HORIZONTAL EQUITY AND DIFFERENCES IN INCOME TAX TREATMENT: A RECONCILIATION

Abstract

Some personal income tax breaks reward socially approved activities, others serve the interests of tax administrators and special interest groups. All give rise to classical HI. We allow for the categorization of tax breaks into deserving and undeserving types, and pose a “modified HE” requirement which legitimizes the former. Deserving breaks result in a loss of VE, non-deserving ones in (modified) HI. The equity cost of each tax break can be assessed. For the U.S. personal income tax, modified HI is potentially a lot smaller than classical HI: e.g. the charitable giving tax break alone in 1990 accounted for 44% of classical HI.