Ability-to-Pay Theory

Taxation can be defined either as a state power, a process or as a mode of cost distribution. Taxation is an
inherent power of a state to enforce equal contribution from its subjects for public purposes from which the
latter benefits from the spending of the former. Because of this, taxation is also a mode of allocating
government costs or burden to its people. With regards to these spending, the government considers the
ability to pay theory and the benefits received theory (Banggawan, 2017).
The government assumes that the people are required to contribute based on their relative capacity to
support its operations. This is the presumption of the ability to pay theory which presupposes that taxation
should also consider the capability of the taxpayer to aid their government. The ability to pay theory could
be perceived in two aspects namely the vertical equity and the horizontal equity (Banggawan, 2017).
Vertical equity suggests that the ability to pay of a person is contingent upon the level of their tax bases. If
their tax bases are high so should their taxes are and vice versa. The vertical equity is a gross concept
(Banggawan, 2017).
As for the other aspect, the horizontal equity, it is a net concept. Horizontal equity looks upon the
circumstances of the taxpayer. This concept is situational in a sense that if two taxpayers have the same
level of income, the ones with dependents up to a certain extent will pay less than the person with no
dependents at all (Banggawan, 2017).

References
Banggawan, R. B. (2017). Income Taxation Laws, Principles and Applications 2017 OBE Edition. Real
Excellence Publishing.