Ability To Pay

What does an 'Ability To Pay' mean

Ability to pay is an economic principle stating that the amount of tax an individual pays should be dependent on the level of burden the tax will create relative to the wealth of the individual. The ability to pay principle suggests that the real amount of tax paid is not the only factor that has to be considered, and that other issues such as ability to pay should also factor into a tax system.

BREAKING DOWN 'Ability To Pay'

The application of this principle is a progressive tax system, in which individuals with higher incomes are asked to pay more tax than individuals with lower incomes. Classical economists like Adam Smith believed any elements of socialism, such as a progressive tax, would destroy the initiative of the population within a free market economy. However, many countries have blended capitalism and socialism with a great degree of success.

RELATED TERMS
  1. Progressive Tax

    A tax that takes a larger percentage from the income of high-income ...
  2. Tax Rate

    The percentage at which an individual or corporation is taxed. ...
  3. Direct Tax

    A tax that is paid directly by an individual or organization ...
  4. Effective Tax Rate

    The average rate at which an individual or corporation is taxed. ...
  5. Vertical Equity

    A method of collecting income tax in which the taxes paid increase ...
  6. Marginal Tax Rate

    The amount of tax paid on an additional dollar of income. The ...
Related Articles
  1. Taxes

    Explaining Progressive Tax

    A progressive tax is a levy in a tax system where the tax rate increases as the taxable base increases.
  2. Taxes

    3 Federal Income Tax Facts You Didn't Know

    Learn about three federal income tax facts that most Americans may not know from one of the most trusted financial resources on the Web.
  3. Taxes

    Do Tax Cuts Stimulate The Economy?

    Learn the logic behind the belief that reducing government income benefits everyone.
  4. Taxes

    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.
  5. Economics

    Comparing Regressive, Proportional and Progressive Taxes

    Learn about the basic differences between three common tax systems.
  6. Taxes

    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 ...
  7. Taxes

    The History Of Taxes In The U.S.

    The number of taxes that we now consider a given did not always exist. Find out how they arose.
  8. Taxes

    How Are Capital Gains And Dividends Taxed Differently?

    Individuals in the 25% or higher tax bracket pay a 20% tax on long-term capital gains.
  9. Taxes

    Understanding Income Tax

    Income tax is a levy many governments place on revenue of entities within their jurisdiction.
  10. Taxes

    3 Common Tax Questions Answered

    We clarify some rules that often puzzle taxpayers.
RELATED FAQS
  1. 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 >>
  2. How does the effective tax rate for an individual differ from that of a corporation?

    Read about the effective tax rate for individuals when compared with the effective tax rate for corporations, including how ... Read Answer >>
  3. In what types of economies are regressive taxes common?

    Understand the three main taxation systems, regressive, proportionate and progressive, and learn where regressive tax systems ... Read Answer >>
  4. How does the marginal tax rate system work?

    The marginal tax rate is the rate of tax that income earners incur on each additional dollar of income. As the marginal tax ... 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's the difference between regressive and progressive taxes?

    Learn what a regressive tax is in comparison to a progressive tax, and understand the specific types of taxes that are considered ... Read Answer >>
Hot Definitions
  1. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  2. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  3. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  4. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  5. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  6. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
Trading Center