Vertical Equity
Vertical Equity is a principle of taxation that advocates for taxing individuals based on their ability to pay. This means that those with higher incomes should pay more in taxes, while those with lower incomes should pay less. The core idea of vertical equity is that the tax system should be progressive, ensuring a fair distribution of the tax burden across different income levels to promote social equity. Vertical equity is commonly associated with a progressive tax system, where tax rates increase as income increases.
Definition: Vertical equity is a tax principle that advocates taxing individuals based on their ability to pay, meaning that those with higher incomes should pay more taxes, while those with lower incomes should pay less. The core idea of this principle is that taxes should be progressive to ensure a fair distribution of the tax burden across different income levels, thereby promoting social equity. Vertical equity is often associated with progressive tax systems, where tax rates increase with income.
Origin: The concept of vertical equity can be traced back to the 18th-century economist Adam Smith, who proposed in 'The Wealth of Nations' that taxes should be levied according to the ability to pay. Over time, this principle has been widely adopted in modern tax systems, especially in the early 20th century, when many countries began implementing progressive tax systems to achieve income redistribution and social equity.
Categories and Characteristics: Vertical equity is primarily reflected in progressive tax systems. There are several types of progressive taxes:
- Personal Income Tax: Tax rates increase with personal income; the higher the income, the higher the tax rate.
- Corporate Income Tax: Different tax rates are applied based on corporate profits.
- Estate Tax: Progressive tax rates are applied based on the value of the estate.
Specific Cases:
- Federal Personal Income Tax in the United States: The U.S. uses progressive tax rates ranging from 10% to 37%, with higher incomes subject to higher rates. For example, individuals with annual incomes below $9,875 are taxed at 10%, while those with incomes over $518,400 are taxed at 37%.
- Personal Income Tax in the United Kingdom: The U.K. also uses progressive tax rates, with a basic rate of 20% and higher rates of 40% or 45% for high earners. For example, individuals with annual incomes below £12,570 are exempt from tax, while those with incomes over £150,000 are taxed at 45%.
Common Questions:
- Why is vertical equity important? Vertical equity achieves income redistribution through progressive taxation, reducing income inequality and promoting social equity.
- Does a progressive tax system discourage high earners? While a progressive tax system may have some impact on high earners, its primary goal is to achieve social equity. Many studies show that reasonable progressive tax rates do not significantly affect the work incentives of high earners.
