Difference Between Horizontal Equity and Vertical Equity

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 Between Horizontal Equity and Vertical Equity

Parameters of ComparisonHorizontal EquityVertical Equity
DefinitionPeople in similar circumstances must pay identical taxes.Tax increases with increase in income.
PrincipleEquality Ability to pay
RedistributionUnequal, as wealthy people have more benefitsEqual
ExamplePoll taxIncome tax
Tax measurementTax 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 measured commonly 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. A person who doesn’t use it doesn’t have to pay the tax.

The health resources are distributed according to the needs and not based on the 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 tax 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

  1. 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.
  2. 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.

Conclusion

There are various arguments based on horizontal equity and vertical equity. The benefit principle in vertical equity and the sense of equality in horizontal equity are both beneficial.

People argue that this makes high potential earners hide their income or leave the country. Partly, strict taxation systems that follow vertical equity are not bliss for wealthy people. They are discouraged from increasing their wealth.

References

  1. https://www.journals.uchicago.edu/doi/abs/10.1086/NTJ41788830
  2. https://www.sciencedirect.com/science/article/pii/S0168851096008512
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