Horizontal Equity and Progression When Equivalence Scales Are Not Constant

Abstract

Household needs must be taken into account when designing an equitable income tax. In this article, the authors are concerned with the use of equivalence scales to achieve horizontal equity. Equivalence scales may be relative or absolute, constant or income-varying. If the equivalence scale is independent of income, horizontal equity is achieved by a form of income splitting (the relative case) or the use of exemptions (the absolute case). However, once one allows the equivalence scale to vary with income, the distinction between relative and absolute scales all but disappears (because one can adjust one form to imitate the other), but a new complication arises because scale values may differ at before and after tax income levels. The authors explore various possible criteria for horizontal equity in this scenario and their implications for vertical equity. In particular, the authors articulate an “equal progression among equals” criterion and showittobe achievable along with horizontal equity under specified conditions.