The Principle of Equity in Distribution of Tax Burden

After reading this article you will learn about the principle of equity in distribution of tax burden.

There has been little interest among philosophers and statesman in the theories of taxation, until the commencement of the eighteenth century. With the advent of the eighteenth century, for several hun­dred years, in the field of public finance systematic efforts has been made to analyses the importance of distributing tax burdens equita­bly among taxpayers.

This effort came from a galaxy of economists ‘ including Smith, Locke, Petty Ricardo, Mill, Seligman, Wagner, Edgeworth and Pigou.

David Ricardo (1772-1823) in his book, ‘Prin­ciples of Political Economy and Taxation’, defined taxation as ‘a proportion of the produce of the land and labour of a country placed at the disposal of the government and always ultimately paid either from capital or from the revenue of the country’.

There are three bases on which the tax proposal are generally developed. In the first instance, there are some theories according to which there need not be any relationship between the taxes paid and the benefit received.

In this respect there are two approaches. The first approach led to the formulation of socio-political theory and the second one yields the expediency theory. In the second instance, an approach emerged which linked the tax liability to the tax activi­ties.

The advocates of this approach argues that since state is pro­viding goods and services to the members, it should charge for the cost involved in providing goods and services. The second approach led to the formulation two theories.

The first theory links the tax liability to the benefits which the tax payers derive from state. This is called the benefit received approach. In the second theory, tax liability is linked to the cost of providing the good or service to the community by the state. This approach is called the cost of service approach.

Views on the principles of taxation may be found in the writings of innumerable authors- philosophers, economists and political theo­rists- starting from the Middle Ages itself. As economic ideas broad­ened in late centuries, the principle of equity also underwent differ­ent interpretations and dimensions.

The determination of equity in taxation must always rest upon value judgments relating to the over­all pattern of most desirable income distribution. Equitable tax sys­tem is that which is most closely in conformity with the standards of equity in the distribution of income, which are acceptable as the desired level by the society.

Equity means that each taxpayer should contribute his ‘fair-share’ to the cost of government. It again means fairness or justice in the distribution of tax burden.

Equity involves two aspects, the treatment of people in like and unlike circumstances:

(a) Horizontal Equity:

Horizontal equity implies a case of treatment of similarly placed persons similarly. In a sense it means equal treatment of equals. Horizontal equity is the concept that individuals with identical abili­ties to pay should be assigned identical tax burdens.

R.W. Broad­way states that a tax is horizontally equitable if it treats equals equally. Two people who had equal welfare before the tax is imposed should enjoy equal welfare after the tax.

(b) Vertical Equity:

The treatment of unlike circumstance implies that people in dissimi­lar circumstances should be subjected to dissimilar treatment. That is persons who are better-off should pay more as taxes than others.

It is in a sense unequal treatment of un-equals. For realization of vertical equity, same objective scale should be evolved, according to which the well-being of different persons might be measured.

Hence the problem of vertical equity is one stage more complex to realize. The basis of the concept of vertical equity is that tax burdens should rise with ability to pay. There is considerable disagreement about what constitutes vertical equity in tax policy.

The basic issue is how much more those with greater abilities to pay should be assigned, to determine tax liability.

Hence, the concept of equity in tax burden distribution is very difficult to implement and not easy to administer. Although income appears to be a useful yardstick for comparison of differences in ability to pay among tax payers, it becomes even difficult, when two individuals have identical incomes.

The individuals may exhibit sub­stantial differences in age, health, family size and personal property. One individual have significant health care cost and a long list of overdue bills associated with caring for an elderly parent.

Other individuals may have no dependents and no outstanding debt. Hence income by itself is therefore not always a dependable guide to differ­ences in ability to pay. Hence a lot of problems are associated with ascertaining horizontal equity.

Likewise there is considerable dis­agreement regarding what constitute vertical equity. To arrive at a meaningful value judgment is very difficult, in the case of vertical equity. There is no unique definition of dissimilar circumstance.

Two men have very similar income, but quite unequal socio-political back­ground. How can we frame an objective yardstick to ascertain equity in the distribution of tax burden? Fiscal theorists differed sharply on this subject. Hence it is not easy to translate the principle of equity into practice.