Ability to Pay Principle - Explained
What is the Ability to Pay Principle?
Written by J. Mance Gordon
Updated at April 17th, 2024
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What is the Ability-To-Pay Principle?
The Ability to Pay Principle is a taxation principle. It states that the tax amount applied on an economic body (generally a business) should be directly proportional to that entity's ability to pay.
How Does the Ability-To-Pay Principle Work?
The ability to pay taxes is a signal which enables us to estimate that we can fulfill our financial responsibilities. Businesses use this principle as a metric in pricing jobs and creating debt obligations (making loans). Ability to Pay Principle depends on the following significant variables:The capability of producing revenue in current and future time with an outlook for the clearance of principal amount along with interest. We can also call it the economic solvency. The money and this incomes stability both.Present assets and revenue available to the lender.Other guarantee cases or 3rd party guarantees and the existence of substitute sources of payment as well.