Ability To Pay

Business, Legal & Accounting Glossary

Definition: Ability To Pay

Quick Summary of Ability To Pay

Ability to pay is a borrower’s ability to meet certain financial demands, such as interest payments and principle, on long-term borrowings.

What is the dictionary definition of Ability To Pay?

Dictionary Definition

The principle that taxes should be levied on the basis of the taxpayer’s ability to pay. This normally leads to the view that as income or wealth increases; it’s marginal utility (it’s value to it’s owner) decreases, so that higher rates of tax may be levied on the higher slices. A typical progressive tax of this sort in the UK is Income Tax.

Full Definition of Ability To Pay

In taxation: The principle of ability to pay is that any tax should fall on those who afford to pay. In practice, taking account of ability to pay means that tax payments increase relative to the observed income or assets of taxpayers. In principle, however, earning capacity should also be taken into account.

The main objections to the ability to pay criterion is that earning capacity is un-observable, and that taxing income potentially acts as a disincentive towards work.

The collection of taxes from those who cannot afford to pay however, is unpopular, expensive and in some cases fundamentally impossible.

Ability to pay is an alternative to the benefit principle – which argues that only those who benefit from any given public expenditure should be taxed to pay for it.

The Government however, requires tax revenue to pay for public goods and the redistribution of income.

Given the level of revenue required to run a modern society, it may be inevitable that taxation processes transition further towards an ability to pay model in the future.

Synonyms For Ability To Pay

capacity to pay, able to pay, means to pay, unable to pay, capacity-to-pay

Cite Term

To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.

Page URL
Modern Language Association (MLA):
Ability To Pay. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. September 28, 2021 https://payrollheaven.com/define/ability-to-pay/.
Chicago Manual of Style (CMS):
Ability To Pay. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. https://payrollheaven.com/define/ability-to-pay/ (accessed: September 28, 2021).
American Psychological Association (APA):
Ability To Pay. PayrollHeaven.com. Retrieved September 28, 2021, from PayrollHeaven.com website: https://payrollheaven.com/define/ability-to-pay/

Definition Sources

Definitions for Ability To Pay are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 4th August, 2021 | 33 Views.