Ability to Pay

The principle that taxes should vary according to an individual's level of wealth or income.

Investopedia Says:
The application of this principle is a progressive tax system, which is considered to be characteristic of a socialist sentiment. Many hard-line classical economists like Adam Smith believed any elements of socialism would destroy the initiative of the population within a free market economy. However, many countries have blended capitalism and socialism with a great degree of success.

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Capacity to meet future obligations from earnings or income.

1. Banking. A borrower's capacity to make principal and interest payments from disposable income. Lenders look closely at a credit applicant's current salary and expected future earnings, and at an organization's Cash Flow from conversion of assets into cash. See also Balance Sheet Ratios; Five C's of Credit; Qualifying Ratio.

2. Securities, municipal bonds. The issuer's capacity to generate sufficient income from taxes or other sources to meet contractual obligations.

3. Finance. The ability to meet Debt Service payments on bonds and other long-term obligations.