A Measure of Horizontal Inequity

TLDR

Tax and transfer legislation create inequities among living units, with state differences and eligibility rules producing vastly different income support for units with equal needs. This study develops a quantitative measure of horizontal inequity and demonstrates its application. The authors derive an inequity index by extending Lorenz‑curve and Gini‑coefficient analysis, then discuss implementation challenges and illustrate the measure. The paper concludes with a brief discussion of the measure’s implications.

Abstract

POLITICIANS, academicians and the general public alike have perceived that the status quo tax and transfer legislation creates inequities among living units. Tax laws create numerous situations in which living units with seemingly equal abilities to pay are taxed quite different amounts. State-by-state differences in welfare eligibility rules, benefit schedules and administrative procedures, the general unavailability of cash welfare to childless, nonaged, healthy couples and single individuals, and other features of transfer programs similarly provide vastly different levels of income support to units with 'equal needs. ' Advocates of major tax and welfare reform have marshalled such evidence into a central argument in favor of their proposals. While there is wide agreement that the process of redistributing incomes abounds with inequities, there have been few attempts to quantify their extent.2 This paper develops a measure of horizontal inequity and illustrates its use. Section II discusses the concept of horizontal equity, then builds upon familiar Lorenz curve-Gini coefficient analysis to derive the inequity index. The third part considers some problems of implementing the measure and illustrates it. Section IV provides a short conclusion.