Which of the following best represents the principle of vertical equity?

The principle of vertical equity is fundamentally concerned with fairness in tax policy based on individuals' abilities to pay. It asserts that individuals who have a greater ability to pay taxes—typically those with higher incomes—should contribute a larger amount in taxes. This principle is grounded in the notion that it is reasonable for wealthier individuals to support government services and initiatives through higher taxes since they benefit more from public expenditures and have a greater capacity to do so without straining their financial wellbeing.

In this context, having a tax structure that imposes higher taxes on individuals with greater incomes aligns perfectly with the principle of vertical equity. This approach aims to reduce income inequality and provide the government with sufficient resources to address societal needs and fund public goods.

Other options do not reflect this principle accurately. Equal tax rates for all income levels would mean that everyone pays the same percentage of their income, which does not take into account their ability to pay. Likewise, lower taxes for low-income earners do not necessarily address the contributions expected from those who are more financially capable. Uniform tax deductions ignore the differences in income that can affect taxpayers' ability to benefit from those deductions. Thus, the option highlighting higher taxes for individuals with greater incomes directly embodies the concept of vertical equity.