A New Measure of Horizontal Equity

44 Pages Posted: 30 Mar 1999 Last revised: 12 Oct 2010

See all articles by Alan J. Auerbach

Alan J. Auerbach

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Kevin A. Hassett

American Enterprise Institute (AEI)

Date Written: March 1999

Abstract

In this paper, we propose a new measure of horizontal equity that overcomes many of the shortcomings of previous proposed measures. Our starting point is the observation that a well-behaved social welfare function need not evaluate global' (vertical equity) differences in after-tax income using the same weights it applies to local' (horizontal equity) differences, even though this constraint has been applied in the past. Following work on the structure of individual preferences, we show that a social welfare function can imply different preferences toward horizontal and vertical equity. Adopting the general approach to the measurement of inequality developed by Atkinson (1970), we use such a social welfare function to derive measures of inequality that are decomposable into components naturally interpreted as indices of horizontal and vertical equity. In particular, the former index measures deviations from the fundamental principle that equals be treated equally. Finally, we apply our new measure to two tax-return data sets, evaluating the degree to which the horizontal equity of the US personal income tax has changed over time, and how horizontal equity would be altered by one version of recent proposals to do away with the so-called marriage penalty.'

Suggested Citation

Auerbach, Alan Jeffrey and Hassett, Kevin A., A New Measure of Horizontal Equity (March 1999). NBER Working Paper No. w7035. Available at SSRN: https://ssrn.com/abstract=156669

Alan Jeffrey Auerbach (Contact Author)

University of California, Berkeley - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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Germany

Kevin A. Hassett

American Enterprise Institute (AEI) ( email )

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Washington, DC 20036
United States
202.862.7157 (Phone)
202.862.7177 (Fax)

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