What Is Horizontal Equity?
Let me explain horizontal equity to you directly: it's an economic theory that insists individuals with similar income and assets should pay the same amount in taxes. This principle applies to anyone considered equal, no matter the tax system in place. The more neutral the tax system, the more horizontally equitable it becomes.
You can contrast this with vertical equity, which is a way to collect income taxes where the rate increases with higher earned income. The idea behind vertical equity is straightforward: those who can afford to pay more should contribute more than those who can't.
Understanding Horizontal Equity
The core of horizontal equity is that people in the same income group should face the same income tax level, treating them equally. Vertical equity, however, focuses on redistributing wealth by having high earners or those with more resources pay more than low earners.
Horizontal equity calls for a tax system without preferential treatment for certain individuals or companies. It's tied to tax neutrality, protecting taxpayers from arbitrary discrimination, so if two people are equally well off before taxes, they remain so after taxes.
Under this principle, some economists measure equality using annual income to group taxpayers. Others prefer lifetime income as the standard. Your view on whether taxing income or consumption aligns with horizontal equity depends on which income definition you adopt.
In healthcare, horizontal equity means equity among people with the same needs. It measures the health system's fairness by ensuring equal healthcare for those similar in relevant ways, like having the same medical requirements.
Key Takeaways
- Horizontal equity is a principle of income tax collection that argues everybody earning the same income should be subject to the same rate of taxation.
- As such, horizontal equity discounts deductions, tax credits, incentives, and loopholes that can lower one's effective tax rate even if they have the same annual income as somebody else.
- Horizontal equity is favored by some economists because it is considered to be a neutral system of taxation, and thus more fair.
Example of Horizontal Equity
Consider this example: if two taxpayers both earn $50,000, under horizontal equity, they should both be taxed at the same rate since they have the same wealth or fall into the same income bracket. But achieving this is tough in a system like the U.S., with its loopholes, deductions, credits, and incentives, because any tax break means similar individuals don't pay the same rate.
For instance, allowing mortgage interest payments to be deducted from income tax creates differences in tax payments between two otherwise economically similar filers. In our example, if one taxpayer pays less tax due to the mortgage interest deduction for home ownership, while the other with equal income doesn't, then horizontal equity isn't achieved.
