30 April 2010
Horizontal Equity Horizontal equity in taxation means, same tax rate is applicable to all individuals who are identical in all relevant espects. Identical in all relevant respects implies equal on income level, or capacity, age and marital status. Only for sake of simplicity, we consider these three criteria as a basis. These three are the most acceptable parameters of basis for the application of horizontal equity. Still, problems are plenty with even these three criteria. For instance suppose ‘A’ and ‘B’ have same level of income ie, ‘A’ and ‘B’ are identical in all relevant respects. So the government impose 20% tax upon both. Suppose that ‘A’ has a daughter who has been affected by an acute heart disease. So ‘A’ has to spent a larger portion of his income as medical expenses. In such situations, can we say that, imposition of same rate of tax upon ‘A’ and ‘B’ is “fair” or “just”? Certainly it is not. To achieve, we have impose a reduced tax upon ‘A’. Now – a – days up to a certain extent government gives tax exemption to medical expenditure. Such exemptions are allowed by the government for achieving the principle of horizontal equity in taxation. Another popular xample is the exemption given to interest on housing loan up to Rs. 150,000.
Vertical Equity Vertical equity means imposition of higher rates of tax upon people who have higher a – t – p and lesser rates upon people who have less a – t – p.
30 April 2010
As I understand, Equity in taxation means, no person shall be in a more favourable or unfavourable situation. It may also mean that the taxation structure should ensure equitable distribution of wealth.
Vertical Equity means, those who are in higher economic stratra shall be liable to contribute more taxes. for example, the rate of personal income tax increases with increase in level of income. Luxury goods are subjected to higher rate of VAT, than goods of mass consumption.
So far horizental equity is concerned, it means, persons in virtuall same economic stratra, shall be subjected to same amount of taxes/concessions etc.
However, in practice, there are distortion of the principle of equity in taxation. It is said that, taxation and equity are strangers.
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