Financing Public Goods and Services through Taxation or User Fees: A Matter of Public Choice?

Abstract

Through a case study methodology this research explores the decision-making process regarding financing services provided by the Canadian federal government to individual citizens. From a transparency and accountability perspective, for those services that benefit individuals versus society as whole, it is important to understand why some services are provided through general taxation while others are financed through user fees. The study utilizes public choice theory as developed in The Calculus of Consent: Logical Foundations of Constitutional Democracy which is the initial attempt to illustrate how the tools of economics may be applied to political institutions using a rational choice approach with an emphasis on rules about how choices are made. Rather than focusing on ‘what’ government spends funds on, the study focuses on ‘how’ government generates funds by examining three major actors: government, citizen-voters and pressure groups. This study furthers scientific knowledge as there has been prior research on distinguishing between public versus private goods, and deciding on how to publicly fund such goods, but there has been limited research undertaken on the actual decision-making process in financing public goods and services. From an academic perspective, this study is the first time that The Calculus of Consent: Logical Foundations of Constitutional Democracy model has been adapted and applied to the Canadian federal government. The study concludes that it depends on what elected officials decide to do to appeal to citizen-voters in order to win votes: appear fiscally prudent thus charge user fees; advance its political agenda with decisions to sometimes charge user fees or other times not; or limit costs to private sector organizations by deciding to not charge user fees. While elected officials make the decisions whether or not to charge user fees, it is the bureaucracy that implements these decisions.