What does vertical equity in taxation refer to?

Vertical equity in taxation refers to the concept that taxpayers with a greater ability to pay should contribute more in taxes, which often translates to those with higher incomes paying higher tax amounts. This principle supports the idea that taxation should be based on an individual's financial capacity, aligning the tax burden with their ability to bear it. Therefore, different income levels result in different tax amounts, affirming the principle that wealthier individuals contribute a higher proportion of their income compared to those with lower incomes.

In contrast to the other options, vertical equity does not support the notion that higher income taxpayers should pay lower rates or that all taxpayers pay the same amount regardless of their income level. It also does not imply that tax credits are equally distributed among all taxpayers, as this would not take into account the varying circumstances and financial capacities of individuals. The concept is primarily focused on ensuring that those who have a greater financial ability contribute a fair amount to the tax system to support public services and government functions.