Ability to Pay

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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.

Ability to Pay

A principle stating that persons or corporations who earn the same amount of money should be taxed in the same way, and that those who earn more should be taxed more. For example, the principle states that two individuals making $50,000 per year should be taxed the same amount, regardless of how they earned their income, while someone making $100,000 per year should be taxed more than either of the other persons. Ability to pay is the idea behind the progressive tax system in place in many countries. See also: Horizontal equity.

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