Ability to Pay Taxation

Updated: September 22, 2025

Definition — ability-to-pay taxation
Ability-to-pay taxation is the principle that taxes should be charged based on a taxpayer’s capacity to bear the burden. In practice, that usually means people or firms with higher income or greater wealth pay a larger share of their resources in tax than those with less.

Key concepts (brief)
– Progressive tax: a tax system whose statutory rate increases as taxable income rises. Lower-income taxpayers face lower marginal rates; higher-income taxpayers face higher marginal rates.
– Marginal rate: the tax rate applied to the last dollar of income.
– Effective (average) rate: total tax paid divided by total income; usually lower than the highest marginal rate.
– Flat tax: the same rate applies to all taxpayers; contrasts with ability-to-pay (progressive) systems.
– Regressive tax: a structure that takes a larger percentage from lower-income earners than from higher-income earners.

Why proponents support it
– Redistribution: moves resources from higher earners toward public goods and social programs.
– Vertical equity: treats taxpayers with unequal ability to pay differently to achieve fairness.
– Revenue: progressive structures can raise significant revenue from high earners to fund government functions.

Common criticisms
– Work and investment incentives: higher marginal rates may reduce the incentive to earn more or invest.
– Perceived unfairness: critics argue taxing higher earners at higher percentages penalizes success.
– Complexity and avoidance: progressive systems often come with many deductions, credits, and planning strategies that increase complexity and create opportunities to reduce taxes.

Short historical notes
– Adam Smith (1776) endorsed taxing according to ability to pay.
– The U.S. created its first income tax administration during the Civil War (1862).
– A progressive structure was used during and after World War I (Revenue Act of 1918 included very high top rates).
– The top U.S. individual statutory rate has fallen over decades (for example, the top bracket was 70% in 1981; it was 37% in 2024).

Recent U.S. figures you should know (examples from the BODY data)
– 2024 (single filers): a 10% rate applied to taxable income below about $11,600; the top statutory rate was 37% for taxable income above about $609,350. Individual bracket thresholds are adjusted periodically for inflation.
– Standard deduction (single filer): $14,600 in 2024; projected $15,000 in 2025. A standard deduction reduces taxable income before applying tax rates.

Worked numeric example — illustrating burden and deduction effects
1) Standard-deduction effect
– Gross income: $60,000 (single filer, 2024)
– Standard deduction: $14,600
– Taxable income = 60,000 − 14,600 = 45,400

This shows how the standard deduction lowers the base on which progressive rates apply.

2) Relative burden illustration (simple comparison, not a full tax calculation)
– Person A earns $1,000,000. An additional tax of $10,000 equals 1.0% of gross income.
– Person B earns $60,000. The same extra $10,000 equals 16.7% of gross income.
This demonstrates why advocates argue higher earners can afford larger absolute contributions without similar hardship.

Checklist — questions to evaluate an ability-to-pay/progressive tax proposal
– Equity: Does the proposal increase vertical equity (higher earners pay a higher percentage)?
– Progressivity vs. fairness: Are marginal-rate increases balanced so they don’t create large perceived unfairness?
– Incentives: Could the change meaningfully alter work, saving, or investment behavior?
– Simplicity and compliance: Will the change increase complexity or opportunities for avoidance?
– Revenue impact: Is the expected revenue sufficient and sustainable for the intended spending?
– Distributional effect: Who benefits and who bears the burden across income groups?

Practical note on interpreting statutory vs. real tax burden
– The statutory (marginal) rate tells you the tax on the next dollar earned.
– The effective rate (tax paid divided by gross income) tells you the actual share of income paid in tax after deductions and credits.
Use both when comparing tax burdens across taxpayers.

Selected references (official and reputable)
– Internal Revenue Service — “IRS Releases Tax Inflation Adjustments for Tax Year 2025”
https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025
– Internal Revenue Service — “IRS Provides Tax Inflation Adjustments for Tax Year 2024”
https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024
– Adam Smith Works — “Adam Smith on Fiscal Policy”
https://adamsmithworks.org/adam-smith-on-fiscal-policy/
– Internal Revenue Service — “Historical Highlights of the IRS”
https://www.irs.gov/newsroom/historical-highlights-of-the-irs
– Brookings Institution — “What We Learned from Reagan’s Tax Cuts”

What we learned from Reagan’s tax cuts

Educational disclaimer
This explainer is for general information and education only. It is not personalized tax, legal, or investment advice. For decisions about your taxes or finances, consult a qualified professional.