Horizontal Inequity: Some New Perspectives
Center for Economic Studies Working Paper No. 162
Posted: 9 Aug 1998
Date Written: May 1998
This paper reviews and synthesizes some new approaches to measuring the horizontal inequity (HI) in an income tax or tax and benefit system. Both 'classical' and 'no reranking' (NR) strands of new enquiry are pursued. The new work on classical HI rests upon the choice of a smooth 'averaged' relationship between pre- and post-tax living standards, which is HI-free. Departures from this, among pre-tax equals, count as local horizontal inequities, and global HI indices emerge as negative components in familiar tax progressivity indices. A different line of analysis conceptualizes HI as lack of perfect association between pre-tax and post-tax living standards, and imposes 'purity' axioms which render HI independent of the metric for living standards and the tax system's vertical performance. A dominance test for HI comparisons results, with a strong affinity to previous work in the NR tradition. The new methodologies are illustrated and compared using Canadian tax and benefit data for 1981 and 1990, and directions for future work are discussed.
JEL Classification: D63, H24
Suggested Citation: Suggested Citation