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. Proof of Charitable Contributions ...

    Substantiation required by the Internal Revenue Service for a ...
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. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  2. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
  3. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
  4. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  6. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
Trading Center