An Evaluation of Alternative Procedures for Measuring Horizontal Inequity

Abstract

In this study we evaluate the strengths and limitations of three distinct methods for measuring horizontal inequity (HI): the coefficient of variation method, the rankpreservation method, and the decomposition method. By way of illustrating the alternative measures, we assess the equity characteristics of three proposed flat tax systems. We conclude that the rank preservation and decomposition methods, while subject to certain limitations, yield HI indices that are more meaningful and convenient than the popular coefficient of variation technique. Preliminary results indicate that the current U.S. individual income tax system yields less HI than any flat tax proposal. Among the flat tax proposals, the rank preservation and decomposition methods show that the Armey proposal yields the least HI. We also document that the flat tax proposal that yields the most horizontal equity yields the least vertical equity, and vice versa, suggesting an inherent trade-off between the goals of horizontal and vertical equity for the flat tax.