Horizontal equity

The principle of horizontal equity is a basic yardstick used to gauge whether tax burdens are fairly distributed. On the one hand, the idea that tax policy should strive for horizontal equity is uncontroversial (Musgrave 1990). It protects taxpayers against arbitrary discrimination, and also seems consistent with basic principles of equal worth. Some might also argue that horizontal equity comports with the principle of “equal protection under law” set forth in the United States Constitution. On the other hand, some tax scholars maintain that the property of horizontal equity is not really an independent principle of tax fairness, but instead is subordinate to the concept of vertical equity, which holds that people with different incomes should pay different amounts of tax (Kaplow 1989). As a matter of logic, a tax system that assigned different tax burdens to people with different incomes should assign the same tax burden to people with the same income. Viewed in this way, equal treatment of equals in taxation is not an end in itself, but rather a means to ensuring that tax burdens are distributed in a way that is vertically equitable. As Musgrave (1990) notes, however, horizontal equity can lay claim to being an independent standard of tax equity because it is consistent with a number of different underlying conceptions of tax fairness, although application of the vertical equity standard will differ. For example, the benefit principle of taxation holds that tax burdens should be assigned according to the benefits that taxpayers receive from government goods and services. If one assumes that the benefits taxpayers receive from government spending vary with their income level, a case can be made that taxation according to the benefit principle would require that taxpayers with the same income pay the same amount of tax. Under the benefit principle, vertical equity would require that taxpayers with different incomes pay different amounts of tax. But, depending on how benefits varied with income, vertical equity could require that benefit tax burdens be distributed regressively, proportionately, or progressively, depending on whether benefits from public goods and services rose less than proportionately, proportionately, or more than proportionately as income increased. Under the ability-to-pay principle, people with the same incomes have the same ability to pay, and thus should pay the same amount in taxes. In contrast to the benefit principle, however, regressive taxes would not be deemed fair under the ability-topay principle, and there is a general presumption that vertical equity under the standard of ability to pay would require some degree of progression in tax burdens. The point is that while different standards of tax fairness may give different answers about how people with different incomes should be taxed (e.g., regressively, proportionately, or progressively), in theory or in practice, they generally give a similar answer about how people with the same incomes should be taxed—namely, that tax burdens should be distributed in a manner that is horizontally equitable.