What are the two components of the ability-to-pay principle?

The ability-to-pay principle is a foundational concept in taxation and public finance, asserting that individuals should contribute to government revenue based on their financial capability. The correct components of this principle are horizontal and vertical equity.

Horizontal equity refers to the idea that individuals with similar abilities to pay should owe similar amounts in taxes. This alignment ensures fairness among taxpayers who are in comparable financial situations. Vertical equity, on the other hand, suggests that those with greater financial resources should contribute a larger share of their income compared to those with lesser means. This aspect addresses the progressive nature of tax systems, where tax burdens increase with the ability to pay.

Together, these two components promote fairness and justice in the tax system, ensuring that the tax burden is distributed in a way that reflects the economic reality of taxpayers. Understanding these components helps professionals in assessment administration comprehend how tax policies are designed to consider different income levels and ensure equitable contributions to public services.