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. Section 7702

    The section of the United States Internal Revenue Code that defines ...
Related Articles
  1. 10 Steps To Tax Preparation
    Taxes

    10 Steps To Tax Preparation

    Follow these simple steps to get you ready for the income tax deadline of April 15.
  2. Retirement

    Tax Tips For The Individual Investor

    We give you seven guidelines to help you keep more of your money in your pocket.
  3. Savings

    Tax-Saving Tips For Canadian Taxpayers

    Find out how to get a bigger return.
  4. Taxes

    Do Tax Cuts Stimulate The Economy?

    Learn the logic behind the belief that reducing government income benefits everyone.
  5. Retirement

    Planning Ahead for 2015's Tax Law Changes

    Increased 401(k) limits can help savers put away more money for retirement in 2015—but some new restrictions are coming for IRAs.
  6. Retirement

    Know The Cost of Living Where You Plan To Retire

    When considering where to live after retiring, it's important to keep in mind the type of taxes that would have to be paid at each retirement location.
  7. Year-end tax tips
    Taxes

    7 Ways To Minimize Your 2014 Taxes By December 31

    The year's not quite over yet. See whether taking any of these steps would leave you owing less in 2014 taxes, come April.
  8. The Affordable Care Act is the largest change to the tax code in 20 years that could affect you when you file that 2014 tax return next year.
    Taxes

    How Might The Affordable Care Act Affect You?

    The Affordable Care Act is the largest change to the tax code in 20 years that could affect you when you file that 2014 tax return next year.
  9. The marginal tax rate is based on a progressive tax system.
    Personal Finance

    What's a Marginal Tax Rate?

    The marginal tax rate is based on a progressive tax system, where tax rates for an individual will increase as income rises. This method of taxation aims to fairly tax individuals based upon ...
  10. Taxes

    How are savings bonds taxed?

    Learn who is responsible for reporting U.S. EE savings bond interest for taxation and when the interest can be reported for proper taxation.

You May Also Like

Hot Definitions
  1. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  2. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  3. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  4. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  5. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  6. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
Trading Center