I n t h I s c h a p t e r y o u w I l L

Vertical equity
states that taxpayers with a greater
ability to pay taxes should contribute a larger amount. 
Horizontal equity
states
that taxpayers with similar abilities to pay should contribute the same amount. Al-
though these notions of equity are widely accepted, applying them to evaluate a
tax system is rarely straightforward.
Ve r t i c a l E q u i t y
If taxes are based on ability to pay, then richer taxpayers
should pay more than poorer taxpayers. But how much more should the rich pay?
Much of the debate over tax policy concerns this question.
Consider the three tax systems in Table 12-7. In each case, taxpayers with
higher incomes pay more. Yet the systems differ in how quickly taxes rise with in-
come. The first system is called 
proportional
because all taxpayers pay the same
fraction of income. The second system is called 
regressive
because high-income
taxpayers pay a smaller fraction of their income, even though they pay a larger
amount. The third system is called 
progressive
because high-income taxpayers
pay a larger fraction of their income.
Which of these three tax systems is most fair? There is no obvious answer, and
economic theory does not offer any help in trying to find one. Equity, like beauty,
is in the eye of the beholder.
v e r t i c a l e q u i t y
the idea that taxpayers with a greater
ability to pay taxes should pay larger
amounts
h o r i z o n t a l e q u i t y
the idea that taxpayers with similar
abilities to pay taxes should pay the
same amount
Ta b l e 1 2 - 7
P
ROPORTIONAL
T
AX
R
EGRESSIVE
T
AX
P
ROGRESSIVE
T