What Is Vertical Equity?
Let me explain vertical equity to you directly: it's a way to collect income taxes where the amount you pay goes up as your earned income increases. The core idea here is that if you have the means to pay more in taxes, you should contribute more than those who don't. This stands in contrast to horizontal equity, where people with similar incomes and assets pay the same tax amount.
Key Takeaways
- Vertical equity is a method of income taxation where more taxes are paid as income increases.
- It's based on the principle of ability to pay through progressive tax rates or proportional taxation.
- Vertical equity is often more achievable than horizontal equity, which can be undermined by loopholes and deductions.
Understanding Vertical Equity
When we talk about the equity of a tax system, we're addressing whether the tax burden is fairly distributed among people. The ability-to-pay principle says your tax amount should depend on how much burden it creates relative to your wealth. This leads to two key ideas of fairness: vertical and horizontal equity.
Vertical equity means those with higher incomes pay more taxes, either through proportional or progressive rates. In proportional taxation, taxes increase directly with income, and everyone pays the same percentage, so the effective tax rate stays constant regardless of income level.
Example of Vertical Equity
Consider this example to see vertical equity in action: imagine one taxpayer earning $100,000 a year and another earning $50,000. With a flat proportional tax rate of 15%, the higher earner pays $15,000 in taxes, while the lower earner pays $7,500. Even with the same rate, those with more resources end up paying more in actual dollars.
Progressive Taxation
Progressive taxation uses tax brackets, where you pay based on the bracket your income falls into, with higher brackets having higher rates. This means effective average tax rates rise with income, so wealthier people pay a larger share of their income in taxes than those in lower brackets.
For instance, in the U.S. as of 2024, a single taxpayer earning $100,000 has a top marginal rate of 22%, paying $5,426 plus 22% on excess over $100,000. A $50,000 earner also faces 22% on excess over $50,000, paying $5,426 plus that percentage. For 2025, it's $5,578.50 plus 22% on the excess for both, respectively.
Horizontal Equity
The other measure of tax equity is horizontal equity, which holds that people with similar ability to pay should contribute the same in taxes. If two people both earn $50,000, they should be taxed at the same rate since they have comparable wealth.
But achieving horizontal equity is tough in systems with loopholes, deductions, and incentives, as these can mean similar individuals end up paying different effective rates.
Is Vertical Equity a Method of Income Taxation?
Yes, vertical equity is indeed a method where more taxes are paid as income rises.
What Is Vertical Equity Based On?
It's based on the ability-to-pay principle, using progressive or proportional taxation.
Is Vertical Equity More Achievable than Horizontal Equity?
Yes, because horizontal equity can be weakened by loopholes and deductions.
The Bottom Line
In summary, vertical equity is how we collect income taxes so that payments increase with earned income. If you can afford to pay more, you contribute more than those who can't.
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