Ability to pay refers to a financial criterion used in various contexts such as finance, taxation, industrial relations, municipal bonds, and public policy. It represents the capacity of an individual or entity to meet financial obligations based on their income or economic status.
The principle that taxes should be levied based on the taxpayer's ability to pay, suggesting that as income or wealth increases, the marginal utility decreases, allowing for higher tax rates on higher income tiers.
The marginal rate of tax represents the amount of extra tax that a taxpayer incurs if they earn one additional unit of currency over their current income. This rate typically rises as incomes increase under a progressive tax regime.
