The Issue Of Equity In Taxation

The principle of equity in taxation is one of the most known and most politically correct principles of taxation

. The basic argument of this principle is that persons who are earning same amount of income should pay the same amounts of taxes. This has not just been left to those who earn the same amount of income, but also those that earn different amounts. So that if someone who is earning $10,000 should pay $1,000 in taxes, someone earning $100,000 should not pay $1,000. Due to constant debate on this principle, there are two main concepts of taxation equity that have emerged.

Horizontal Equity

Horizontal equity is the one that is easily understood by many people. It is therefore uncontroversial and easily agreed upon by politicians and economists. It reiterates that people earning the same amount of income should pay the same amount of taxes. This is to make sure that certain individuals are not favored compared to others. In essence, it aims to guarantee equal rights and protection under the law.

It also aims to ensure that all incomes are treated equally. For example, the person who earns $50,000 a year as a high school teacher should pay the same amounts as someone who earns $50,000 as a poet. However this concept can also be blurred when it comes to taxation of dividends. Companies pay corporate tax on their taxable income. The net profit after tax is then distributed as dividends. If the government goes ahead to tax an individual's income from dividends at the same rate as the employment income, the shareholder would have been taxed twice.

Vertical Equity

Vertical equity is a bit more complex and far more controversial. It tends to explain that people who earn different amounts of income should pay different amounts of taxes. A case may fulfill a condition of horizontal taxation but fail to fulfill the condition of vertical taxation. For example, if the government levies a $1,000 to all the citizens earning more than $10,000 a year, two people earning $10,000 a year will pay the same taxes - $1,000 hence fulfilling the principle of horizontal equity. However, someone earning $1,000,000 will also be required to pay $1,000. This definitely does not fulfill the condition of vertical equity. The proponents of vertical equity argue that though both of these two taxpayers have the ability to pay $1,000, the person earning $1,000 will feel a greater pinch than the one earning $1,000,000.

One of the things that came up as a result of this is the proportional tax. Here, the government sets a certain tax rate that will apply to everyone so that people pay taxes according to their ability. If the tax rate is 10%, the person earning $10,000 will pay $1,000 and the person earning $1,000,000 will pay $100,000. Even this, might not bring out the concept of vertical equity fully, hence the progressive taxes. Here, the higher your income, the higher your tax rate.

All in all, the concept of equity in taxation is rather complicated and few governments would like to rock the boat.

by: David de Souza

POST COMMENT

Consigue Dinero Con Tu Trafico Why You Don't Want To Hire Someone Who Reads The Newspaper Degassing means for a twin screw extruder for plastic materials Pass999 117-201 Practice Test Building Lists How to be a part of the apt conferences The Castle of Good Hope Declaratory Judgment is Preventive Adjudication Pass999 000-M50 practice test Red Bull Flies To Monaco Grand Prix Victory Preffered Basingstoke Builders. Pass999 000-M07 Questions Kaapse Klopse