Benefits Received Rule: What it is, How it Works, Examples

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

Lea Uradu, J.D. is a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, and Tax Writer.

What is the Benefits Received Rule

The Benefits Received Rule, or benefits received principle, may take one of two related definitions: one as a tax theory; and one as a tax provision. The two definitions are:

1. The Benefits Received Principle, which is a theory of income tax fairness that says people should pay taxes based on the benefits they receive from the government.  
2. A tax provision that says a donor who receives a tangible benefit from making a charitable contribution must subtract the value of that benefit from the amount claimed as an income tax deduction.  

Key Takeaways

• The benefits received rule argues that those who receive the greatest benefit from the government, either directly or indirectly, should pay the most taxes, in principle of fairness.
• Rather than applying such a rule in the U.S., taxes are largely paid based on a progressive income tax system.
• As a tax regulation, the benefits received rule discourages double-counting charitable donations.

Understanding the Benefits Received Rule

The Benefits Received Rule is thought to be appealing for its apparent fairness in that those who benefit from a service should be the ones who pay for it.   However, this is not how the tax system works in the United States. The U.S. tax system is a "progressive" or "ability-to-pay" system, meaning that those who make more money tend to pay taxes at a higher rate and those who make less money tend to pay taxes at a lower rate or even receive taxpayer-funded benefits while paying no taxes at all.    

An alternative taxation system is a flat tax system in which everyone pays the same tax irrespective of income, which again, is not how the US tax system works, as the US system is income-based, meaning not everyone pays the same amount of taxes.

Examples of the Benefits Received Rule

Under the first definition of the Benefits Received Principle, supporters believe that taxpayers that use certain services in disproportionate amounts should pay higher taxes on those goods or services than taxpayers who do not utilize them. For example, taxpayers who own or drive cars should pay more taxes that go towards road maintenance than taxpayers who do not own or use cars. However, it is difficult to separate what goods and services are for the good and maintenance of the entire nation and not just an individual.  

Under the second definition of the benefits received rule, an individual must subtract his or her contribution towards a tax deduction in order to reflect the true value of the contribution. So, for example, if Jane bought a $500 ticket to a nonprofit fundraising gala and received a dinner worth $100, she could only claim $400 as a tax deduction. This rule, in theory, might help curb attempts to avoid paying taxes by donating money for tax deduction purposes.