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Horizontal equity is considered as a fundamental principle in order to follow and

evaluate a redistributive tax policy. Horizontal equity comes under the topic of fairness in tax
systems, which has been and I am most certain will continue to be a major issue. Most
criticisms of tax systems begin with their unfairness. There are two main distinct concepts in
fairness: horizontal equity and vertical equity. Vertical equity doesn¶t have many definitions
± some individuals are in a position to pay higher taxes, and that these individuals should do
so. In simpler terms, people who are better off should pay more taxes (Joseph Stiglitz, 2000).
However, horizontal equity is not as straight forward as it has more than one definition and
therefore different implications.

According to the Oxford Dictionary of Economics, horizontal equity is defined as the

view that people in similar circumstances should be treated equally and that differences in
needs should be reflected by differences in treatment. This is deemed to be the traditional
definition of horizontal equity. People in equal positions should be treated equally (Rosen,
H.S. and T. Gayer, 2008). The main implication of this is the difficulties in defining what is
meant by ³equals´ and then treating these equals ³equally´. For example, if there are two
individuals who both earn the same amount per hour. For argument purposes let us say this
amount is £10. If individual X chooses to work more hours than individual Y, then in terms
of income they will not be ³equal´. However, another interpretation of this could be that both
individuals are the same because their earning capacities are identical ± individual X just
works more hours (Rosen, H.S. and T. Gayer, 2008). This moves us on to a similar definition
of the principle of horizontal equity proposed by Joseph Stiglitz (2000), with not too
dissimilar implications. µA tax system is said to be horizontally equitable if individuals who
are the same in all relevant respects are treated the same¶. Like the definition before, an
immediate implication is what does it mean by individuals who are the same in all relevant
respects? This obviously raises several issues as there is undoubtedly scope for differences of
opinion (Roberto Galbiati & Pietro Vertova, 2006). In his book, economics of the public
sector, Joseph Stiglitz (2000) gives an example of twins with different tastes in two
commodities that are essentially identical. In practice, there are many examples where the tax
system treats differently individuals who differ in tastes. Some people prefer books to
television, ice cream to chocolate, beer to wine and hence cannot be treated the same. The
implication is that no two individuals are ever the µsame in relevant respects¶. People will
always posses different tastes for commodities and hence it is therefore simple for us to say
that this definition of horizontal equity will almost never apply.

Another alternative to the definition of the principle horizontal equity and the
implications surrounding the measurements of equals and equal treatment is the definition
provided by utilitarianism. The utility definition of horizontal equity proposed by Feldstein
(1976) is a method of classifying people of equal positions in terms of their utility levels.
This definition has two aspects to it: (a) if two individuals would have the same utility level
in the absence of taxation, they should also be equally well off if there is taxation; and (b)
taxes should not alter the utility ordering- if A is better off than B before taxation, he should
be better off after (Rosen, H.S. and T. Gayer, 2008). If we assume all individuals have the
same utility (same preferences), a situation then arises where individuals who consume the
same commodities should pay the same tax. Otherwise, those with identical utilities before
tax will have different utilities after tax.

Diversification in tastes also leads to an implication of Feldstein¶s definition of

horizontal equity. Those who put a higher value on income than leisure have different
implications after tax. With the same utility levels before any taxation, if the same
proportional income tax is imposed, a Pareto efficient situation will arise where it those who
value income higher than leisure are worse off. Therefore, if we look at an income tax policy,
an implication is that even though income tax is adjudged to be fair according to the so called
µtraditional¶ definition of horizontal equity, it is unfair if measured by the utility definition.
Furthermore, on a more obvious note, before any utility tax is imposed, there are reasonable
difficulties obtaining an individuals¶ utility function.

