Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Ability-to-Pay Taxation

What it is:

Ability-to-pay taxation is a tax that's assessed based on the taxpayer's ability to pay the tax.

How it works (Example):

John Doe earns $40,000 a year. Jane Doe earns $100,000 a year. The federal government wants more money to pay off its debts and considers raising tax rates to get the money. Because the government feels that higher tax rates would be more of a hardship on John Doe than Jane Doe, it codifies the new tax rule such that only people who make more than $75,000 a year have to pay 100% of the tax, and people who make less than $75,000 a year pay only a quarter of the tax. The difference is based on the two taxpayers' ability to pay.

Why it Matters:

Ability-to-pay taxation is essentially the philosophy behind the United States' progressive tax system. Proponents argue that the approach is fairer to people who don't have the means to pay taxes; critics argue that the approach punishes people for financial success.