What is vertical equity?

Vertical equity is an income tax collection method whereby the taxes paid are proportional to the income obtained. Vertical equity is predicated on the notion that individuals with a greater propensity to pay taxes ought to make more significant contributions than those who lack such capacity.

In contrast to those mentioned above, horizontal equity entails that taxpayers with comparable assets and income should remit an equivalent amount of money.

Comprehension of Vertical Equity

In the context of a tax system, equity denotes the proportionate distribution of the tax burden among the populace. The ability to pay principal stipulates that an individual’s tax liability should be proportional to the burden the tax imposes on their fortune. Vertical and horizontal equity are two concepts of fairness and equity derived from the ability-to-pay principle.

Implementing proportional or progressive tax rates can achieve the vertical equity principle, which states that higher-income people should pay higher taxes. Proportional taxation implies that the tax liability escalates directly to one’s income. The effective average tax rate, which is constant regardless of income, ensures equitable income distribution among taxpayers.

Illustration of vertical equity

To illustrate vertical equity, let us consider two taxpayers, each earning $50,000 annually and the first earning $100,000 annually. A 15% fixed and proportional tax rate would require the taxpayer with the higher income to pay $15,000 in taxes for the specified tax year, while the taxpayer with the lower income would incur $7,500 in taxes. When the same tax rate is applied to all income levels, those with more extraordinary financial means or higher incomes will invariably owe more tax dollars than those with lower incomes.

The Progressive Levy

Tax brackets are a component of progressive taxation in which individuals owe taxes based on the tax bracket into which their income positions them. A distinct tax rate will be applied to each income bracket, with the maximum percentages paid by those in higher income brackets. Effective average tax rates increase with income under this taxation system so that individuals with the highest self-reported incomes pay a greater proportion of their income in taxes than those in the lowest income bracket. As of 2019, the highest marginal tax rate for a single taxpayer earning $100,000 in the United States is 24%.1 A tax liability of $18,174.50 would be their result under an effective tax rate of 18.17%. 22% is the highest marginal tax rate applicable to an individual taxpayer with an annual income of $50,000. This taxpayer would owe $6,864 at an effective tax rate of 13.73 percent.

Horizontal equity is another metric employed to assess equity within a taxation system. This criterion posits that individuals of comparable financial means should remit equivalent taxes to the economy. The premise of this concept is that individuals belonging to the same income bracket have an equal capacity to contribute to society and, as such, ought to be subject to an equivalent rate of income taxation. For instance, for two taxpayers earning $50,000, their tax rates should be identical due to their shared wealth or classification within the same income bracket. In contrast, horizontal equity is difficult to attain in a tax system rife with exemptions, deductions, and incentives, as the provision of any tax relief effectively results in different rates for comparable individuals.

Conclusion

• Vertical equity is an income taxation method in which tax payments increase with income.
• The ability to pay, as determined by proportional or progressive taxation, is the foundation of vertical equity.
• Vertical equity is often more feasible than horizontal equity, which is susceptible to deductions and exemptions.