Vertical Equity

AAA

DEFINITION of 'Vertical Equity'

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

INVESTOPEDIA EXPLAINS 'Vertical Equity'

The two main types of vertical equity are proportional and progressive taxation. In proportional taxation, the amount of taxes paid increases directly with income. For example, a 5% increase in earnings will cause a 5% increase in taxes. Progressive taxation includes tax brackets, where people pay taxes based on the tax bracket into which their income places them. Each tax bracket will have a different tax rate, with higher income brackets paying the highest percentages.

RELATED TERMS
  1. Income Tax

    A tax that governments impose on financial income generated by ...
  2. Tax Bracket

    The rate at which an individual is taxed. Tax brackets are set ...
  3. Regressive Tax

    A tax that takes a larger percentage from low-income people than ...
  4. Proportional Tax

    A tax system that requires the same percentage of income from ...
  5. Progressive Tax

    A tax that takes a larger percentage from the income of high-income ...
  6. Working Tax Credit (WTC)

    A tax credit offered to low-income individuals working in the ...
Related Articles
  1. 10 Steps To Tax Preparation
    Taxes

    10 Steps To Tax Preparation

  2. Tax Tips For The Individual Investor
    Retirement

    Tax Tips For The Individual Investor

  3. Tax-Saving Tips For Canadian Taxpayers
    Savings

    Tax-Saving Tips For Canadian Taxpayers

  4. Do Tax Cuts Stimulate The Economy?
    Taxes

    Do Tax Cuts Stimulate The Economy?

comments powered by Disqus
Hot Definitions
  1. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  2. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  3. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  4. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  5. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  6. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
Trading Center