The ability to pay principle is the concept that individuals shouldn’t be required to pay taxes beyond their wherewithal to pay the taxes. In other words, it’s a concept that determines the proportional amount of tax levied on an individual based on his or her income and capability to afford the taxes.
This principle seeks to impose a higher tax on people with a higher income and a lower tax on people with a lower income, ceteris paribus. This way lower-income people aren’t taxed excessive amounts relative to their overall income.
This is the fundamental principle in the progressive tax system of the United States, which seeks income redistribution. The amount of money spent by wealthy consumers is higher than their basic necessities. Conversely, the amount of money spent by lower-income consumers is lower than their basic necessities. With this concept, the lower-income people can meet their tax obligations because they are lower than those of the higher-income people.
This concept also extends beyond simple tax brackets and income levels. For instance, individuals shouldn’t be taxed on transactions in which they don’t receive any cash. An example of this is stock options. An employee who is granted stock options receives something of value that is subject to taxation, but because they didn’t receive any cash, they can delay the tax on the options until they cash them in.