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Equity and Government Revenues
So what is equity as it relates to the economy and government?
Equity comes into play in relation to the budget when considering, for instance, the possible exclusion of people from the use of social or private goods through such means as income limits or geographical barriers; for instance, raising the cost of public bus fair can impact those who must take public transportation versus those who have access to a car. Through the political process, a budget is adopted that may include measures that do not allow people to dictate how their money is being spent, as through taxes. Also, when compromises are made in the process, perhaps as a result of politics and pork-barrel trading of votes, fairness of resulting decisions can be affected.
Equity is something that is considered in developing or maintaining a tax structure, where people should pay their fair share; rely on private marketplace decisions to ensure a tax structure with as little interference as possible; reduce capital gains taxes because some people can’t benefit from capital gains; use fiscal policies for economic stabilization (we must ask if a tax will increase or decrease stabilization); utilize a fair system of collecting taxes efficiently; ensure the tax is understandable and not too complex; and keep administrative costs as low as possible.
There are different levels of equity. There is vertical equity, an array with people with more income at the top; those at the top should pay more. Also, there is horizontal equity, where people with same capacity should pay same amount; this is associated with flat-rate income tax (not graduated or progressive).
There is an economic benefit principle of the 18th century of a fair and equitable tax, in which the taxpayer contributes in line with benefits he/she derives from the tax. Benefits may be perceived differently by others, and certain benefits may have more value in other areas. There are user charges (which happen to be a primary source of revenue for local governments) for which it is relatively easy to identify who the beneficiary and user is of the service, especially when the service is voluntary; with utility charges, the more a person consumes, the more they pay, which seems fair.
Also involved in this discussion is the Ability to Pay Principle, or the obligation people have to general society; this obligation is greater for those with more. This concept is most closely associated to transfer payments, where the person who pays tax is not the direct beneficiary, like Social Security.
With the issue of tax incidence and burdens, the benefits of the service should result in a net burden or benefit. There should be a balance between opportunity costs and burdens on private sector and ability to make discretionary purchases. The government imposes taxes and revenues to pay for purchase of social goods and services, often in connection with payment of public employees, but some taxes are deemed fairer than others, with some arguing that tax on consumption is more equitable than tax on income, especially adjusted to size of family. Spending patterns may be changed by taxes, like by gasoline tax. With the issue of Proposition 13, the trend of who pays property taxes has changed so that the burden has fallen on new homeowners; the unfairness of this has resulted in this issue being litigated under Equal Protection in California courts. Also, since businesses turn over less often and they know how to get around Proposition 13, the burden has also switched to residences.
The Constitution established a framework for levying taxes, though not always in a most fair and equitable manner; for instance, Article I, Section 8 says that taxpayers will be treated equally… though all don’t have the same income. Also, in Section 9, it is stated that taxes should be “head taxes” on a per-person basis, and rates will vary in states per capita. With the 16th Amendment, it was determined that federal government could levy taxes, resulting in everyone paying different taxes and receiving different benefits. Finally, with the 14th Amendment also came the Equal Protection Clause that won’t allow for another form of slavery (which can be used in terms of taxation and its effects).
Distributive justice represents as aspect of equity in that it addresses issues related to how people should pay for services and how the government collects revenue, and how to create a system that hurts as few people as possible (Pareto efficiency), though this isn’t always realistic. Endowment-based criteria, which stems from Hobbes and Locke, holds that a person has an innate right to the fruits of their labor, and that whatever you produce, you should keep. This has been amended since, saying that: 1) only income earned in a competitive marketplace should be capable of being kept, so if monopolistic or contrived, they shouldn’t keep them, 2) only income derived from labor should be kept or excluded, but not capital, 3) we can keep all earned income derived in a competitive market if we all start in equal positions. This is now more utilitarian, to distribute income to achieve the greatest sum total of happiness; A should be given more than B if A’s ability to derive happiness is higher than B. Equalitarian ideas include how equality is inherently desirable and given voice in a community philosophy of each according to their need (though how do we determine need?); this results in a philosophy that once no one suffers poverty, people should keep most of what they produce.
Generational equity is the issue of inheriting budgetary issues from previous generations, such as through Social Security and budget deficits. This isn’t fair to those who didn’t incur those costs; that’s why, for instance, budgets should be balanced to prevent people from having to deal with a deficit in the future.