Ability to Pay

Ability to Pay

The principle that taxes should vary according to an individual's level of wealth or income.

Notes:

The application of this principle is a progressive tax system, which is considered to be characteristic of a socialist sentiment. Many hard-line classical economists like Adam Smith believed any elements of socialism would destroy the initiative of the population within a free market economy. However, many countries have blended capitalism and socialism with a great degree of success.

See also: Classical Economics, Economics, Flat Tax, Income Tax, Invisible Hand, Progressive Tax, Tax Bracket

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Ability to pay

Refers to the borrower's ability to make interest and principal payments on debts. See: Fixed charge coverage ratio.
In context of municipal bonds, refers to the issuer's present and future ability to create sufficient tax revenue to fulfill its contractual obligations, accounting for municipal income and property values.
In context of taxation, notion that tax rates should be determined according to income or wealth.