Ability-to-Pay Taxation

Written By:
Paul Tracy
Updated August 12, 2020

What is Ability-to-Pay Taxation?

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

How Does Ability-to-Pay Taxation Work?

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 Does Ability-to-Pay Taxation Matter?

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.