On the Measurement of Horizontal Inequity

IMF Working Papers, December 1, 1995

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On the Measurement of Horizontal Inequity

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Bibliographic details

• Authors: Peter J. Lambert
• Published: December 1, 1995
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451855654.001

Summary and central contributions

• Proposes local measures of inequality of posttax income among pretax equals that reflect alternative value judgments about the nature and magnitude of an inequity.
• Aggregates local measures into global indices that capture:
  • the welfare gain from eliminating horizontal inequity revenue-neutrally while preserving the vertical performance of the tax, and
  • the revenue gain from eliminating horizontal inequity welfare-neutrally while preserving the vertical performance of the tax.
• Discusses difficulties of implementation arising from the “identification problem.”
• Introduces and validates a variation in the methodology that bands the income data to create “close equals” groups; simulations show the banding procedure works well.
• Discusses a range of potentially fruitful applications.

Proposed measures and indices

• Local measures: inequality of posttax income among pretax equals (designed to reflect alternative value judgments about inequity).
• Global indices: aggregations of local measures that quantify welfare and revenue implications of eliminating horizontal inequity under constraints that preserve vertical performance.

Methodology and validation

• Addresses the “identification problem” as a difficulty in implementing the measurement approach.
• Banding variation: groups incomes into “close equals” via banding the income data.
• Simulation evidence: shows the banding procedure works well in validating the methodology.

Policy relevance and applications

• Provides tools to evaluate:
  • welfare gains from revenue-neutral elimination of horizontal inequity, and
  • revenue gains from welfare-neutral elimination of horizontal inequity,

both while preserving vertical performance of the tax.

• Suggests a range of potentially fruitful applications in analyzing income tax performance and tax equity.

Subject areas and keywords

• Subject: Income distribution, Income inequality, Income tax systems, National accounts, Personal income, Tax equity, Tax policy, Taxes
• Keywords: formula offer justice, Gini coefficient, Global, HI characteristic, HI index, horizontal equity, Income distribution, Income inequality, income tax performance, Income tax systems, Personal income, posttax income, Tax equity, tax system, WP