Horizontal equity and vertical equity are such systems. These systems are followed to keep the process fair and maintain equality.
Key Takeaways
- Horizontal equity treats individuals with equal income or wealth fairly and consistently regarding taxation.
- Vertical equity emphasizes that individuals with higher income or wealth should contribute more taxes, promoting a progressive tax system.
- Both principles aim to create a just tax system, with horizontal equity ensuring fairness among equals and vertical equity addressing income inequality.
Horizontal Equity vs Vertical Equity
The difference between horizontal equity and vertical equity is that both are based on contrasting principles. The concept of equality is followed by horizontal equity. But in vertical equity, the ability of each taxpayer is taken into consideration to select their income bracket and finalize their tax.
There are various advantages to horizontal equity. The concept of equality is well maintained. It prevents any form of discrimination.
Therefore, it is justifiable to increase their tax. But high earners have access to tax preparers to help them protect their income against taxation. Progressive, regressive, and proportional methods of taxation are applied in vertical equity.
Comparison Table
| Parameters of Comparison | Horizontal Equity | Vertical Equity |
|---|---|---|
| Definition | People in similar circumstances must pay identical taxes. | Tax increases with an increase in income. |
| Principle | Equality | Ability to pay |
| Redistribution | Unequal, as wealthy people have more benefits | Equal |
| Example | Poll tax | Income tax |
| Tax measurement | Tax is measured according to income and assets. | Tax is determined according to the place in income brackets. |
What is Horizontal Equity?
Horizontal equity suggests that people with the same income levels must pay the same amount of taxes. It is based on equality. This is a socio-political concept rather than a financial concept.
The tax is commonly measured according to the annual income. However, theorists believe that lifetime income must be considered as the measuring yardstick.
There are cases in which horizontal equity does not match the situation. Consider the example of tobacco tax burdens. People who don’t use it don’t have to pay the tax.
The health resources are distributed according to the needs and not based on privileges. The disadvantages of this system include a lack of encouragement towards savings as there are no tax exemptions.
What is Vertical Equity?
This system is based on the ability-to-pay system. The tax amount increases with the rise in income. Those who can pay more should contribute in large amounts than those who don’t have such income.
Vertical equity involves progressive taxation. Hence, the rich pay more taxes than the poor. This system is proportional to the total wealth created by an individual.
Vertical equity is easier to apply as, in most economies, there are tax benefits like deductions. Supporters of this system preach that wealthy people require more government services, and thus they should pay more tax.
Main Differences Between Horizontal Equity and Vertical Equity
- Vertical equity enables equal redistribution of tax in society. Wealthy people must contribute more to public service. This is absent in horizontal equity as it is based on impartiality.
- A poll tax is an example of horizontal equity. In vertical equity income, brackets are taken into account while determining the tax. Income tax improves vertical equity.
- https://www.journals.uchicago.edu/doi/abs/10.1086/NTJ41788830
- https://www.sciencedirect.com/science/article/pii/S0168851096008512
Last Updated : 13 July, 2023
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
It’s interesting to see how these two systems contribute to ensuring fairness in taxation, and how they address income inequality in different ways.
The discussion about the examples of tax systems under horizontal and vertical equity brings real-world relevance to the theoretical principles being presented in the article.
The discussion about the advantages and disadvantages of horizontal equity provides a clear insight into the implications of this system.
The distinction between the socio-political concept of horizontal equity and its financial implications is well elaborated in this article.
The example of tobacco tax burdens is particularly thought-provoking, as it highlights the complexities of applying horizontal equity in practice.
The article clearly describes the concept of horizontal and vertical equity in taxation. It provides a comprehensive comparison between the two principles.
The references cited are from credible sources, which adds to the reliability of the information presented.
I completely agree. The comparison table is especially helpful for understanding the differences between horizontal and vertical equity.
The article provides a clear and concise explanation of the main differences between horizontal and vertical equity. It’s well-detailed and informative.
The references to scholarly articles add academic rigor to the understanding of horizontal and vertical equity. It’s a well-researched and insightful piece.
The concept of vertical equity based on ability-to-pay makes a compelling case for addressing income inequality through progressive taxation. It’s a thought-provoking perspective.
I agree. Furthermore, the discussion about tax benefits and deductions in vertical equity adds depth to the understanding of this system.
The comparison of different taxation methods under vertical equity offers valuable insights into the practical application of this system.
Absolutely, the example of income tax as a representation of vertical equity is a compelling illustration of how wealth-based taxation can improve income equality.