An alternative to the ability-to-pay principle of taxation is the benefit principle of taxation, which is the idea that individuals should be taxed in proportion to the marginal benefits that they receive from governmentally provided commodities and services. The benefit and ability-to-pay principles, though seemingly inconsistent, may lead to similar policies. Rich people may benefit more than the poor from such public goods as national defense or police and fire protection because rich people stand to lose more from disasters. They drive more miles on public roads and ring up more frequent flyer bonuses when flying out of publicly supported airports. Thus, both the benefit and the ability-to-pay principles may support the rich paying more taxes than the poor.
Vertical Equity Vertical equity is the idea that a rich person should pay more taxes than a poor one for each to bear the same burden in supporting government.
Vertical equity asserts that people better able to pay higher taxes should do so.
Implementing vertical equity in any tax system involves deciding who should pay higher rates and then writing tax laws that actually collect this amount from the correct people. Wealth and income are normally viewed as good measures of one’s ability to pay taxes. Progressive taxation is, however, unnecessary for vertical equity; even regressive tax systems might satisfy this equity principle as long as the rich paid more in absolute terms.
• Horizontal Equity The Fourteenth Amendment to our Constitution (the Equal Protection clause) states, “nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.” Economists term the concept that equals must be treated equally as horizontal equity.
Horizontal equity requires that individuals who are equal in all important respects be treated equally.
Implementing a horizontally equitable tax system first requires identifying what constitutes equal circumstances—income, wealth, age, or marital status? Then we must specify what equal treatment means. Does equal treatment mean equal tax rates or equal tax payments over a lifetime? Equity in our tax system requires both horizontal and vertical equity. Horizontal equity dictates that equals should pay equal taxes; vertical equity means that unequals should be treated unequally. Vertical equity is at the heart of the ability-to-pay principle. |
