COMPENSATION IN TAX REFORM
- 1 June 1976
- journal article
- Published by University of Chicago Press in National Tax Journal
- Vol. 29 (2) , 123-130
- https://doi.org/10.1086/ntj41862096
Abstract
The principle of horizontal equity is not a mere abstraction of academic theory but a fundamental belief that is widely held and strongly felt. Many otherwise desirable tax reforms may never be enacted because doing so would violate this injunction that government action should not treat equals unequally. It is important therefore to seek ways to eliminate or reduce such horizontal inequities. Complete compensation of those who would otherwise lose because of a tax change eliminates the problem of horizontal equity. When such compensation is feasible, as it generally would be for reforms affecting capital income, there is much to recommend it. Unfortunately, for a wide range of reforms involving the taxation of labor income, compensation is virtually impassible. In these circumstances, the choice of an optimal tax reform must balance efficiency gains from alternative reforms against the corresponding infractions of horizontal equity.Keywords
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