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A New Measure of Horizontal Equity

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  • Alan J. Auerbach
  • Kevin A. Hassett

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.'
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Suggested Citation

  • Alan J. Auerbach & Kevin A. Hassett, 2002. "A New Measure of Horizontal Equity," American Economic Review, American Economic Association, vol. 92(4), pages 1116-1125, September.
  • Handle: RePEc:aea:aecrev:v:92:y:2002:i:4:p:1116-1125 Note: DOI: 10.1257/00028280260344650
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    References listed on IDEAS

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    1. Harvey S. Rosen, 1978. "An Approach to the Study of Income, Utility, and Horizontal Equity," The Quarterly Journal of Economics, Oxford University Press, vol. 92(2), pages 307-322.
    2. Adonis Yatchew, 1998. "Nonparametric Regression Techniques in Economics," Journal of Economic Literature, American Economic Association, pages 669-721.
    3. King, Mervyn A, 1983. "An Index of Inequality: With Applications to Horizontal Equity and Social Mobility," Econometrica, Econometric Society, vol. 51(1), pages 99-115, January.
    4. Stiglitz, Joseph E., 1982. "Utilitarianism and horizontal equity : The case for random taxation," Journal of Public Economics, Elsevier, pages 1-33.
    5. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-969, July.
    6. Aronson, J Richard & Johnson, Paul & Lambert, Peter J, 1994. "Redistributive Effects and Unequal Income Tax Treatment," Economic Journal, Royal Economic Society, vol. 104(423), pages 262-270, March.
    7. Mervyn A. King, 1980. "An Index of Inequality: With Applications to Horizontal Equity and Social Mobility," NBER Working Papers 0468, National Bureau of Economic Research, Inc.
    8. Alan J. Auerbach & Kevin A. Hassett, 2002. "A New Measure of Horizontal Equity," American Economic Review, American Economic Association, pages 1116-1125.
    9. Kaplow, Louis, 1989. "Horizontal Equity: Measures in Search of a Principle," National Tax Journal, National Tax Association, vol. 42(2), pages 139-54, June.
    10. Stiglitz, Joseph E., 1982. "Utilitarianism and horizontal equity : The case for random taxation," Journal of Public Economics, Elsevier, pages 1-33.
    11. Kreps, David M & Porteus, Evan L, 1978. "Temporal Resolution of Uncertainty and Dynamic Choice Theory," Econometrica, Econometric Society, vol. 46(1), pages 185-200, January.
    12. Louis Kaplow, 1985. "Horizontal Equity: Measures in Search of a Principle," NBER Working Papers 1679, National Bureau of Economic Research, Inc.
    13. Peter Lambert & Xavier Ramos, 1997. "Horizontal Inequity and Vertical Redistribution," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 4(1), pages 25-37, January.
    14. Kaplow, Louis, 1989. "Horizontal Equity: Measures in Search of a Principle," National Tax Journal, National Tax Association, vol. 42(2), pages 139-154, June.
    15. Plotnick, Robert, 1981. "A Measure of Horizontal Inequity," The Review of Economics and Statistics, MIT Press, vol. 63(2), pages 283-288, May.
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    More about this item

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence

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