Tax Equity

7 Key excerpts on "Tax Equity"

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  Human Rights and Economic Inequalities

  • Gillian MacNaughton, Diane Frey, Catherine Porter(Authors)
  • 2021(Publication Date)
  • Cambridge University Press

    (Publisher)

  Although the principle of equity occupies a prominent place in tax policy, it has not prevented fiscal injustice. Over the past few decades, the balance between the competing tax principles of equity and efficiency has tipped toward efficiency (Christians 2009, 215), that is, toward lower, more “competitive” tax rates, especially for corporations, in the pursuit of economic growth. 4 In the current paradigm, Tax Equity comprises at least two distinct dimensions: horizontal equity (equally situated taxpayers are treated equally) and vertical equity (unequally situated taxpayers are treated progressively, i.e. based on their ability to pay). The equal treat- ment standard entailed in horizontal equity is widely accepted and resembles the human rights emphasis on status-based equality. Yet in contrast to human rights, horizontal Tax Equity has been blind to factors such as gender and race, which can render seemingly equal groups of taxpayers very unequal. While rights-based approaches, particularly GRB, investigate status differences in taxation, they have paid less atten- tion to vertical equity. Vertical equity entails progressive redistribution and, as such, remains politically contentious, despite its ubiquity in current tax codes. It tends to clash with the efficiency principle, as it is assumed that progressive tax rates – particularly marginal rates – influ- ence taxpayers’ economic decisions, that is, “distort” market processes and thus violate the efficiency mandate of “neutrality” (Steuerle 2002, 266). Some scholars make the case for transcending the dichotomy of equal treatment and ability to pay by adding a compensatory dimension to equity, according to which tax policy is adjusted when taxpayers 4 This concept of efficiency, defined by tax law as minimizing market distortions, is different from the more conventional interpretation of efficiency, i.e. increased productivity achieved with the same amount of input. a framework for fiscal justice 157

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  Equity and Administration

  • P. G. Turner(Author)
  • 2016(Publication Date)
  • Cambridge University Press

    (Publisher)

  Both policy choices were expressed in legislation. A survey of the tax code from the eighteenth century to the present day reveals that the British system moved from a system dominated by indirect taxation to a more balanced one comprising both direct and indirect taxation. Individual taxes were increasingly designed to achieve internal equality. So generally, regarding tax policy, fairness came to be considered in terms of ‘horizontal equity’. According to this notion, people in similar circumstances should pay the same amount of tax. Fairness was also considered in terms of ‘vertical equity’, which demands that people in different circumstances should pay a different amount; specifically, it demands that wealthier individuals pay proportionately more tax than poorer ones. Horizontal equity, which was advocated by Adam Smith in the eighteenth century, was and remains uncontroversial. Vertical equity was less readily accepted. Graduation at the lower end of the income scale had always formed part of the income tax, but the new estate duty of 1894 included a clear and comprehensive principle of graduation, with a scale of rates of the tax depending on the value of the estate. 19 In 1910, after more than fifty years of debate, the same principle of graduation was introduced into the income tax through the medium of super-tax. 20 Throughout the formative era of British tax, therefore, the substantive statutory law of tax was cast broadly in accor- dance with prevailing notions of fairness. The formal law of tax could not, however, ensure comprehensive fairness. It was not inherently unfair in that it did not purport to treat individuals within a defined group differently. But the very nature of tax legislation undermined the third expression of fairness: the consistent treatment of taxpayers within a taxable group with no extraordinary individual hardship.

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  Equity and Choice

  An Essay in Economics and Applied Philosophy

  • Julian Le Grand(Author)
  • 1991(Publication Date)
  • Routledge

    (Publisher)

  Problems of this kind also arise with the ‘envy-free’ method of allocating the cake. Suppose that one of the two individuals concerned had baked the cake; might not she have a claim, on equity grounds, to a larger share? Or suppose there was an imbalance of knowledge between the cutter and the chooser: the former knew that some parts of it were more nutritious than other parts. In both these situations, it seems unsatisfactory to judge the allocation that resulted as equitable.

