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Ability-to-Pay Taxation: Definition and Examples

What Is Ability-To-Pay Taxation?

According to the ability-to-pay tax theory, a person’s tax burden should be proportional to their economic means. The concept is that those with more financial means should contribute a greater share of government revenues.

Understanding the Ability-To-Pay Principle

According to the ability-to-pay taxation theory, people with higher salaries should pay a larger share of their income in taxes than those with lower incomes. In 2020, for instance, the maximum individual income tax rate in the United States was 37%, while the lowest rate was 10% for taxpayers with less than $9,875 taxable income. The income you make between these thresholds will be subject to the tax rates for that bracket.

Because those with more wealth have less need for a given dollar, paying more taxes does not place a heavier burden on them, which is the principle behind ability-to-pay taxation. Consider that a person making $1,000,000 per year will not notice a $10,000 increase in their income, whereas a person making $60,000 per year will notice a significant increase in their standard of living.

History of Ability-to-Pay Taxation

A progressive income tax is based on the principle that those who can afford more should pay a larger share of their income in taxes. In 1776, Adam Smith, widely regarded as the founding father of modern economics, advocated for it.

Smith said, “The subjects of every state ought to contribute toward the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.”

Arguments for Progressive Taxation

Those who support ability-to-pay taxes believe that the wealthy and successful should be expected to contribute more financially to the common good since they have benefited so much from the nation’s standard of living.

They claim that the infrastructure (highways, fiber optic communications networks, a strong military, public schools, and a free market system) built with tax money makes their success possible and ensures it will continue.

Criticism of Ability-to-Pay Taxation

Some people believe that progressive taxation is unjust on its face. They argue that it discourages achievement and punishes those who work hard. One common proposal for a fairer tax system is a “flat tax” where all taxpayers are subject to the same rate on their income.

Progressive Taxation and Inequality

Tax rates for the wealthy have dropped dramatically over the last several decades, even though the United States still has a progressive tax structure. Before Ronald Reagan became president in 1981, the top rate of individual income tax was 70%. The highest marginal tax rate in 2020 is 37%. As a result, inequality is now at a hundred-year high. The wealthiest 1% own more than the poorest 90% combined.


  • According to the ability-to-pay concept, tax rates should be set such that those with a higher financial capacity to do so pay a larger share of the burden.
  • The concept of “ability to pay” stems from the belief that people who have benefited from society’s generosity should be prepared to contribute more.
  • Proponents of “ability to pay” say that the affluent should pay more for their sacrifice than the middle class and the working poor.

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