Another implication of the utility definition horizontal equity is if everyone has the
same preferences and there are two different types of jobs available, a cycle is created if the
individuals have the freedom of choice. If we say one job has amenities that are not taxable,
and the other has only monetary bonuses, which are taxable then this would infringe the
traditional definition of horizontal equity as the individual in the job with monetary bonuses
will have a much larger tax burden compared to an individual in the job with tax free
amenities. However, if individuals are able to choose between jobs, then the net after-tax
rewards (including amenities) must be the same in both jobs. This is because individuals will
try to take advantage of the tax free amenities and obtain that job. But the increase in amount
of workers for that particular job will result in lower wages. This shows that any existing tax
policy does not infringe the utility definition of horizontal equity if individuals are presented
with the freedom of choice. In simpler terms, although individuals in diverse occupations pay
unequal amounts in tax, there is no horizontal inequity because of amendments in wages
before the tax is imposed (Rosen, H.S. and T. Gayer, 2008).

A big criticism of utilitarianism is that it may imply horizontal inequity. It is often

suggested that with the current tax structure, the rich are the bearers of tax advantages and
often get richer. This is deemed incorrect by the utility definition of horizontal equity. If all
those with high-incomes had identical tastes, and the tax advantages were only available to
those on high-incomes, then tax progressiveness may be lowered by these tax advantages, but
they do not have any effect on horizontal equity.

The last definition of horizontal equity accept by some is the rule definition of
horizontal equity. This is defined as the rules that govern the selection of taxes are more
important for judging fairness than the outcomes themselves (Rosen, H.S. and T. Gayer,
2008). The rule definition of horizontal equity excludes taxes that are based on irrelevant
characteristics and it also excludes capricious taxes even if they did have efficiency or
distributional effects. However, the main implication from this how do we define the
acceptable set of characteristics for which a tax policy will be based on. It is hugely debated
what characteristics are relevant or irrelevant in helping determine a tax policy. Some people
disagree as to whether or not marital status is relevant in influencing policy. Most of the
population agree that race and religion should not be a part of determining tax policy and
most also agree on those with physical disabilities should be taken into account.

To conclude it is fair to say that the fundamental unsolved problem is the concern to
what is the exact meaning of horizontal equity. This is supported by Auerbach and Hasset
(1999), µFrom Musgrave (1959) on, there is a general agreement that horizontal equity is
important, but little agreement on quite what it is¶ (Roberto Galbiati & Pietro Vertova, 2006).
There are major issues as to what equals should be defined as. The utility definition of
horizontal equity also has issues and very conservative implications, because in the definition

it is implied that there is an existence of a concept that pre-tax status quo has special ethical
validity (Rosen, H.S. and T. Gayer, 2008). Other conclusions we are lead to by the utility
definition of horizontal equity are the inequities only arise from changes in tax laws and
given identical tastes, any existing tax structure cannot cause horizontal inequities. However,
the argument that utilitarianism may imply horizontal inequity is perhaps greatly supported
by the example of the shipwrecked crew. µThe crew has enough food for all but one of its
members to survive. Equality must therefore imply all on board must die, clearly a worse
situation than one from which only one dies¶ (Joseph Stiglitz, 2000). Additionally, a problem
with the rule definition is that it is hard to measure certain characteristics. Like for those who
get treated differently because of disabilities or impairments, how bad does the impairment or
disability have to be to qualify for special tax treatment. Finally from the evidence gathered,
it must be pointed out that horizontal equity, no matter in what way it is defined, is a much
unstructured concept and seems yet to be finalised. However, it still regarded highly and has
a massive impact as a principle of tax policy design.

Auerbach, A.J. and Hasset, K.A, (1999), º      
Working Paper No. 7035

Black, John (2002), R     , 2nd edition, Oxford University Press

Galbiati, Roberto and Vertova, Pietro (2006),    

 , London School of
Economics and Political Science

Musgrave, R.A, (1959),   

 , New York McGraw-Hill

Rosen, H.S. and T. Gayer (2008), 

 , 8th edition, McGraw-Hill

Stiglitz, J. (2000),    

 , 3rd edition, Norton