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January 18, 2020 

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ADJUSTMENT, LONG-RUN AGGREGATE MARKET: Disequilibrium in the long-run aggregate market induces changes in the price level that restore equilibrium. If the price level is above the long-run equilibrium price level, economy-wide product market surpluses cause the price level to fall. If the price level is below the long-run equilibrium price level, economy-wide product market shortages cause the price level to rise. In both cases long-run equilibrium is restored. Price level changes induce changes in aggregate expenditures but NOT changes in real production. The reason is that long-run aggregate supply is full-employment real production, which is unaffected by the price level.

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VERTICAL EQUITY:

A tax equity principle stating that people with a different ability to pay taxes should pay a different amount of taxes. This is one of two equity principles related to the ability-to-pay principle. The other is horizontal equity, which states that people with the same ability to pay taxes should pay the same amount of taxes.
Vertical equity is a basic "fairness" notion of government taxation. If government needs to collect taxes from members of society to finance the provision of public goods and other government operations, then it makes sense to collect those taxes in a fair and equitable manner. One noted criterion of equity is the ability-to-pay principle, stating that taxes should be collected from those who can afford to pay, those with ability to pay reflected by income.

Using the ability-to-pay as the criterion for taxes, it also makes sense to collect a different amount of taxes from those with a different ability to pay. Those who have greater ability, pay more taxes. Those with less ability, pay fewer taxes. This across the board tax equality is vertical equity.

Suppose, for example, that Jonathan McJohnson earns $50,000 of income as a junior executive at OmniConglomerate, Inc. and pays $5,000 income taxes, a rate of 10%. Vertical equity results if Lisa Quirkenstone, a clerk at the MegaMart Discount Warehouse Supercenter, pays $500 of taxes on $5,000 of income earned from her job, also 10%. Jonathan has greater ability and pays more taxes.

Vertical equity is violated if people with a different ability to pay, or income, pay the same taxes. If Jonathan McJohnson has $5,000 of income and Lisa Quirkenstone has $5,000 of income, but due to a special tax deduction for home ownership, Jonathan pays the same $500 in taxes as Lisa, then vertical equity is not achieved.

A related tax equity principle is horizontal equity. Horizontal equity holds if people with the same ability to pay, that is, the same income, pay the same tax. Horizontal equity is violated if people with the same ability, pay different taxes.

<= VERIFICATIONVERTICAL MERGER =>


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VERTICAL EQUITY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2020. [Accessed: January 18, 2020].


Check Out These Related Terms...

     | tax equity | horizontal equity | taxation principles | taxation basics | ability-to-pay principle | benefit principle | tax proportionality | proportional tax | progressive tax | regressive tax | tax effects | revenue effect | allocation effect | tax efficiency | tax incidence | tax wedge | deadweight loss |


Or For A Little Background...

     | taxes | government functions | efficiency | equity | distribution standards | public finance | allocation | normative economics | economic goals | public goods | near-public goods | consumption rivalry | nonpayer excludability |


And For Further Study...

     | public choice | good types | market failures | public goods: demand | public goods: efficiency | tax multiplier | personal tax and nontax payments | transfer payments |


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