Question

A tax jurisdiction has 3 taxpayers. Ann has income of $10,000 and paid $2,000 tax. Bill has income of $10,000 and paid $2,000 tax. Charles had income of $50,000 and paid $8,000 tax. Assume income is reflective of ability to pay.

Is the tax horizontally equitable?
Is the tax vertically equitable?

Answer 1

The tax appears to be horizontally equitable since Ann and Bill with equal incomes paid the same amount of tax. However, it's unclear if it's vertically equitable without knowing the tax rates for different income levels, although Charles should pay a higher proportion of his income in tax for vertical equity, which is not evident.

Step-by-step explanation:

To determine if a tax is horizontally equitable, we look at whether taxpayers with the same ability to pay are charged the same amount of tax. In the scenario provided, both Ann and Bill have identical incomes of $10,000 and both paid $2,000 in taxes. This suggests the tax is horizontally equitable for them since they paid the same amount of tax on the same income.

However, when considering vertical equity, the focus is whether taxpayers with greater ability to pay (higher incomes) contribute more to taxes in comparison to those with less ability to pay. Charles had a higher income of $50,000 but paid only $8,000 in tax. If the tax system is progressively designed (like in the provided examples with marginal tax rates of 10%, 15%, and 25% for different income brackets), Charles should pay a higher marginal tax rate on the additional income. In this context, without specific tax brackets details for Ann, Bill and Charles, it's unclear if the tax system is vertically equitable as we would need to compare the proportion of income paid in taxes rather than the raw tax amounts. For it to be vertically equitable, Charles should be paying a larger portion of his income in tax than Ann and Bill, which is not clearly the case here.