Vertical Equity

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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.

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