Vertical equity is a principle by which people who are in a different economic situation should be treated differently. This mainly applies to the tax field.
In other words, under the concept of vertical equity, individuals with a higher taxable capacity should be subject to a higher tax burden.
The contributory capacity can be measured by the income and assets of the individual. However, there are other possible differentiation variables such as location, access to basic services, among others.
We can conclude that, unlike the principle of horizontal equity that is based on non-discrimination, vertical equity is based on proportionality. Thus, those who receive more income should pay more taxes.
That is, what is sought is that the tax system has a redistribution effect of wealth in society. Thus, greater equity is pursued.
Vertical equity example
A tax system applies vertical equity when it tries, for example, to group individuals based on certain characteristics.
Thus, for personal income tax, it can be taxed in different sections. For example, those who earn less than 5,000 euros must pay 15%, but those who receive above that salary, 30%.
In any case, in general, vertical equity is observed in progressive taxes. These are the ones that increase the tax burden the greater the taxpayer's economic capacity.
On the contrary, those taxes that are regressive do not comply with vertical equity. This happens, for example, with value added tax (VAT). In this case, we must take into account that individuals with lower incomes spend a greater proportion of their salary on consumption. Therefore, the VAT they pay will represent a higher percentage of their income. This, compared to people with greater purchasing power.
Let's imagine that we have, on the one hand, subject A who earns 2,000 euros and consumes 1,800 euros per month. So, if the VAT is 18%, what you pay for that tax is 324 euros.
On the other hand, subject B earns 5,000 euros and consumes 2,500, so the VAT to pay is 450 euros. This figure is higher in absolute terms compared to what A.
However, the VAT paid by A represented 16.2% of its income, while in the case of B it represented 9% of the income. Therefore, the tribute affects A more than B, showing something totally contrary to what would be a vertical equity.