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      Question

      The 'Vertical Equity' principle of taxation implies

      that:
      A Similarly situated taxpayers should be treated similarly. Correct Answer Incorrect Answer
      B Taxpayers with a greater ability to pay should contribute more. Correct Answer Incorrect Answer
      C Taxes should be convenient to pay. Correct Answer Incorrect Answer
      D The cost of collecting taxes should be minimal. Correct Answer Incorrect Answer
      E Taxes should be levied at a flat rate. Correct Answer Incorrect Answer

      Solution

      • Equity in taxation has two main principles:
        • Horizontal Equity:  People with  similar ability to pay  (similar income, wealth) should pay similar amounts in tax. (Option a describes this).
        • Vertical Equity:  People with  greater ability to pay  should contribute a  larger proportion  of their income/wealth in taxes. This is the justification for  progressive taxation , where the tax rate increases as the taxable amount increases. It is based on the concept of the "diminishing marginal utility of money."

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