Among tax-related issues, one topic that’s almost guaranteed to start an argument is that of the tax code’s role in redistributing income. Should those who have the ability to access more resources pay higher taxes than those who are less wealthy, or should those with similar incomes pay similar rates? The principles of vertical equity and horizontal equity address -- but do not resolve -- these issues.
Vertical equity is based on the principle that wealthier individuals, or those with more resource access, should pay more taxes. Also known as the “ability to pay principle of taxation,” vertical equity posits that those who can afford to pay more to support the government, should. Vertical equity is also supported by the “benefit principle of taxation,” or the idea that those who receive more benefits from government services should pay more. For example, wealthy individuals benefit more from government-supported national defense, police and fire protection, as they have more assets to lose in a war or disaster.
In contrast, the notion of horizontal equity is based on the principle that equals should be treated equally. In reference to taxes, this means that those with the same levels of income and resources should be taxed at the same rate as others within that income bracket. Many agree that horizontal equity is desirable in that it eliminates arbitrary tax variations.
Difficulties in Achieving Horizontal Equity
Though a combination of vertical and horizontal equity through the tax code is a desirable goal, obtaining a clear definition -- and thus, application -- of horizontal equity has proven to be a tough task, based on the difficulties that arise when attempting to group individuals together based on equal access to resources and wealth. Should individuals be classified in groups based on income, age or marital status? Should equal taxes refer to taxes at a certain point in an individual’s life or over an entire lifetime? These variables make horizontal equity difficult to implement in the tax code.
Tax and Income
Both horizontal and vertical equity are affected by the way income is taxed. Taxe rates can be progressive, regressive or proportional. Progressive taxes increase proportionately to income, so those who make more pay both a larger absolute amount of taxes and a greater percentage of their income. Regressive taxes decline proportionately to income, so those who make more income pay a smaller percentage in taxes than those who have less income. Regressive taxes don’t always result in a greater absolute tax payment for those with higher incomes. Proportional, or flat, taxes take the same percentage out of everyone’s income, regardless of how large or small that income is.
- University of California, Berkeley; A New Measure of Horizontal Equity; Alan J. Auerbach, et al.; 1999
- Experimental Economics Center; Horiztonal and Vertical Equity; 2006
- Experimental Economics Center; Vertical Equity in the United States; 2006
- University of North Carolina at Chapel Hill; Ability to Pay Principle of Taxation; Ralph Byrns
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