus that no longer needs moral foundations at all.
But, acceptance of the unified principle—benefit and ability-to-pay, understood as the same thing—would actually support the collaborative relationship that Seligman envisioned. Citizens and government need not be seen as adversaries. They are partners in a joint project: sustaining and improving the institutional order that makes economic life possible, with each contributing in proportion to how much that order has enabled them to achieve.
The “Protection” and Accounting Problems
The common thread linking most of these missed connections—from Smith through Lindahl, Musgrave, and Seligman—is a too-narrow definition of what government provides.
When Musgrave speaks of “protection received,” when Lindahl proposes pricing individual government services through preference-revealing auctions, when critics argue that the poor benefit more from welfare than the rich—they are all operating with the same minimalist, service-by-service conception of government benefit. Government is imagined as a provider of discrete, individually consumed services: roads, courts, police, defense, schools. The question becomes: how much of each service does each citizen consume? Murphy and Nagel, to their credit, escaped this atomistic framing—they identified the Hobbesian baseline as the right reference point and actual welfare as the right proxy. But even they stumbled on the next step: how to translate aggregate benefit into a specific tax schedule without interpersonal utility comparisons.
This narrow framing produces two fatal consequences for those who remain within it. First, it makes benefit appear unmeasurable. How do you determine one person’s share of national defense, or the value to a specific individual of the court system’s existence? The measurement problem that sank Lindahl’s approach is an artifact of this atomistic conception of benefit.
Second, and more fundamentally, the “protection” framing implies that government’s function is merely protective—standing guard over wealth that individuals generate autonomously through their own effort and talent in the marketplace. This is, at bottom, the libertarian premise: the market creates, government protects. Under this framing, the rich benefit “more” only in the trivial sense that a security guard is more valuable to the person with more property to watch over. The convergence of benefit and ability-to-pay cannot work under this conception because “protection” is too thin a concept to bear the weight.
But what if government’s function is not merely protective? Abraham Lincoln offered a far more expansive definition in his “Fragment on Government” (c. 1854):
“The legitimate object of government, is to do for a community of people, whatever they need to have done, but can not do, at all, or can not, so well do, for themselves—in their separate, and individual capacities.”19
Under Lincoln’s principle, the function of government is not protection but enablement—creating the conditions under which individuals can accomplish together what they could never accomplish alone. If that is government’s function, then the relevant benefit is not a bundle of discrete services consumed but the entire institutional and regulatory ecology that makes productive life possible. And this changes everything about how we think about the Benefit Principle.
The Hobbesian Correction: Government as Institutional Ecology
Thomas Hobbes understood something that the “protection” framing misses entirely.
In Leviathan (1651), Hobbes described the state of nature—life without government, without the institutional order that constitutes political society. In that condition, there are no property rights, no enforceable contracts, no markets, no currency, no corporations, no banks, no insurance, no patents, no regulated professions, no standardized weights and measures. There is, in Hobbes’s memorable phrase, “no place for Industry; because the fruit thereof is uncertain.” Economic life above bare subsistence is impossible. Crucially, Hobbes argued that in this condition all people are essentially equal—not in talent or strength, but in their inability to achieve security or accumulate wealth. Even the strongest can be overcome by the cunning or by combinations of the weak; no one can reliably hold what they have. The state of nature is a condition of rough equality precisely because it is a condition of universal precariousness. It is the institutional order that makes possible both greater accumulation for all and inequality in outcomes, by creating the conditions under which differences in talent, effort, and luck can compound into vast differences in economic position.
The institutional order does not protect preexisting wealth. It creates the conditions under which wealth can be generated at all. The relevant benefit of government is not a bundle of individually priceable services but the entire institutional ecology: currency and banking regulation, contract law and commercial codes, transportation infrastructure, education systems, public health measures, scientific research, telecommunications standards, bankruptcy law, environmental management, intellectual property regimes, and the thousand other institutions without which a complex modern economy could not function.
Consider a concrete example. A skilled surgeon in the United States might earn several hundred thousand dollars per year. That same surgeon, with the same hands, the same training, and the same work ethic, transported to a failed state without functioning institutions, would earn little to nothing as a surgeon—because there would be no hospitals, no medical supply chains, no malpractice insurance, no credentialing system, no patients with the means to pay. The surgeon’s earning capacity is not a product of individual talent alone — but neither is it a product of the institutional ecology alone. It is the result of individual talent, effort, and skill operating within an institutional ecology that makes that talent economically productive. The surgeon’s years of training, discipline, and expertise are real and deserve recognition. The point is not that institutions replace individual effort, but that individual effort without institutions has no market in which to be rewarded.
