Ability to Pay Taxation

Ability to pay taxation is a kind of tax that is often assessed on the ability to pay the tax of the tax payer.

Example of Ability to Pay Taxation

In order to fully understand the concept the ability to pay taxation we will explain it with the help of an example where an individual A earns about $40,000 in a year. On the other hand another individual B earns about 100,000 per year. Suppose that the federal government is trying to raise its funds to pay its debt by increasing the tax rates of the public. Now there is a great difference in the earnings of different individuals as a result the government feels that increasing tax rate will affect individual A more as compare to affecting individual B. As a result the government made a rule that increase in the tax rate will only implement on the individuals earning more than $75,000 per year and not on those who are earning less than $75,000 per annum. The new rule says that the individual with more than $75,000 have to pay 100 percent of their tax where as individuals with less than $75,000 has to pay only quarter of their total tax.

Importance of Ability to Pay Taxation

Ability to pay Taxation is a concept that is actively present behind the progressive tax system of United States Of America.