Ability-To-Pay Taxation

What is 'Ability-To-Pay Taxation'

The ability-to-pay taxation is a taxation in the form of a progressive tax. The ability-to-pay principle in taxation maintains that taxes should be levied according a taxpayer's ability to pay. This progressive taxation approach places an increased tax burden on individuals, partnerships, companies, corporations, trusts and certain estates with higher incomes. The theory is that individuals who earn more money can afford to pay more in taxes.

BREAKING DOWN 'Ability-To-Pay Taxation'

Ability-to-pay taxation requires that higher earning individuals pay a higher percentage of income towards taxes. The tax rate increases as a percentage along with income. For example, in the United States in 2010, a tax rate of 10% applied to incomes between $0 - $8,375; the tax rate increased incrementally up to 35% for those whose incomes were $373,651 or greater (these figures are based on single filers). Critics of ability-to-pay taxation state that the progressive tax reduces the incentive to earn more money, and penalizes those whose hard work and ingenuity have helped them earn higher incomes.

RELATED TERMS
  1. Vertical Equity

    A method of collecting income tax in which the taxes paid increase ...
  2. Taxpayer

    An individual or entity that is obligated to make payments to ...
  3. Tax Rate

    The percentage at which an individual or corporation is taxed. ...
  4. Terminal Year

    The year in which an individual dies, in the context of estate ...
  5. Tax Fairness

    A tax platform based on an ideal that aims to create a system ...
  6. Bilateral Tax Agreement

    An arrangement between two jurisdictions that mitigates the problem ...
Related Articles
  1. Personal Finance

    The Impact Of U.S. Corporate Taxation On Investment Decisions And CFC Transfer Pricing

    To avoid taxation, businesses do careful tax planning, taking into consideration more than one country's taxation system.
  2. Personal Finance

    Explaining Double Taxation

    Double taxation refers to income taxes being imposed twice on the same source of earned income.
  3. Personal Finance

    What's a Marginal Tax Rate?

    The marginal tax rate is based on a progressive tax system, where tax rates for an individual will increase as income rises. This method of taxation aims to fairly tax individuals based upon ...
  4. Financial Advisor

    Federal Tax Brackets

    Why do we have income tax brackets? What do they do for us? Read this to understand the basics and where to find your own bracket.
  5. Personal Finance

    Do Tax Cuts Stimulate The Economy?

    Learn the logic behind the belief that reducing government income benefits everyone.
  6. Personal Finance

    Why America's Taxes Are Too Low

    The solution to America's economic woes may not be in lowering taxes further, but may, in fact, lie in increasing them.
  7. Financial Advisor

    Your Social Security Benefits: Who Gets Taxed?

    Many folks will pay some taxes on their Social Security benefits, but some will not. Here's the lowdown on who gets taxed by how much.
  8. Personal Finance

    Could The Fair Tax Movement Ever Replace The IRS?

    Although many taxpayers would love to see the IRS abolished, only a handful of thinkers have come up with any sort of viable replacement plan. The Fair Tax is one such idea that has continued ...
  9. Personal Finance

    Paying Uncle Sam: From Tobacco To $1 Trillion

    The services we rely on, like education, law and security, were built on taxes.
  10. Markets

    Macroeconomics: Government - Expenditures, Taxes and Debt

    By Stephen Simpson ExternalitiesIn a market economy there are important differences between public and private goods. Private goods are considered "rival and excludable" - one person consuming ...
RELATED FAQS
  1. Will I have to pay taxes every year when I receive the $25,000 from my trust fund?

    My inheritance is in the form of a trust fund that distributes $25,000 per year for 10 years. ... Read Answer >>
  2. Is a progressive tax more fair than a flat tax?

    Find out which is more fair: flat tax or progressive tax. Learn about both sides of the debate and the challenges of defining ... Read Answer >>
  3. Is progressive tax the same thing as marginal tax rate?

    Learn how a marginal tax rate is a form of a progressive tax rate. Learn the pros and cons of such a tax policy and who may ... Read Answer >>
  4. What percentage of withdrawals from a trust fund is taxed?

    I have inherited a trust fund. This is the first time I have considered pulling money from the account.  ... Read Answer >>
  5. Are progressive taxes ever more unfair that flat taxes?

    Learn more about progressive taxes and flat taxes. Find out why progressive taxes may be unfair for many taxpayers and why ... Read Answer >>
  6. What are the differences between regressive, proportional and progressive taxes?

    Understand the differences between the most common tax systems including regressive taxes, proportional taxes and progressive ... Read Answer >>
Hot Definitions
  1. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  2. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  3. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  4. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  5. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  6. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
Trading Center