Vertical Equity


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.

BREAKING DOWN '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.

  1. Regressive Tax

    A tax that takes a larger percentage from low-income people than ...
  2. Income Tax

    A tax that governments impose on financial income generated by ...
  3. Proportional Tax

    A tax system that requires the same percentage of income from ...
  4. Tax Bracket

    The rate at which an individual is taxed. Tax brackets are set ...
  5. Progressive Tax

    A tax that takes a larger percentage from the income of high-income ...
  6. Section 1231 Property

    A tax term relating to depreciable business property that has ...
Related Articles
  1. Taxes

    Before You Visit Your Tax Preparer: Do This

    The earlier you start preparing your tax records and documents, the more likely you are to have a smooth tax return experience – and all the tax benefits you're due.
  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. Professionals

    7 Tips for Year-End Financial Planning

    There is always a rush to get financial planning tasks done at year's end. Here are some tips to help ease the crunch.
  6. Professionals

    How to Navigate Taxable Mutual Fund Distributions

    It's almost time for year-end capital gains distributions for mutual funds. Here's how to monitor them and minimize their tax impact.
  7. Taxes

    The Top 10 Caribbean Tax Havens

    Discover relevant tax policy information about the top 10 tax havens located in the Caribbean, including the Cayman Islands and the Bahamas.
  8. Investing

    How ETFs May Save You Thousands

    Being vigilant about the amount you pay and what you get for is important, but adding ETFs into the investment mix fits well with a value-seeking nature.
  9. Professionals

    How to Protect Your Portfolio from a Market Crash

    Although market crashes are usually bad news for your portfolio, there are several ways to minimize losses or even profit outright from market movement.
  10. Retirement

    How Are 401(k) Withdrawals Taxed for Nonresidents?

    As a U.S. nonresident, deciding what to do with your 401(k) after you return home comes down to which tax penalties, if any, you're willing to incur.
  1. Are Cafeteria plans taxable?

    Whether the benefits you receive through your employer-sponsored cafeteria plan are taxable depends entirely on which benefits ... Read Full Answer >>
  2. Why is the Cayman Islands considered a tax haven?

    The Cayman Islands is one of the most well-known tax havens in the world. Unlike most countries, the Cayman Islands does ... Read Full Answer >>
  3. Why is Panama considered a tax haven?

    The Republic of Panama is considered one of the most well-established pure tax havens in the Caribbean due to extensive legislation ... Read Full Answer >>
  4. How do I get out of my annuity and transfer to a new one?

    If you decide your current annuity is not for you, there is nothing stopping you from transferring your investment to a new ... Read Full Answer >>
  5. Are Cafeteria plans exempt from Social Security?

    Typically, qualified benefits offered through cafeteria plans are exempt from Social Security taxes. However, certain types ... Read Full Answer >>
  6. Why is Andorra considered a tax haven?

    Andorra is one of many locations around the globe considered a tax haven because of its relatively lenient tax laws. However, ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  2. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  3. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  4. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  5. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  6. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!