The ability to pay tax theory.

This is an exceptional theory compared to the other theories of

taxation. This is because out of all theories this remains to be applicable compared to the others
which base on academic purpose only. The ability to pay theory of taxation relies on the fact that
tax should be levied on a person’s ability to tax only,1 thus implying that tax levied should
correspond with a person’s income. This theory looks at income as the main determinant in
payment of tax. People who earn more income are subjected to pay more tax.2 This theory has
been supported by various prominent figures such as John Locke and Thomas Hobbes and a
number of present-day tax specialists. The early believers of this theory the likes of John Locke
and Thomas Hobbes promoted this theory with the view of equality and fairness. And they
believed tax payable should be measured on what is spent or consumption rather than mere
income.3 The theory can be greatly related to the progressive tax whereby rate of tax paid
increases with income level.4 It is an effort towards promoting income distribution. This theory is
the most applicable in Tanzania as observed below;

Total Income is expressly shown under section 5 (1) of The Income Tax Act,5 where it is
described to be the sum of a person’s chargeable income for the year of income from
employment, business and investment and section 5 (2), shows that every person’s income will
be determined separately. This proves that an individual’s income will be observed separately in
determining tax payable. Thus, tax is charged with relation to a person’s income.

Ability to pay theory is also applicable under the first schedule of the Income Tax Act, whereby
tax charged bases on the progressive theory for it increases with the income gained by a person.
For not all individuals are subjected to pay same amount of tax because their incomes are not the
same. The greater the income gained the greater the tax charged on the individual. This thus
promotes an element of fairness to the people charged.

Another applicability of the ability to pay tax theory is capital gain tax. Whereby this type of tax
is only levied where the chargeable asset is disposed by way of sale. It is an increase in a capital
asset value and is to be realized when the asset is sold.6 This has been provided for in The

1
https://investopedia.com
2
https://study.com
3
https://britanica.com
4
https://corporatefinanceinstitute.com
5
Cap 332, RE 2019
6
https://abcattorneys.co.tz
Income Tax Act under Section 67 provides for charging of tax on sources of profit and loss.
Whereby in capital gains only the profit is charged for and not the loss. This reflects on ability to
pay theory because if a person has gained in that year then they will be able to pay. In order to
determine capital gain that is subjected to tax one has to compute selling prices and the cost that
which will be deducted, and the excess is taxed according to prescribed amount.

However, despite the applicability of the ability to pay theory of taxation it has still been
subjected to some criticism. And they are as follows

Critics to the theory argue that the ability to pay theory discourages economic success. This is
because earning more seems like a penalty at this point because the people who earn more are
taxed more than the ones who earn less.7 Moreover some critics condemns this theory for having
a socialist approach that discourages innovation in a free market. Thus, people end up viewing
earning more money as unappealing.

This theory leads to discrimination. This is because of the fact that regardless of the earnings of
the wealthy, they receive the same benefits as those who pay lower taxes.8 Thus taxing the rich
greater is basically unfair.

The ability to pay tax encourages tax avoidance and relocation of wealth. The rich usually find
ways to avoid paying a higher tax rate than everyone else. Thus it makes them take up ways to
avoid paying of higher tax rates such as diverting their wealth and income to low taxing
jurisdictions.

7
https://gocardless.com
8
https://penpoin.com