Horizontal Equity

Reviewed by Sweta | Updated on Aug 27, 2020

Introduction

Horizontal equity is a principle of equity in taxation. According to horizontal equity, taxpayers with similar income and assets should pay tax on par.

What is Horizontal Equity?

Horizontal equity seeks to achieve parity in taxation among individuals, irrespective of the tax system. It focuses on a tax neutral system to achieve equity. Unlike horizontal equity, the principle of vertical equity is that those who have the ability to pay more taxes should contribute more towards the government’s revenues in comparison to those who are not. Vertical equity aims at redistribution of wealth and encourages a tax system in which high-income earners or taxpayers having more resources pay more tax than low-income earners.

While some economists use annual income as the measure of income that groups taxpayers as equals, others believe a taxpayers lifetime income is a better yardstick.

Horizontal equity in healthcare refers to equal treatment between people having the same healthcare requirements. It also acts as a measure of the healthcare system by proposing that equal healthcare should be given to all with equal needs.

In reality, horizontal equity is hard to achieve in a tax system, like that of the U.S. or India which consists of various deductions, exemptions, credits, and incentives. This is because the presence of any tax break means that similar individuals or enterprises do not pay the same rate of tax.

An example of differential tax treatment is allowing a deduction for mortgage interest payments to taxpayers who have bought property on a mortgage.

Who is eligible to pay?

  1. According to the principle of horizontal equity, people with higher necessary expenses should pay less tax than someone else with equal income but without the expenses. The principle is in contrast to vertical equity where the tax rate would increase with the amount of earned income.

  2. Horizontal equity does not treat two taxpayers differently. It proposes a system of levying taxes which does not give preferential treatment to certain individuals and companies. It is against any arbitrary discrimination such that two individuals who are equally well-off before taxes should be equally well-off after taxes.