Horizontal and Vertical Equity

November 12th, 2008 | economics -

Readers Question: discuss the implications of the different definitions of horizontal equity?

I’m afraid I am not familiar with the different definitions of horizontal equity.

Horizontal equity implies that we give the same treatment to people in an identical situation. E.g. if 2 people earn £15,000 they should both pay the same amount of income tax. Therefore, horizontal equity makes sure we don’t have discrimination on the grounds such as race / gender / different types of work.

Vertical Equity: Implies that that people with higher incomes should pay more tax. Vertical equity seeks to tax in a proportional or progressive way – People with more ability to pay should pay more tax.

Horizontal equity is an important starting point for any tax system. Horizontal equity can be consistent with also achieving vertical equity. Horizontal equity is the equal treatment of equals and this is a means for achieving a distribution of tax burdens that is vertically equitable.

Examples, The Poll Tax is an example of a tax that has horizontal equity (everyone pays a lump sum of £500 a year). Mrs Thatcher’s theory was that since everyone had the same access to council services everyone should pay the same tax. However, the poll tax does not meet the criteria for vertical equity. For those on low incomes, the poll tax was a high % of their disposable income. For those on high incomes and more ability to pay it was a low %.