This is true of everyone, but it is more true of those with the highest economic position. The subsistence farmer depends relatively little on the institutional ecology; the hedge fund manager depends on it entirely. Without the dense web of financial regulation, contract enforcement, currency stability, telecommunications infrastructure, and legal protections that constitute modern capital markets, the hedge fund manager’s considerable analytical skills would have no market in which to generate returns. You may be poor in any country, but to be a billionaire, you must have the support of powerful government institutions.
The Hobbesian baseline—the state of nature, where everyone’s capacity to generate economic surplus is approximately zero, and equal in that precariousness—provides the reference point that makes measurement possible.
The Convergence Restored
Once the benefit of government is defined as the institutional conditions that enable economic achievement above the Hobbesian baseline, the measurement problem vanishes.
We do not need Lindahl’s conceptual auction, because the real economy has already produced the answer. Each person’s economic position above the baseline—their accumulated capacity to generate and command resources—is the most meaningful measure of the benefit received from the institutional order. The institutional ecology enabled it; without that ecology, it would not exist. And that same economic position—whether derived from labor, investment, inheritance, or luck—is, obviously, the measure of ability to pay.
Of course, different individuals achieve different economic positions within the institutional order, and those differences reflect — in part — real differences in effort, talent, and risk-taking. But they also reflect different degrees of benefit from the institutional ecology: the order that enabled a $50,000 income and the order that enabled a $50,000,000 income are the same order, but the second person’s economic life undoubtedly depends on more of its features, and depends on them more intensely. The measure of benefit enjoyed is not a denial of individual effort — it is a recognition that effort produces greater rewards when it operates within a richer institutional context.
The two principles are not merely correlated, not approximately aligned, not usefully similar. They converge on the same underlying base, even if imperfectly proxied. The benefit the institutional order has conferred upon an individual is measured by that individual’s economic position above the baseline of no institutional order. The individual’s ability to pay is measured by the same thing. They are two descriptions of a single reality, just as Smith originally implied with his “that is.”
No preference revelation is needed. No individual pricing of government services is required. No conceptual auction must be conducted. The market economy, operating within the institutional framework that government sustains, has already done the measuring. The result is observable. The convergence is not a theoretical conjecture—it is a more accurate description of the relationship between the two concepts.
What This Implies
If the Benefit Principle and Ability-to-Pay are genuinely the same thing, several consequences follow.
First, progressive taxation is not merely compassionate, not merely pragmatic, and not merely a concession to political necessity—and, as Obama said, it is “not because we begrudge those who’ve done well—we rightly celebrate their success.”20 It is a direct reflection of the fact that the institutional order has enabled greater economic outcomes for some than for others. Those who have achieved the most within that order have received the most from the institutional ecology, and their greater contribution is not charity or sacrifice—it is proportional participation in the joint project that made their achievement possible. This does not deny that those who have achieved the most have often worked hard, taken risks, and exercised exceptional skill. It does say that their economic position was jointly produced — by their effort and by the institutional order within which that effort was rewarded. Their greater contribution to maintaining that order is not charity or sacrifice—it is proportional participation in the joint project that made their achievement possible.
Second, the age-old debate between these two principles has been a distraction—consuming intellectual energy on a false dichotomy while the real questions went unasked.
Third, and perhaps most importantly, the convergence transforms how we understand the relationship between citizens and government. They need not be adversaries in a zero-sum contest over resources. They are partners in a joint project of sustaining the institutional order that enables everyone’s economic life. Under the functional finance framework developed by Abba Lerner, a currency-issuing government does not need tax revenue in order to spend—it issues the currency.21 Taxation serves to manage aggregate demand, maintain the currency’s value, and ensure that the community’s stake in the institutional order is properly recognized. The adversarial framing—“the government is taking your money”—is not just politically toxic. It is economically incoherent. The benefit principle, under functional finance, does not answer the question “how much should each person pay for government services?” It answers the question “how should the burden of maintaining price stability be distributed?”
