Ability to Pay Principle – Definition

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Ability-To-Pay Principle (Taxation) Definition

The Ability to Pay Principle is a taxation principle. It states that the tax amount applied on an economic body (generally a business) should be directly proportional to that entity’s ability to pay.

A Little More on What is the Ability-To-Pay Principle

The ability to pay taxes is a signal which enables us to estimate that we can fulfill our financial responsibilities. Businesses use this principle as a metric in pricing jobs and creating debt obligations (making loans).

Ability to Pay Principle depends on the following significant variables:

The capability of producing revenue in current and future time with an outlook for the clearance of principal amount along with interest. We can also call it the economic solvency. The money and this income’s stability both.

Present assets and revenue available to the lender.

Other guarantee cases or 3rd party guarantees and the existence of substitute sources of payment as well.

References for Ability to Pay Principle

Academic Research on Ability-to-Pay Principle

A pure theory of local expenditures, Tiebout, C. M. (1956). Journal of political economy, 64(5), 416-424. This paper provides information about the concept of local expenditures and the relevant pure theory presented in this domain.

From ability to pay to concepts of equal sacrifice, Richter, W. F. (1983). Journal of Public Economics, 20(2), 211-229. The Ability to Pay Principle ( APP) has a great role in the social and economic theoretical structures. Generalized ideas of equal sacrifice have been widely acknowledged and use this taxation rule explicitly. The authors discuss the extended concept of progressivity. But it does not state the non-excessive progressivity without taking into consideration the utility function of taxpayers.

Fairness in international taxation: the ability-to-pay case for taxing worldwide income, Fleming Jr, J. C., Peroni, R. J., & Shay, S. E. (2001). Fla. Tax Rev., 5, 299. In this study, the authors state the effectiveness of Ability to Pay Principle. It is a rule, recognized worldwide for fair taxation in the economy. It is applicable on an international level for every type of taxable income.

theories of tax Justice: ruminations on the benefit, Partnership, and Ability-to-Pay Principles, Dodge, J. M. (2004). Tax L. Rev., 58, 399. Among the theories of taxation, Ability to Pay Principle is known as a great rule to maintain justice in taxation. The author also explains its implication and reflection on the partnership and the underlying benefits.

Ability to pay, Buehler, A. G. (1945). Tax L. Rev., 1, 243. This research highlights the benefits and fair application of Ability to Pay Principal of taxation, but this research was carried out earlier and does not focus on the extended concept.

Ability to pay, Utz, S. (2001). Whittier L. Rev., 23, 867. This is related to the extended concept of Ability to Pay Principle and its beneficial role in the present economy.

Subsistence emissions and luxury emissions, Shue, H. (1993). Law & Policy, 15(1), 39-60. The author analyses the four important points related to greenhouse gases; (i) cost allocation to avoid global warming (ii) The relevant social consequences which we cannot avoid. (iii) Background cost allocation to make it a fair process (iv) Greenhouse gases emission and their fair allocation. To satisfy these queries, we have to choose fault-based and no-fault rules.

Tax and Disability: Ability to Pay and the Taxation of Difference, Seto, T. P., & Buhai, S. L. (2005). U. Pa. L. Rev., 154, 1053. This paper is about the difference between the Ability to Pay Principle and the disability to pay taxation.

The political arithmetic of international burden-sharing, Kravis, I. B., & Davenport, M. W. (1963). Journal of Political Economy, 71(4), 309-330. This study makes arithmetic calculations based on the political aspects related to global burden sharing.

Ability to pay and the taxation of virtual income, Chodorow, A. S. (2007). Tenn. L. Rev., 75, 695. This paper throws light on the Ability to Pay Principle and the taxation laws considering the virtual income of a person.

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