  As these examples illustrate, the fundamental problem with this conception is that the absence of envy is neither a sufficient nor a necessary condition for an allocation to be judged equitable, at least as the term is conventionally used. In most cases, these judgements seem to require more information about the underlying situation than simply the absence or presence of envy. Equity cannot be adequately characterized by envy-freeness.

  Horizontal equity and rank reversals

  The concepts of horizontal and vertical equity are generally discussed in the literature on the economics of taxation (Musgrave 1959, 1976). Horizontal equity in tax policy requires that equals should be treated equally, and vertical equity that unequals should be treated unequally.

  Now these may meet the criterion of general intuitive acceptability; for it is difficult to imagine anyone taking issue with these requirements as they stand. But they do so at the expense of specificity. Precisely who are equal and who unequal? What is meant by treatment? What form should the different treatment of unequals take? These principles cannot be applied in any meaningful way until these questions are answered; but, as soon as any attempt is made to do so, consensus is likely to disappear. In fact, in this form all the concepts embody is ‘the formal principle of all moralities which are not actually anti-rational: don’t act capriciously’ (Watkins, quoted in Rees 1971).

  However, there have been recent attempts to give horizontal equity, in particular, more content. This is the identification of horizontal inequity with the absence of ‘rank reversals’, an idea that has attracted attention from several distinguished economists (see, for example, Atkinson 1980; Feldstein 1976; M.King 1983a; Plotnick 1981, 1982, 1985). Under this interpretation, a tax change that affects the distribution of income or utility between individuals is identified as horizontally equitable if, despite the change, individuals’ rankings in the initial distribution are preserved; it is horizontally inequitable if it causes individuals’ positions in the distribution to change. So, for example, a tax change that demoted one individual from the top of the income distribution to the bottom would be inequitable; so would a less dramatic change, such as one reversing the rankings of two individuals next to each other in the distribution. An advantage of the interpretation is that the extent of inequity can be measured by the number of rank changes.

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  Public Sector Economics

  • Richard W Tresch(Author)
  • 2021(Publication Date)
  • Bloomsbury Academic

    (Publisher)

  As noted, two people with the same Haig– Simons income may pay very different taxes, and the tax is viewed as violating horizon-tal equity. But, as Feldstein has pointed out, markets come to the rescue in terms of the second economic version of horizontal equity, assuming markets are competitive. Markets respond to changes in the tax structure, and they do so in such a way that the following two principles hold, one applicable in the long run and the other in the short run: 1. The long run: Once the market has fully responded to a newly legislated exclusion or deduction and reached its new long-run equilibrium, then two people with equal utility before tax must have equal utility after tax. The tax structure cannot be a source of horizontal inequity in the long run (Feldstein, 1986). 7 2. The short run: Starting from a long-run equilibrium, any changes in the tax structure do give rise to horizontal inequities in terms of utility, but only temporarily in the short run until the market is once again in its long-run equilibrium. The markets for owner-occupied housing and apartment rentals are a good illustra-tion of Feldstein’s principles. The U.S. federal government has a long-standing tradition of promoting homeownership. In the 1930s, the government established and funded a separate savings and loans banking industry whose sole purpose was to supply low-interest mortgages to homeowners. In addition, Congress has made liberal use of the federal income tax to favor homeownership. Homeowners receive three large tax breaks P U B L I C S E C T O R E C O N O M I C S 272 relative to renters: The imputed rental income paid to themselves is excluded from taxable income, and homeowners can also deduct the interest paid on their mortgages and their local property taxes in computing their taxable income.

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  Toxic Economic Theory, Fraudulent Accounting Standards, and the Bankruptcy of Economic Policy

