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The "ability to pay" principle of taxation rests on the fact that the sacrifice from the last dollar is small for high income individuals but large for low income individuals. Thus, the principle leads to a recommendation of progressivity of tax rates for all taxes.
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The principle of ability to pay is obvious in income taxes: the higher the income the higher the rate one has to pay. The principle used to be even more noticeable in the U.S. prior to the Tax Reform Act of 1986: the rate of taxes assessed on higher income was much higher (50%) than what it has been since then (33%). |
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