What does vertical equity mean in the context of income tax?

Vertical equity in the context of income tax refers to the principle that individuals with a greater ability to pay should contribute more in taxes than those with a lesser ability. This concept is grounded in the idea of fairness – that the tax system should reflect the varying capacities of individuals to shoulder the tax burden.

When applying vertical equity, higher income earners typically face higher tax rates, which is why higher taxes for higher income earners is considered the correct response. This progressive tax structure is designed to address income inequality by ensuring that those who can afford to pay more contribute a larger share towards the funding of government services and programs.

The other options do not align with the definition of vertical equity. Equal tax burdens regardless of income suggests a flat tax system where everyone pays the same percentage, which does not account for individual capacity. Lower taxes for lower-income individuals may be a part of a progressive tax system, but it does not encapsulate the principle of vertical equity itself. Flat rate taxation signifies everyone paying the same rate, which contradicts the essence of vertical equity that seeks to impose different rates based on income levels.