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The ability-to-pay approach treats government revenue and expenditures separately. Taxes are based on taxpayers’ ability to pay; there is no quid pro quo . Taxes paid are seen as a sacrifice by taxpayers, which raises the issues of what the sacrifice of each taxpayer should be and how it should be measured:
The ability-to-pay principle is one of the reasons for the general acceptance of the progressive income tax system. The principle of user pays supports the idea of horizontal equity, which states that those in similar wealth and income positions should be treated equally by the tax system. The basic idea is that those who do not use a service ...
The compensation principle is based on the willingness to pay the tax. If people are motivated to pay, there is a growth in consumer surplus. In this principle, when the willingness to pay is more than the cost to do so (Including if there is a cost imbalance for individuals) the projects/policies should be taken.
Of the hundreds of provisions in the US tax code, for example, only a handful actually impose a tax (26 USC Sections 1, 11, 55, 881, 882, 3301, and 3311 are the primary examples). Instead, most of those provisions help to define how much income a taxpayer has—that is, their ability to pay.
For example, if income is taxed on a formula of 5% from $0 up to $50,000, 10% from $50,000 to $100,000, and 15% over $100,000, a taxpayer with income of $175,000 would pay a total of $18,750 in taxes.
For the 80th acre, her marginal willingness to pay has decreased down to zero. Figure 2: Tom's marginal willingness to pay. Figure 2 shows Tom's marginal willingness to pay for a public park. Unlike Sarah, for the first acre of park he is willing to pay $40, and for the 40th acre of park he has a marginal willingness to pay of $20.
One of the key features of a progressive tax system is that it takes into account the taxpayer’s ability to pay. This means that higher-income individuals or entities are taxed at a higher rate because they have a greater ability to pay the tax. In contrast, in a regressive tax system, the level of income of the taxpayer is not considered.
The opposite of a progressive tax is a regressive tax, such as a sales tax, where the poor pay a larger proportion of their income compared to the rich (for example, spending on groceries and food staples varies little against income, so poor pay similar to rich even while latter has much higher income). [4]