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.

Related Terms View All
  • Auction Market
    Though most of the trading is done via computer, auction markets can also be operated via...
  • Best Execution
    Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
  • Book-Entry Savings Bond
    Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to...
  • Break-Even Point
    The basic idea behind break-even point is to calculate the point at which revenues begin...
  • Calendar Year
    If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...