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Taxation Equity

Taxation equity is the principle that taxes should be fair. However, there are several criteria for determining what is fair. The benefits principle states that people should pay taxes based on the benefits that they receive from government services. For instance, excise taxes on gasoline are used to build roads and bridges. However, taxes on income and investments are based on the ability to pay.

The ability-to-pay principle can be classified as vertical equity and horizontal equity. Vertical equity is the principle that people with higher incomes should pay more taxes, such as the provision for the increasing marginal tax rates on higher income. Horizontal equity is the principle that people with higher necessary expenses should pay less tax than someone else with equal income but without the expenses. A common application of this principle is the provision for the numerous deductions and tax credits available for people who have children, allowing them to pay less tax for a given level of income.

Another general principle that would make taxation more equitable is to consider the marginal utility of money. As with everything else, the marginal utility of money declines with ncreasing amounts. Each successive dollar of income holds less value than the previous dollar for the holder. This is because when people have less money, they need to spend it on essential goods and services, such as food, clothing, and health insurance. On the other hand, wealthy people have much more money than what they need for essential goods and services, so they can invest it to make even more money or pass it to their descendants. Extremely wealthy people have so much money that they pay record prices for art, such as the recent payment of $106.5 million for a painting that took Picasso only 1 day to paint. So when considering the marginal utility of money, a poor person paying 25% of his income for taxes is paying a much more valuable portion of his income than a wealthy person paying the same percentage of her income.