Question

6. Given the following tax structure,

Taxpayer	Salary		Total Tax
Mae	$	14,000	$	1,260
Pedro	$	52,000		???

  

What is the minimum tax that Pedro should pay to make the tax structure vertically equitable with respect to the amount of tax paid?

This would result in what type of tax rate structure?

Answer 1

Answer: To be vertically equitable with respect to the amount of tax paid, Pedro is required to pay more in tax dollars compared to Mae because Pedro income is more taxable income than her. Mae’s average tax rate is 9 percent ( = 1,260 / 14,000 = 9%).

Thus the tax is vertically equitable when Pedro pays 1 more dollar in tax compared to Mae (i.e., $1,261). But this would lead to a regressive tax structure (which most people would argue are not vertically equitable). A less strict vertical equity interpretation based on dollar amounts aould be that Pedro must pay more tax compared to Mae however at the same tax rate (i.e., a flat or proportional tax rate structure).