The Ability-to-Pay Principle
Most people view an equitable tax system as being based on people’s
ability to pay taxes. In considering equity that is based on ability to pay,
two concepts need to be distinguished.
Vertical equity concerns equity across income groups. Vertical equity refers
to the idea that those people with a greater ability to pay tax should pay
more than those with less ability to do so. The higher is your income, the
more you have available after the necessities of life have been met, and
thus the more you are able to pay. Thus, an ability-to-pay standard of
equity requires progressive taxation.
Horizontal equity concerns equity within income groups. Individuals and
families with the same income may have very different abilities to pay
depending on their circumstances, such as the number of children to
support, aging or disabled family members to care for, or extra expenses
necessary for earning income. It is difficult for a tax system to account for
all such factors, but some effort is made by allowing taxpayers to deduct
some of these expenses from their taxable income. However, corrections
like these are rough at best.
The Benefit Principle
According to the benefit principle, taxes should be paid in proportion to
the benefits that taxpayers derive from public expenditure. From this