Vertical equity and tax progressitivity

A property results in tax payments that varies with the value of the property. Under the poll tax, however, every adult in a given local jurisdiction pays the same annual tax, period. For example, the duke with his estate paid the same tax as the butcher in his three-room flat.

There are two distinct aspects to the fairness of a tax system. First, called vertical equity by economists, concerns the appropriate tax burden on households of different levels of well-being.

A tax system can be evaluated against another standard of fairness--under what circumstances is it acceptable that two equally well-off households bear a different tax burden? (horizontal equity)

If everyone pays the same percentage of income in tax, regardless of income, then the tax is called proportional.

One tax structure is more progressive than another if the average tax rate (tax liability as a percentage of income) rises more rapidly with income. 

Two principles for determining the fair distribution of tax burden across income classes.
(1) benefit principle: each person's tax burden ought to be commensurate to the benefits he or she receives from the gov.t.

Trouble: sometimes it is hard to determine exactly how much each citizen benefits

If the benefit principle supports a progressive tax system, it does so not to ameliorate income inequality or redistribute income but instead to "charge" correctly for the progressive benefits of government programs.

(2) ability-to-pay principle: the tax burden should be related to the taxpayer's level of economic well-being.

In principle, there could be substantial inequality in annual incomes even if everyone ended up earning the same total income over a lifetime. The best available evidence suggests that the distribution of long-term income is only a bit less unequal than the distribution of single-year income. There is also evidence that the growing inequality of annual incomes over the last few decades have been matched to a large extent by growing inequality in lifetime incomes. 

Trouble: we have no way to quantitatively compare across individuals the sacrifice caused by having less money. There is no objective way to measure and compare the degree of sacrifice across people.