Ability to pay theory

Ability to pay theory is the theory of taxation that the level of taxation should be related to the taxpayer’s ability to pay. Taxpayers with higher incomes pay tax at a higher rate than those on low incomes. This is the basis of progressive taxation. Many taxes, such as VAT, fuel tax, or sales tax, are not linked to the purchaser’s ability to pay and are therefore regressive taxation.

Category: Economics
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