# What Is Ability-to-Pay Taxation?

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> **Definition**
>
> The ability-to-pay principle is also known as progressive taxation.

## What Is Ability-To-Pay Taxation?

The [ability-to-pay](https://www.investopedia.com/terms/a/abilitytopay.asp) philosophy of taxation maintains that taxes should be levied according to an individual's ability to pay. The idea argues people, businesses, and corporations with [higher incomes](https://www.investopedia.com/terms/v/vertical_equity.asp) can and should pay more taxes. 

### Key Takeaways

*   The ability-to-pay principle holds that those with more income and wealth should pay more taxes.
*   One argument for "ability to pay" is those with success should be willing to give back to society.
*   Proponents of ability-to-pay taxation argue that a single dollar ultimately means less to a wealthy individual than an average taxpayer.

## Progressive Taxation

A [progressive tax](https://www.investopedia.com/terms/p/progressivetax.asp) has a tax rate that increases or progresses as taxable income increases. It imposes a lower tax rate on low-income earners and a higher rate on those with higher incomes. Ability-to-pay taxation argues that those who earn higher incomes should pay a greater percentage of those incomes in taxes than those who earn less.

In 2024, individuals in the United States with taxable [income](https://www.investopedia.com/terms/i/income.asp) less than $11,600 ($11,925 in tax year 2025) faced a 10% income tax rate, while those with taxable income of more than $609,350 ($626,350 in tax year 2025) faced a rate of 37%, the nation's top individual rate. Earnings between those amounts face tax rates as set by income brackets.

The ideals of ability-to-pay taxation promote the notion that people with more money who pay more taxes are not heavily burdened. To a person earning $1 million a year, $10,000 will make very little difference in their life, while it will make a big difference to a person earning only $60,000 a year.

> **Fast Fact**
>
> Standard deductions help reduce an individual's taxable income. In 2024, the deduction for single filers is $14,600 and will increase to $15,000 in 2025.

## History

A progressive income tax was endorsed by [Adam Smith](https://www.investopedia.com/updates/adam-smith-economics/) in 1776. Smith wrote: “The subjects of every state ought to contribute toward the support of the government, as near as possible, in proportion to their respective abilities; that is in proportion to the revenue which they respectively enjoy under the protection of the state."

To support efforts in World War I, the U.S. passed The Revenue Act of 1918 which codified all tax laws and imposed a progressive income-tax rate structure of up to 77 percent. A progressive tax structure is evident in the tax brackets for the tax year 2025:  

## Arguments and Criticism

Advocates of ability-to-pay taxation argue that those who have benefitted most from the nation’s way of life in the form of higher incomes and greater wealth can afford and should be obligated to give back more. Tax revenues build [infrastructure](https://www.investopedia.com/terms/i/infrastructure.asp), a strong military, and public schools.

Critics of [progressive taxation](https://www.investopedia.com/terms/p/progressivetax.asp) argue that it is [fundamentally unfair](https://www.hoover.org/research/inequity-progressive-income-tax). They say it penalizes hard work and success and reduces the incentive to make more money. While the U.S. maintains a progressive tax system, tax rates for the wealthy have plummeted over several decades. When President Ronald Reagan took office in 1981, the highest income [tax bracket for individuals was 70%](https://www.investopedia.com/terms/e/economic-recovery-tax-act.asp). In 2024, the top rate is 37%.

## What Is a Tax Levied Equally?

Flat taxes are levied at the same rate for all payers. This is the inverse of the ability-to-pay principle or a [regressive tax](https://www.investopedia.com/terms/r/regressivetax.asp) system.

## What Are Types of Taxes?

Common types of taxes include income, corporate, sales, and property taxes. Income tax is levied on an individual's earnings, while corporate tax on a company's. Sales taxes are collected at points of sale. Property taxes are based on the value of a home.

## When Did Income Tax Collection Begin?

President Lincoln passed a revenue-raising measure to pay for Civil War expenses in 1862. It created a Commissioner of Internal Revenue and the United States' first income tax. 

## The Bottom Line

Ability-to-pay refers to a principle holding that taxes should be levied according to one's ability to pay them. Higher earners and wealthier individuals pay higher tax rates than those with lower or middle income.

> **Article Sources**
>
> 1.  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)."
>     
> 2.  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)."
>     
> 3.  Adam Smith Works. "[Adam Smith on Fiscal Policy](https://www.adamsmithworks.org/speakings/adam-smith-on-fiscal-policy)."
>     
> 4.  Internal Revenue Service. "[Historical Highlights of the IRS](https://www.irs.gov/newsroom/historical-highlights-of-the-irs)."
>     
> 5.  Brookings. "[What We Learned from Reagan’s Tax Cuts](https://www.brookings.edu/articles/what-we-learned-from-reagans-tax-cuts/)."