In the AFR recently there was a rallying call for “tax boffins” to stop hiding behind terms and communicate with the public - with the call from none other than Ken Henry.
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!
True true - I'll rip from my old working paper on horizontal equity to show that I agree, especially on the broader tax and transfer system!
A transfer system that targets these non-income characteristics that influence individuals material standard of living will generate horizontal inequity according to these measures, but such horizontal inequity is by design and exists to satisfy policy goals (eg equalizing opportunity or capabilities (Sen 2000)) which are predicated on the idea that these individuals
are not equals.
Following Musgrave (1976) the definition of individuals being in an equal position needs to be given operational meaning, and assuming people are equals due to the equivalised market income is insufficient for this.
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!
True true - I'll rip from my old working paper on horizontal equity to show that I agree, especially on the broader tax and transfer system!
A transfer system that targets these non-income characteristics that influence individuals material standard of living will generate horizontal inequity according to these measures, but such horizontal inequity is by design and exists to satisfy policy goals (eg equalizing opportunity or capabilities (Sen 2000)) which are predicated on the idea that these individuals
are not equals.
Following Musgrave (1976) the definition of individuals being in an equal position needs to be given operational meaning, and assuming people are equals due to the equivalised market income is insufficient for this.