What is "Ability to Pay" taxation?

Ability to pay is a philosophy that asks individuals to pay tax according to their ability. This means that rich people should pay more in taxes than a poorer one. The ability to pay is based on the concept that since the value of one dollar is more for poorer individuals, they should pay less than the rich.

The ability to pay encourages authorities to collect and levy more taxes to the rich as they are in a better position to pay more taxes. At the same time, since poorer people are unable to pay the same amount due to various reasons, they should be exempted from paying more taxes or taxes at a flat rate.

The philosophy of ability to pay also means that since the dollar value is more for the poorer than the rich, an amount that best suits should be paid by the former. High-earning individuals and richer people have to be taxed more as the dollar value is less for them.

As is obvious, taxation is related to income, and the ability to pay is no different. It is based on an individual's income over a certain period. If the income is low, a lower rate of taxation is levied and if it is more than the rate of taxation is kept high. Countries usually follow the ability to pay more than resorting to a flat rate of taxation to all its citizens.

Points in Support of the Ability to Pay

As mentioned above, since poorer people cannot pay taxes equal to the rich, their ability to pay has to be considered while levying taxes. It is reasonable because the poorer individual would be unable to meet the expenses if a bigger chunk of wealth is taken away from them. Rich people who have a palpable amount of wealth, however, can easily meet the demands of life even if they pay more tax. That is why the ability to pay taxation is favorable.

Points against the Ability to Pay

Critics argue that it is the talent and hard work that make people rich and poor. Hence a flat rate of tax should be levied on all irrespective of whether the individual is poor or rich. As the rich people become rich for their efforts, they should be exempt from higher taxes as in the case of the ability to pay tax.

Points to Note

  • The concept of "Ability to Pay" suggests that the Rich should pay more in taxes.

  • Poorer individuals can pay less in taxes, as they do not have the ability to pay high.