Ability-To-Pay Taxation

Published Feb 8, 2023

Definition of Ability-to-Pay Taxation

Ability-to-Pay Taxation is a taxation system that is based on the principle that people should pay taxes according to their ability to pay. That means it is based on the idea that people with higher incomes should pay a higher percentage of their income in taxes than people with lower incomes. This system is closely related to progressive taxation, where the tax rate increases with the taxpayer’s income.

Example

To illustrate this, let’s look at the federal income tax system in the imaginary country of Zogonia. In Zogonia, the tax rate increases with the taxpayer’s income. That means people with higher incomes pay a higher percentage of their income in taxes than people with lower incomes. For example, in 2020, people with an income of up to USD 9,875 paid a tax rate of 10%. By contrast, people with an income of more than USD 518,400 paid a tax rate of 37%, because they could afford to pay that much and still have more money left over than people with a lower income, i.e., their ability-to-pay is higher.

Why Ability-to-Pay Taxation Matters

Ability-to-Pay Taxation is an important tool for governments to reduce income inequality. That means it allows them to redistribute wealth from the wealthy to the less wealthy. This can be beneficial for society as a whole because it can help to reduce poverty and create a more equal society. In addition to that, it can also be used to fund public services and infrastructure, which can benefit everyone.