What’s horizontal equity?
Horizontal equity holds that people with equal income and assets should pay the same taxes. Equal people should have horizontal equity, regardless of the tax system. More neutral tax systems are more horizontally egalitarian.
In contrast, vertical equity is a tax collection strategy that increases tax rates based on earned income. Vertical equity holds that people who can pay more taxes should contribute more.
Understanding Horizontal Equity
This quality holds that people in the same income group should pay the same income tax. Vertical equity promotes wealth redistribution and a tax system in which high-income earners or those with more significant resources pay more tax than low-income earners.
Horizontal equality suggests a tax system without favoring particular people or enterprises. It protects taxpayers against arbitrary discrimination, so if two people are as well off before taxes, they should be similarly well off after taxes.
Some economists use yearly income to equalize taxpayers under the horizontal equity concept. Other economists prefer taxpayer lifetime income. Which definition of income one uses determines whether taxing income or spending constitutes horizontal fairness.
Horizontal healthcare equality is between people with similar needs. It measures the health system by offering equitable healthcare for individuals with the same need.”
Example
If two taxpayers earn $50,000 and have the same wealth or income band, this equity should tax them at the same rate. However, achieving horizontal justice in the U.S. tax system is challenging due to loopholes, deductions, credits, and incentives since tax breaks result in different rates for similar people. Governments establish a tax gap between economically comparable individuals by deducting mortgage interest payments from income tax.
The mortgage interest deduction for house ownership prevents equity if one taxpayer pays less tax than the other with similar income.
Conclusion
- Horizontal fairness in income taxes states that everyone with the same income should pay the same tax.
- Horizontal equity discounts deductions, tax credits, incentives, and loopholes that can decrease one’s effective tax rate, even if they have the same yearly income.
- Some economists like horizontal equity because it is impartial and fair.
