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Tim Helm's avatar

Nice summary.

Horizontal equity is slippery. It's tricky to apply.

Which people defined by which characteristics should we treat equally?

People of the same income? Same wealth? Same property wealth? Same land value? Same consumption externalities?

It seems to me it's impossible to apply the principle of horizontal equity without some prior statement of the purpose of the tax.

The principle only acquires useful meaning (i.e. has normative content) in the context of some particular tax with a specified purpose.

For example, if we want a wealth tax to vertically equalise wealth, horizontal equity means taxing wealth held in different forms equally. If we want a vacant land tax to spur development, it means something else altogether.

That's why principles like the beneficiary principle or impactor principle are needed. They give moral direction to tax design. Efficiency and vertical and horizontal equity alone aren't enough to deduce better and worse.

If that's not clear, take an example. Suppose the elasticities of demand and supply for water and cigarettes are identical and consumption shares by income are equal. Now justify excise tax on cigarettes using efficiency, vertical equity and horizontal equity alone.

FYI I blatantly ripped most of the above from a forthcoming (one day) Prosper paper about tax principles and why the case for Georgist taxation is richer with the moral dimension of the beneficiary principle than the sterile efficiency case alone. Follow at prosper.org.au!

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