What Is Vertical Equity?

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Vertical equity is a tax theory dictating that taxpayers in different income groups should be taxed at different percentages.

Key Takeaways

  • Vertical equity is a tax theory that requires taxpayers in different income groups to be taxed at different percentages, with those who earn more having to pay a higher percentage of their incomes in taxes.
  • The progressive tax system is based on vertical equity, and it dictates tax brackets in the U.S. by which lower earners are taxed at a lesser percentage.
  • Brackets are applied to taxable income, not gross income (what is left over after you take all available deductions).
  • Wealthier earners can sometimes be privy to more deductions that can significantly reduce their taxable incomes.

How Vertical Equity Works

Vertical equity is the idea that those who earn more should be subject to a higher tax percentage, while those who earn less should be subject to a lower percentage.

The concept is that “unequals should be taxed unequally” and the higher your income, the higher your tax bill should be. Vertical equity goes hand-in-hand with the theory of horizontal equity, which states that "equals should be taxed equally."

Vertical equity is the basis of the United States' progressive income tax system. This system holds that those who earn more should contribute more to the country’s public services because they can afford to do so. Thus, their top tax rate is a more significant percentage of their earnings.

Progressive taxation is enforced through tax brackets. Each bracket has a different tax rate, with higher-income brackets paying the highest tax rates.

A progressive tax system is the opposite of a regressive tax system, wherein those who earn less pay a greater portion of their incomes to taxation. Sales tax is a prime example of a regressive tax because individuals who earn less must pay more of their incomes toward the tax than those who earn more.


Creating more vertical equity for taxpayers was the goal of the Tax Reform Act of 1986. It’s a reasonable theory on the surface, but it doesn’t guarantee that you and your neighbor will pay the same amount in federal taxes, even if your incomes are the same dollar for dollar.

How Tax Breaks Affect Vertical Equity

The concept of vertical equity can be complex because you don’t have to pay income tax on every single dollar you earn, thanks to provisions like tax deductions. And the vertical equity theory works on taxable income, not gross income—what you earn before claiming deductions and other tax breaks.

Tax breaks and deductions can skew the vertical equity concept a bit because they can lower your tax liability. You and your neighbor might pay the same tax rate even though they earn $15,000 more a year than you do. If they qualify for and use more tax deductions, they might be able to eliminate that $15,000 difference by subtracting available deductions.

Your neighbor might be able to afford a more expensive home than you and thus pay more mortgage interest, which they can deduct. Or perhaps your neighbor provides annual charitable donations, also considered an itemized deduction, thus decreasing their tax liability.

The end result is that you have fewer deductions, so you and your neighbor might have similar taxable incomes.


Some tax deductions come with built-in phaseouts, prohibiting taxpayers who earn over a certain threshold from claiming them, or at least from claiming the full deduction that lesser-earning taxpayers might be entitled to.

Standard deductions, unlike itemized deductions, are not vertical. They’re the same for everyone based on their filing status, regardless of income. Both you and your neighbor could shave the same amount off your gross income—$12,950 in tax year 2022 if you’re both single—and pay the applicable tax rate on the balance.

An Example of Vertical Equity

The U.S.'s progressive tax system is a good example of vertical equity. If you’re single, the portion of your income over $41,775 and up to $89,075 would be taxed at 22% in tax year 2022. Say you make $80,000 of taxable income annually. In this case, you would pay 22% on the top $38,225 of your income—the difference between $75,000 and $41,775. Your income that falls below this threshold is taxed at a lesser rate.

Now let’s say that your neighbor earned $95,000 of taxable income in 2022. Their portion of their income over $89,075—$5,925—would be taxed at 24%. This is vertical equity in action. The portion between $40,525 and $86,375 would be taxed at 22%, just as your top dollars are.

Vertical Equity vs. Horizontal Equity

The theory of horizontal equity is effectively an extension of vertical equity. It states that those in the same income group should pay the same tax rate.

Vertical Equity Horizontal Equity
Different income groups taxed at different rates Similar income groups taxed at the same rate
Higher earners pay a greater percentage of taxes on their top dollars Strives for equality between high and low earners by minimizing tax incentives

You and your neighbor would pay the same tax rate in the scenario outlined above if you both had taxable income of $75,000, even after they were able to claim more deductions. The major difference between vertical and horizontal equity is that horizontal equity attempts to reduce or eliminate the impact of tax incentives that may favor certain wealthier taxpayers. It strives to remove this inequity, which is not always possible due to the exceptions that exist.

Frequently Asked Questions (FAQs)

Does the US have vertical equity?

The United States' progressive tax system is a type of vertical equity. Those in higher tax brackets pay higher tax rates than those in lower tax brackets.

What is horizontal and vertical equity?

Horizontal equity says those who earn roughly the same should be taxed at roughly the same rate, while vertical equity says those who earn more should be taxed more than those who earn less.

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  1. IRS. "Worksheet Analyzing Specific Tax Situations," Page 1.

  2. Urban Institute. “Horizontal Equity,” Page 2.

  3. IRS. "Worksheet Analyzing Specific Tax Situations," Page 2.

  4. IRS. “IRS Provides Tax Inflation Adjustments for Tax Year 2022.”

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