Tax equity

economic-dictionary

Tax equity is a principle that maintains that people must contribute to the treasury according to their taxable capacity.

That is, according to this premise, individuals should be subject to a different tax burden according to their economic condition. Thus, the more favorable the position of the citizen, the greater the tax burden should be and vice versa.

This principle is trying to find a more equal distribution of the tax burden among taxpayers. Therefore, people with greater capacity should contribute more to the treasury. In this way, these resources can be invested, for example, in public works.

It should also be noted that contributory capacity is evaluated not only based on remuneration, but also on other variables such as assets and disposable income (the income that remains after complying with all obligations).

Components of equity

Within the principle of tax equity, there are two components:

  • Horizontal equity: The collecting body must impose the same tax burden on people who have a similar economic capacity.
  • Vertical equity: It means that the tax burdens of individuals are linked to their economic situation. Thus, the better the economic condition of the individual, the higher the tax rate he should pay.

Equity and progressive taxes

According to the consensus, it is usually affirmed that there is equity in progressive taxes. These are those that charge a higher rate the higher the tax base of the subject in question.

A personal income tax is progressive when it has several brackets. Thus, you can charge 15% on the remuneration, for example, when the income is less than equal to 5,000 euros, but 30% if the taxpayer's salary is greater than 5,000 euros.

However, some non-progressive taxes could be considered equitable. For example, let's imagine that the inheritance tax is 40%. This may seem excessive, but we must bear in mind that large inheritances are not common, but tend to occur in high socioeconomic levels and do not come from the effort of the user. So, this type of tribute has a redistributive purpose.

Although it is true that in some cases, inheritance and gift tax is considered unfair because it has already been previously taxed on that estate. In addition, in specific cases in which the assets are not liquid, it could be difficult to pay the tax and end up losing the assets due to the inability to make the tax payment.

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