  • A. Rayman(Author)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Economic efficiency still implies that the costs of collection and the disruption of economic activity should be kept to a minimum. Social justice still implies that the burden should be shared as fairly as possible. Since economic efficiency is to the mutual advantage of every mem- ber of the community, the last three maxims excite very little controversy. 141 142 Part V: Reform of the Tax System Social justice is a different matter: it involves the question of relative shares. The first maxim has been the subject of debate ever since its publication. When it comes to sharing the burden of taxation, there are bound to be winners and losers. Social justice means different things to different people. There are, however, certain features of taxation which are gener- ally accepted as “fair” even by the losers. One is that, whatever the tax basis, the rates should be graduated. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities. [1776, vol.II, p.310] Another is that allowance should be made for the particular circum- stances of the individual taxpayer. Both of these dimensions of “fairness” are represented in Table 14.1 where the degree of graduation of the tax rates increases from left to right: (1) non-graduated or “fixed”: a fixed charge on all taxpayers who fall within the relevant category; (2) semi-graduated or “banded”: a fixed charge on taxpayers who fall into a specified “band” within the relevant category (with different fixed charges on those who fall into other “bands”); Table 14.1 Two dimensions of “fairness” Tax Rates Tax Allowances Non-graduated Fixed Semi-graduated “Banded” Fully-graduated Variable Negligible on Persons Community Charge (“Poll Tax”) on Expenditure Licence Fees on Expenditure Excise Duties Value Added Tax Partial on Property Council Tax Full on Income Income Tax Corporation Tax

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  Advances in Taxation

  • John Hasseldine(Author)
  • 2020(Publication Date)
  • Emerald Publishing Limited

    (Publisher)

  The remainder of this chapter is organized as follows. In the next section, we summarize relevant aspects of justice theory and discuss relevant liberal–conservative political ideology, tax policy, and methodological considerations. We also present our research hypotheses for the likely influences of participants' political attitudes on their tax fairness judgments. In the third section, we provide details of our experimental procedures. In the fourth section, we report the results. In the final section, we draw conclusions, list limitations, and offer suggestions for future research in this area.

  LITERATURE REVIEW

  Equity Theory and Justice Theory

  Fairness and justice have been debated since the beginning of human civilization. Of necessity, societies must develop customs and expectations for individual rights and for the distributions of resources and obligations (Rawls, 1971 ). As far back as 300 BCE, Aristotle developed a normative ethical model based on an input–output framework (Aristotle, 1984 ; Mellers, 1982 ). This framework calls for outcomes distributed in proportion to inputs. This normative input–output framework is also found among early American settlers and early Christian communities, for example, Captain John Smith's law, “he that will not work, shall not eat” (Snell, 1974 ), and the Apostle Paul's similar edict (II Thessalonians 3:10).

  According to Equity Theory (Adams, 1963 , 1965 ), individuals naturally compare the ratio of their work inputs (time, effort, expertise, etc.) and outcomes (pay, benefits, praise, etc.) to this same ratio of others. When individuals feel underrewarded or overrewarded compared to others, they feel distressed and will act (by changing inputs and/or outcomes) to achieve a more equal ratio. However, Leventhal (1976)

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  The Distributional Effects of Government Spending and Taxation

  • D. Papadimitriou(Author)
  • 2006(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  However, it remains doubtful whether and to what extent the vertical equity aspect of the Korean income tax system was affected. It is presumed that the dramatic changes in income distribution itself were mostly responsible for the changes in the distribution of tax burdens. Whether a given income tax system is structurally progressive or not may be determined by whether the marginal tax rate is higher than the average tax rate at all income levels, or equivalently by whether the average tax rate monotonically increases in income levels. In practice, an individual taxpayer's effective tax rates is computed as the ratio of the amount of tax paid to the pre-tax income amount. Also, the tax system is considered progressive if a taxpayer with a higher pre-tax income faces a higher effective tax rate. This study computed an individual household's effective tax rate as the equi- valized tax amount divided by the pre-tax equivalent household income, which is identical to the tax amount divided by the household income. Table 8.5 presents the average equivalized tax payment and the average effective tax rates computed for deciles and the whole sample per year. First of all, it is seen that the households in the 9th decile in 1996, the 7th decile in 1997 and the 8th decile in 1998 paid less taxes in absolute amounts than their immediately poorer deciles, respectively. Thus, any conceivable vertical equity principle would not imply such phenomena, not to mention truly progressive taxation. This doubt on the vertical equity and progressivity of the Korean income tax system is further substantiated by the non-monotonic progression of the average effective rates shown in the same table. If the Korean income tax system is to be progressive on the basis of house- hold welfare measured by pre-tax equivalent household income, the average effective tax rate should be increasing in decile rankings. Table 8.5 shows that the taxation was not truly progressive during the sample period.

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