ability-to-pay principle

Discipline: Economics

Ability-to-pay principle envisages that taxation should be levied according to an individual's ability to pay; that is, individuals with higher incomes should be charged higher taxes.

Individuals with higher incomes are charged more taxes not because they use more government goods and services but because they have the ability to pay more. The primary indicator of ability to pay is commonly agreed to be income. Ability-to-pay principle is therefore in contrast with the benefit approach principle, which determines the amount of taxes a person should pay by the benefits received in public services. Ability-to-pay principle is based not on the benefits received but on the notion of equal sacrifice. It is considered to be characteristic of a socialist sentiment, and is used in most industrialized economies; but equality of sacrifice, is open to interpretation as it can be easured in absolute, proportional or marginal terms.

The main downside of the ability-to-pay principle is that it diminishes the incentive to work, since a higher portion of the generated income will be collected by the government as taxes.

Ability-to-pay principle was extended by the Swiss philosopher Jean-Jacques Rousseau (1712-1778), the French political economist Jean-Baptiste Say (1767-1832) and the English economist John Stuart Mill (1806-1873).

The most popular variant of the ability-to-pay principle is called the equal marginal sacrifice principle.

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