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Florida Tax Review

Abstract

No tax policy analysis stands complete without examination of equity implications. But despite its role as a traditional pillar of tax policy analysis, equity itself remains a controversial concept. What is meant by the term equity? How should it be measured? Is there more than one type of equity? What is the relationship of different types of equity to each other? For decades, scholars and policy makers have explored the possibility that equity is best understood as two distinct concepts —vertical equity and horizontal equity—both of which must be evaluated. Horizontal equity (HE) is defined to mean that equals should be treated alike. Vertical equity (VE) is defined to mean that an appropriate distinction should be made in the treatment of people who are not alike. Although disagreement exists, HE in our tax system has generally been thought to require that individuals with the same income should pay the same tax. VE has generally been thought to require a progressive rate structure that imposes progressively higher rates on individuals with higher incomes. Despite frequent reliance on both HE and VE in tax policy analysis over the years, scholars have engaged in an active and vibrant debate about whether HE has any significance independent of VE in designing a tax system. This dispute has been best captured by the debate between two economists, Richard Musgrave and Louis Kaplow.

In their 1993 article, Paul McDaniel and James Repetti (M-R) reviewed this pivotal debate regarding the meaning of VE and HE, and ultimately agreed with Musgrave I and with Kaplow that both HE and VE lack independent significance and should be best understood as a single concept. But HE has not died. In the intervening years HE has survived as a frequently articulated independent policy ground in the assessment of tax policy. Why? Was earlier analysis faulty, or is something else at work in the tax literature? Almost two decades later, this paper reexamines the appropriate role of HE in tax policy and the debate that has occurred subsequent to the 1993 M-R paper. In this paper, we agree with Musgrave I’s original assessment and later determinations by Kaplow and M-R. HE does not serve a useful role in formulating tax policy. HE and VE are merely both sides of the same coin, because starting an analysis by asking what the appropriate criteria are to determine which persons are not alike yields the same result as starting the analysis by asking what criteria should be used to determine whether persons are alike. In addition, we agree with Musgrave I and M-R that VE also is not useful without appeal to a theory of distributive justice.

Part II of this article describes why HE and VE lack normative content. Part III considers and rejects arguments that have been offered after the M-R article to defend the role of HE. Part IV suggests that while HE is not helpful in designing a tax system because it provides no guidance about what the system should look like, support for HE has persisted because of a shared belief that government should communicate the rationale for treating people differently. HE tells us that government should communicate the rationale for different treatment, but it does not tell us what that different treatment should be. Part IV further suggests that support for the role of HE may also be rooted in the notion that government should be even-handed in its enforcement of tax laws. Part IV observes, however, that HE is not helpful in insuring even-handed enforcement. In a world of finite resources, not every taxpayer can be audited. In deciding who should be audited, it is necessary to refer to something beyond HE. Part V concludes this article.

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