Fourth, the convergence reveals something about the moral-educational function of the tax system that is almost entirely absent from the academic literature. It is often said that the tax code is a moral document. This is true in two distinct ways: its impacts have moral consequences—who bears the burden, who is helped, who is harmed—and its justification teaches moral lessons about the relationship between individual and community. The second dimension may be more consequential than the first. A tax system that produces a mathematically optimal distribution while teaching citizens that government is a predatory force extracting value from their endowments will eventually undermine the political conditions necessary to sustain that distribution. The moral lesson corrodes the moral outcome.
Motives matter, even when outcomes are identical. A tax justified as extraction from the capable teaches citizens that their abilities are collective property and that the state has a prior claim on their productive capacity. A tax justified as proportional contribution to the institutional order that enabled one’s achievement teaches citizens that they are participants in a shared project whose maintenance benefits everyone. Over time, these different lessons produce different political cultures—one that resists taxation as an imposition and one that accepts it as an expression of what citizenship means.
The contrast between two presidential visions makes the stakes vivid. Abraham Lincoln spoke of “government of the people, by the people, for the people”—a formulation in which government is the people, acting collectively.22 Ronald Reagan declared in his first inaugural that “government is not the solution to our problem; government is the problem”—a formulation in which government is an alien force imposed upon the people.23 These are not merely rhetorical differences. They reflect fundamentally different theories of the state. Under Lincoln’s conception, taxation is the means by which citizens share the burden of their own institutional order—an act of collective self-governance. Under Reagan’s, taxation is extraction by an external power. The convergence of benefit and ability-to-pay makes sense only under Lincoln’s conception. And it is Lincoln’s conception that the evidence supports. The benefit is the ability-to-pay.
The convergence of benefit and ability-to-pay points toward a healthier understanding: citizens contribute to the maintenance of the institutional ecology in proportion to how much that ecology has enabled them to achieve. Not because the government compels sacrifice, but because participation in the joint project is what citizenship means. This is what Seligman was reaching for when he spoke of “the feeling of civic obligation.” He was right about what he wanted. The path he chose to get there—discarding the benefit principle—led somewhere else entirely. Perhaps it is time to find our way back.
What remains, then, are the further questions that the convergence opens but does not answer. What is the proper measure of the economic position that the institutional order enables? How should the tax code recognize it? And what obligations does the community have toward those whom the institutional order has not yet adequately served? These are questions for another day. But they can only be properly asked once we have set aside the false rivalry and recognized that the two great principles of tax justice were always, as Adam Smith quietly implied, the same idea.
Fairness and Tax Policy. 2015. JCX-48-15. Joint Committee on Taxation. https://www.jct.gov/publications/2015/jcx-48-15/.↩︎
Holmes reportedly made this statement in a 1904 speech and wrote a version of it in his 1927 dissenting opinion in Compañía General de Tabacos de Filipinas v. Collector of Internal Revenue, 275 U.S. 87.↩︎
Lindahl’s argument appears in Die Gerechtigkeit der Besteuerung (1919), translated as “Just Taxation: A Positive Solution” in R. A. Musgrave and A. T. Peacock, eds., Classics in the Theory of Public Finance (London: Macmillan, 1958). The paraphrase cited here—that Lindahl “argued that there did not necessarily exist any contradiction between the principles of benefit and ability to pay because ability to pay could often be taken as a good indication of the benefit derived from public expenditure”—is drawn from the overview of the benefit principle in the Handbook of Public Economics (ScienceDirect), which also notes that “on this point, Lindahl’s argument is reminiscent of Adam Smith’s first maxim of taxation.”↩︎
Linda Sugin, “A Philosophical Objection to the Optimal Tax Model,” 64 Tax Law Review 229, 238 (2011).↩︎
Liam Murphy and Thomas Nagel, The Myth of Ownership: Taxes and Justice (Oxford University Press, 2002), ch. 2.↩︎
Murphy and Nagel, The Myth of Ownership, ch. 2.↩︎
