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Ability to pay is a tax principle applied to certain U.S. tax laws, such as the progressive tax system that places higher tax rates on individuals who have a higher income. This principle states that those with a higher income should pay more in taxes because they have a greater ability to do so (not because they are using up more government resources.)
History of Ability to Pay Principle of Taxation
Many of our country’s current taxation principles are based on the theories of Adam Smith, an American economist and philosopher from the 18th century. The ability to pay principle of taxation traces back to 1771, when Smith published four principles of taxation in his political economy book, “The Wealth of Nations.”
The first principle states that all members of a nation should pay taxes in proportion to the amount of income they earn.
What Is the Difference Between the Benefits Principle and the Ability to Pay Principle?
The ability to pay definition separates it from the benefits principle in one key way. Both principles state that taxes should be proportional.
But the ability to pay principle states that the proportion should be based on income, while the benefits received principle states that the proportion should be based on the benefits received from goods and/or services the government gives out.