What Is Vertical Equity?

Vertical equity is a method of collecting income tax in which the taxes paid increase with the amount of earned income. The driving principle behind vertical equity iꦡs that those who have the ability to pay more taxes should contribute more than those who are not.

This can be contrasted with 澳洲幸运5官方开奖结果体彩网:horizontal equity, whereby individuals with similar income and assets should pay the same amount in taxes.

Understanding Vertical Equity

The equity of a tax system speaks to whether the tax burden is distributed fairly among the population. The 澳洲幸运5官方开奖结果体彩网:ability to pay principle states that the amount of tax an individual pays should be dependent on the level of burden the tax will create relative to the wealth of the individual. The 澳洲幸运5官方开奖结果体彩网:ability to pay principle gives rise to two notions of fairness and equity: vertical and hori💟zontal equity.

Vertical equity drives the principle that people with higher incomes should pay more tax, through proportional or progressive tax rates. In 澳洲幸运5官方开奖结果体彩网:proportional taxation, the amount of taxes paid increases directly with income. Everyone pays the same proportion of their income in tax since the effective average ta𒀰x rate does not change with income.

Example of Vertical Equity

For an example of vertical equity, consider a taxpayer who earns $100,000 per annum and another who earns $50,000 per annum. If the tax rate is flat and proportional at 15%, the higher income earner will pay $15,000 tax for the given tax year, while the taxpayer with the lower income will have a 澳洲幸运5官方开奖结果体彩网:tax liability of $7,500. With the same rate applied across all income amounts, the individuals with more resou🌜rces or higher income levels will always ꦐpay more tax in dollars than lower earners.

Progressive Taxation

Progressive taxation includes 澳洲幸运5官方开奖结果体彩网:tax brackets, in which people pay taxes based on the tax bracket that their income places them. Each tax bracket will have a different tax rate, with higher ꦚincome brackets paying the highest percentage🌸s.

Under this taxation system, effective average tax rates increase with income, so that the rich pay a higher share of their income in taxes than people whose self-reported incomes were in the lowest income bracket. For example, in the United States, a single taxpayer who earns $100,000 has a top 澳洲幸运5官方开奖结果体彩网:marginal tax rate of 22%, as of 2024. Their tax liability would be $5,426 plus 22% of any excess over $100,000. The top marginal tax rate for a single taxpayer whose annual income is $50,000 is also 22%. In this case, this taxpayer would pay $5,426 plus 22% of any excess over $50,000. For 2025, the marginal tax rate remains 22%, but a single taxpayer who earns $100,000 or $50,000 would pay $5,578.50 plus 22% of any excess over $100,000 or $50,000, respectively.

The other yardstick that is used to measure equity in a taxation system is horizontal equity, which states that people with similar abilities to pay should contribute the same amount in taxes to the economy. The basis behind this notion is that people in the same income group are equal in their contribution capacity to society and, thus, sh꧅ould be treated the same by imposing the same level of income tax.

For example, if two taxpayers earn $50,000, they should both be taxed the same rate since they both have the same wealth or fall within the same income bracket. However, horizontal equity is hard to achieve in a tax system with 澳洲幸运5官方开奖结果体彩网:loopholes, 澳洲幸运5官方开奖结果体彩网:deductions, and incentives, because the proviꦍsion of any tax break means that similar ind🍰ividuals effectively do not pay the same rate.

The Bottom Line

Vertical equity is a method of coll🧔ecting income tax in which the taxes paid increase with the amount 🦩of earned income. Those who have the ability to pay more taxes contribute more than those who don’t.