These objections are addressed in other essays in this series. Briefly: the benefit principle, properly understood, implies constraints on expenditure (Lincoln’s principle) and inherently supports progressive taxation (because the untaxed Hobbesian baseline creates effective progressivity). As for the supposed incompatibility with welfare provision, Murphy and Nagel argue that “the benefit principle is, in fact, incompatible …with every account of social justice that requires government to provide any kind of income support or welfare provision whatsoever to the destitute.” But this objection dissolves under the institutional ecology framing. If government’s proper function is to create the conditions under which all citizens can flourish, then the need for welfare provision is not a benefit conferred on the poor—it is evidence that the institutional order has failed to achieve its core purpose. Programs that address destitution are remedial measures, not the system’s primary product. They represent the government’s obligation to correct its own shortcomings, not a gift that recipients should be expected to pay for.↩︎
The question of how to translate observable economic position into a specific rate structure without relying on interpersonal utility comparisons is addressed in a companion work on Surplus Capacity Theory, which substitutes the observable marginal propensity to consume for the unobservable marginal utility of income.↩︎
Ely rejected the benefit principle’s transactional framing in explicitly civic terms: “The citizen pays because he is a citizen, and it is his duty as a citizen to do so. It is one of the consequences which flow from the fact that he is a member of organized society…. Only an anarchist can take any other view.” Richard T. Ely, Taxation in American States and Cities (New York: T. Y. Crowell, 1888), 13. For Ely, taxes were “one-sided transfers” and “the element of reciprocity is excluded”—a direct rejection of the benefit principle’s commercial logic.↩︎
Adams emphasized the collective rather than individual character of economic life, arguing that “the science of finance is par excellence the branch of economic science which lays stress upon the organic or collective conception of social relations.” Henry Carter Adams to Edwin R. A. Seligman, December 26, 1907, quoted in Joseph Dorfman, “The Seligman Correspondence II,” 56 Political Science Quarterly 270, 275 (1941). See also Adams, The Science of Finance: An Investigation of Public Expenditures and Public Revenue (New York: H. Holt & Co., 1899), 46–49.↩︎
Ajay K. Mehrotra, “Edwin R. A. Seligman and the Beginnings of the U.S. Income Tax,” Tax Notes, November 15, 2005. See also Mehrotra, “Envisioning the Modern American Fiscal State: Progressive-Era Economists and the Intellectual Foundations of the U.S. Income Tax,” 52 UCLA Law Review 1793 (2005).↩︎
James A. Mirrlees, “An Exploration in the Theory of Optimum Income Taxation,” Review of Economic Studies 38, no. 2 (1971): 175–208.↩︎
John Rawls, “Some Reasons for the Maximin Criterion,” American Economic Review 64, no. 2 (1974): 141–146, at 145. See also Kirk J. Stark, “Enslaving the Beachcomber: Some Thoughts on the Liberty Objections to Endowment Taxation,” 18 Canadian Journal of Law & Jurisprudence 47 (2005); Linda Sugin, “A Philosophical Objection to the Optimal Tax Model,” 64 Tax Law Review 229 (2011); David Hasen, “Liberalism and Ability Taxation,” 85 Texas Law Review 1057 (2007).↩︎
Immanuel Kant, Groundwork of the Metaphysics of Morals (1785), second formulation of the categorical imperative.↩︎
The resemblance to Marx’s principle is difficult to ignore: “From each according to his ability, to each according to his needs.” Karl Marx, Critique of the Gotha Programme (1875). The Mirrleesian framework operationalizes the first half of this formula within a liberal capitalist order.↩︎
Matthew Weinzierl, “Revisiting the Classical View of Benefit-Based Taxation,” Economic Journal 128, no. 612 (2018): F37–F64.↩︎
Franklin D. Roosevelt, Message to Congress on Tax Revision, June 19, 1935.↩︎
Barack Obama, Remarks on Fiscal Policy, George Washington University, April 13, 2011.↩︎
Abraham Lincoln, “Fragment on Government” (c. July 1, 1854), in Collected Works of Abraham Lincoln, ed. Roy P. Basler (New Brunswick, NJ: Rutgers University Press, 1953), vol. 2, 220–221. I explore the implications of Lincoln’s principle for understanding taxation as a service rather than an extraction in a companion essay, “Taxation Is a Service.”↩︎
Obama, Remarks on Fiscal Policy, April 13, 2011, quoted above.↩︎
Abba P. Lerner, “Functional Finance and the Federal Debt,” Social Research 10, no. 1 (1943): 38–51.↩︎
Abraham Lincoln, Gettysburg Address, November 19, 1863.↩︎
Ronald Reagan, First Inaugural Address, January 20, 1981.↩︎