What is Horizontal Equity?

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Horizontal Equity (wallstreetmojo.com)

Example of Horizontal Equity

Let us suppose there are two taxpayers, X & Y, who earn USD 45000 during their work in a company. Out of their earnings, both X & Y make savings in their ways, where X tends to save USD 15000 while Y can save USD 10000. After retirement, let us assume their return on investment is 10%. Determine how the application of horizontal equity will take place.

Solution:

The application of horizontal equity would depend on how we consider the individual’s income, whether it is on an annual or a lifetime income basis. Let’s consider the income on an annual basis. There will be horizontal equity application on taxpayers X & Y as they have the same income before retirement and would be eligible at the same tax rate until retirement. However, after retirement, their income would change as the investment made by both differ, i.e., Income of X would be USD 1500 (10% of 15,000 savings) and Income of Y would be USD 1000 (10% of 10,000 savings), and hence it would change after retirement period. Also, in the case of lifetime income, there would be no application of horizontal equityEquityEquity refers to investor’s ownership of a company representing the amount they would receive after liquidating assets and paying off the liabilities and debts. It is the difference between the assets and liabilities shown on a company’s balance sheet.read more as the income over life would not be the same for both the taxpayers.

Advantages

  • All the taxpayers are treated equally.All the taxpayers have a real feeling of being treated fairly and equally.Since everyone will be treated equally in the health sector, there will be no bias in treating the patient. Patients with an emergency would be treated on priority rather than the ones with high income.Businesses are also not at a disadvantage as they feel that they are treated equally with other businesses and taxed at the same rate.

Disadvantages

  • There are many cases where the taxpayer may be paying a larger percentage but actually may pay less tax when all things are considered.Higher savings is discouraged as it does not lead to any tax exemption.

This has been a guide to what horizontal equity is and its definition. Here we discuss its example, measures, advantages, and disadvantages. You can learn more about accounting from the following articles –

  • Federal Income TaxFuta TaxTaxation PrinciplesTax Evasion