Ability to Pay


Health Economics

  • This is not a technical term in economics; it is, however, frequently used as though it were - most frequently as a part of an ethical principle used in connection with an idea of fair taxation, viz. that a taxpayer's contribution ought to bear some relation to their income or wealth (i.e. ability to pay). A strict definition might amount to this: ability to pay is the sum of an individual's tradable human and non-human capital, i.e. their entire wealth. Some may have in mind no more than the individual's current budget constraint. Ability to pay stands in contrast to the benefit principle according to which what is paid (e.g. in premiums or taxes) ought to be proportional to the anticipated benefit rather than the wherewithal to acquiring it. This at least has the virtue of making clear that a value judgment is being made. In the context of taxation, ability to pay is often coupled with the idea that what one pays in (income or wealth) tax ought to be progressive, i.e. that the fraction paid should rise with income or wealth, rather than being merely proportional, let alone regressive.