Ability-To-Pay Taxation

AAA

DEFINITION of 'Ability-To-Pay Taxation'

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.

INVESTOPEDIA EXPLAINS '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. Taxes

    An involuntary fee levied on corporations or individuals that ...
  2. Regressive Tax

    A tax that takes a larger percentage from low-income people than ...
  3. Progressive Tax

    A tax that takes a larger percentage from the income of high-income ...
  4. Flat Tax

    A system that applies the same tax rate to every taxpayer regardless ...
  5. Tax Bracket

    The rate at which an individual is taxed. Tax brackets are set ...
  6. Working Tax Credit (WTC)

    A tax credit offered to low-income individuals working in the ...
Related Articles
  1. Tax Tips For The Individual Investor
    Retirement

    Tax Tips For The Individual Investor

  2. Do Tax Cuts Stimulate The Economy?
    Taxes

    Do Tax Cuts Stimulate The Economy?

  3. The History Of Taxes In The U.S.
    Taxes

    The History Of Taxes In The U.S.

  4. Personal Income Tax Guide
    Taxes

    Personal Income Tax Guide

comments powered by Disqus
Hot Definitions
  1. Last In, First Out - LIFO

    An asset-management and valuation method that assumes that assets produced or acquired last are the ones that are used, sold ...
  2. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  3. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  4. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  5. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  6. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
Trading Center