The Principle of Horizontal Equity: Fairness in Taxation
Horizontal equity is an economic theory that asserts individuals with similar income and assets should pay the same amount in taxes. This principle is foundational for a fair and neutral tax system, where equality is maintained regardless of varying circumstances. The more neutral the tax system, the more horizontally equitable it is considered.
This concept can be contrasted with vertical equity, a tax collection method where an individual’s tax rate increases with higher income levels. The underlying principle of vertical equity is that those with the greater ability to pay more should contribute proportionately more in taxes.
Exploring Horizontal Equity in Depth
The core idea behind horizontal equity is that people with alike income brackets should be treated uniformly, with identical income tax liabilities. Conversely, vertical equity aims at wealth redistribution, endorsing tax systems where higher-income earners face higher tax rates compared to lower-income earners.
Horizontal equity proposes a comprehensive tax system devoid of preferential treatment towards any person or entity. This aligns closely with the idea of tax neutrality, shieldining taxpayers from indiscriminate discrimination, and ensuring that individuals equally well-off before taxes remain equally well-off after taxation.
Under this principle, some economists use annual income to group taxpayers as equals, whereas others advocate for lifetime income as a better benchmark. Decisions about whether taxing income or consumption aligns with horizontal equity depend on the chosen income definition.
In the context of healthcare, horizontal equity implies equality among those with similar healthcare needs, advocating for standardized healthcare access provision based on equivalent needs.
Key Takeaways
- Horizontal equity promotes a uniform income tax rate for individuals earning the same amount.
- This principle opposes deductions, tax credits, incentives, and loopholes, striving for a fairer tax obligation distribution.
- Some economists value horizontal equity for its neutrality, making it a more equitable taxation system.
Real-World Example of Horizontal Equity
Consider two taxpayers, both with an annual income of $50,000. Horizontal equity demands that both individuals incur the same tax rate, given their similar financial standing. However, achieving horizontal equity in complex tax systems like that of the U.S. is challenging due to prevalent loopholes, deductions, credits, and incentives.
For instance, mortgage interest deductions create taxable income disparities. If one taxpayer benefits from deductions due to home ownership while the other does not, they end up with differing tax payments despite identical incomes, thereby violating horizontal equity.
To illustrate, one taxpayer reduces taxable income through a mortgage interest deduction, leading to a lesser tax obligation compared to another taxpayer with equal income but without similar tax advantages, thereby failing to achieve horizontal equity.
Related Terms: vertical equity, tax neutrality, income tax, wealth redistribution.
References
- HealthKnowledge. “Equity in Healthcare”.
