![]() The most commonly used are basically: i) The “revenue” obtained, and ii) the “capital” or assets that are possessed.Ĭertainly the ideal would be to use both indicators, which constitute factors that demonstrate the financial and economic reality of the person. There might be a tax that would tax the income without taking into account the personal situation of the taxpayer, but in this case it would become a tax of “non-personal” or “objective” nature, where wealth is considered in isolation, disregarding who gets the benefits.Ĭertain indicators allow determining in economic terms the personal situation of the taxpayer, which highlight the individuals’ contributive capacity. Logically, in this last position, we are moving away from those elements that allow measuring the “personal status”, either of an individual or a family, through measurable economic indicators. However if the contributive capacity is measured exclusively in terms of income or capital, regardless of the remaining aspects outlined above for individuals, obviously one could think that this would extend the concept to legal entities, but in a partial manner and not avoiding inequities, if the economic unit is analyzed as a whole. Progressivity is not only reached by the structure of the rates scale but also by the non-taxable minimums (minimum level of subsistence for the taxpayer).Īll these concepts, obviously, do not apply to legal entities in general. This is the opposite of a regressive tax, where the fraction of income necessary to pay the tax decreases when the income increase. For this reason it is essential to use progressive rates, where the aliquot part increases more than proportionally with the increase in the tax base. The “Vertical” concept means that people who are at different levels in terms of contributive capacity, must be taxed differently. ![]() Hence the importance that the tax should be “personal” in the sense of taking into account the taxpayer capacity as a whole, for which it is required to be “global”. The “horizontal” concept is that those who are in a similar situation, in terms of contributive capacity, should pay the same amount of tax. In addition, it is also seen as a way to ensure that those with the most resources pay their fair share of taxes.It is a principle which stands for Justice and which is reached through the principle of contributive capacity, which in 1776 Adam Smith called the “capacity to pay”.Įquity in terms of contributive capacity is generally considered in two senses: vertical and horizontal. Thus, it is seen as a way to reduce inequality and promote social justice. This principle is based on the idea that those with more resources should contribute more to the public good. It is often used to justify progressive taxation, which is a system where those with higher incomes pay higher taxes. The ability-to-pay principle is an essential concept in public finance. Thus, a progressive tax system would require John to pay a higher tax rate than Jane. According to the ability-to-pay principle, John should pay more taxes than Jane because he has more financial resources, even after paying more taxes. Jane is a single mother who earns USD 25,000 per year. John is a wealthy businessman who earns USD 100,000 per year. To illustrate this, let’s look at two hypothetical taxpayers, John and Jane. This principle is often used to justify progressive taxation, where higher-income people pay higher taxes. That means the amount of taxes an individual or business pays should be based on their available financial resources. The ability-to-pay principle is an economic concept that states that taxes should be levied according to the taxpayer’s ability to pay. Published Definition of the Ability-to-Pay Principle
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