In the world of investment, one might come across the concepts of vertical and horizontal equity. While horizontal equity and vertical equity are primarily social policy concepts, they are relevant to investments because they can influence tax policies.
Horizontal equity - explained
Horizontal equity refers to the idea of a tax system in which those on the same income pay the same amount of tax as equal treatment. A lot of countries use this concept as a starting point and a tax principle. However, tax-deductible expenses can make this system more complicated. Examples of this would be medical expenses being deductible. Compromising horizontal equality for this creates tax inequality, but also helps those in challenging circumstances.
Vertical equity - explained
The concept of vertical equity describes the idea that those who earn more pay higher taxes. The concepts of horizontal equity vs vertical equity are actually comparable because it is still possible for people in the same income bracket to be treated in the same way and pay the same tax rate. Another term for the system of vertical equity is "progressive taxation” because tax levels progress upwards depending on a person's income. The concept of vertical equity is easier to implement if it is based on income rather than asset-based taxes. This is because income is liquid, whereas assets are not. Some assets can be monetized (eg renting out a room in your home).
Equity vs equality
You might be confused about the difference between equity and equality - so how do they differ?
While both aim for fairness, their approaches are different. Equity is focused on the outcome, allowing people to be treated differently as long as that means they have equal access to the same outcome. Equality describes people being treated equally, regardless of their circumstances.