The United States has adopted an income tax code, and the discussion now zeroes in on the income tax that Congress has adopted.
Fairness and Equity: Issues of fairness as between those who must pay an income tax arise. A reduction in one taxpayer’s taxable income of course produces a reduction in that taxpayer’s taxes. If the government is to raise a certain amount of money through an income tax, a reduction in one taxpayer’s tax liability necessarily means that someone else’s taxes must increase. This is why the reduction of some taxpayers’ tax liability is a matter of concern for everyone else. The government may choose to discriminate in its assessment of tax liability. The policy considerations that justify reducing one taxpayer’s tax liability but not another’s are the essence of tax policy.
Three Guiding Principles: This leads us to observe that there are three norms against which we measure income tax rules:
- Horizontal equity: Taxpayers with the equal accessions to wealth should pay the same amount of income tax. Like taxpayers should be taxed alike. Of course, we can argue about which taxpayers are truly alike.
- ertical equity: Taxpayers with different accessions to wealth should not pay the same amount of income tax. Unlike taxpayers should not be taxed alike. Those with more income should pay more and pay a higher percentage of their income in taxes. Income tax rates should be progressive.
- Administrative feasibility: The tax system only applies to persons who have incomes. The rules should be easy to understand and to apply – for both the taxpayer and the collection agency, the Internal Revenue Service.
The first two of these principles are corollaries, i.e., each is little more than a restatement of the other. Without taking up administrative feasibility, consider how closely we can come to defining the “income” that should be subject to an income tax so that compliance with the first two principles would require little more than establishing the progressive rates that would produce (an acceptable level of) vertical equity. 1
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