Part A: Please pick the criteria listed below, define it, and indicate how it applies to this proposal. Added comments, experiences, and a lot of interaction are highly encouraged.
- Horizontal Equity
Income tax systems have changed and developed so much in the past 200 years that there are already a lot of ways how an individual or a group of individuals could be taxed or levied by the government. Before defining what horizontal equity is, it would be beneficial to know what a basic equity is. Equity or what is not so popularly known as economic quality, is actually a large umbrella of terms that refers to any concept or idea that enforces fairness in economics and its subfields. Application of equities is most commonly used in taxation. The purpose of Equity is basically to help governments have a stronger basis for taxing both individual and corporate taxpayers. Besides, inequalities in any economic system could lead to economic instabilities and financial catastrophes in the long run, especially for countries that heavily rely on taxes in generating revenues. Horizontal equity refers to the concept or idea in public finance that suggests that taxpayers who presents with a similar capacity to pay taxes should have the same liabilities in taxes or should pay similar amounts. Two individuals who work as healthcare service providers who also receive the same compensation and miscellaneous benefits for example, should pay a similar amount of tax to the government. In the case, given, application of horizontal equity is not that recommended because the city government and the owner of the Rocky Mountain Wranglers definitely have different taxpaying capabilities.
- Vertical Equity
This is another concept or principle in public finance that is somewhat the opposite of horizontal equity. This concept is based on the idea of tax neutrality. Basically, it suggests that all taxpayers, whether it is an individual employee or a corporate entity, should pay for taxes to the government that is proportional to their overall income. Factors such as the enforced tax percentage in the country, and the declared amount of income of the taxpayers, could greatly affect the calculation of taxes. Suppose that Company X earns an annual income of 1,000,000 USD and that the tax rate he has to pay for incomes 1,000,000 USD and below is only 5%; and 10% for an income that is between 1-2 million USD. Should Company X’s income the next fiscal year balloon to nearly 2,000,000 USD, then the company would be obliged to pay for 10% of that as taxes that will be sent to the government. In this case, vertical equity could be applied because the city government definitely has higher taxpaying capabilities than the team owner and under this concept; the one who has more should pay for more.
Adequacy or capital adequacy refers to the ratio that government financial institutions use to describe the measure of a business or any entity’s capital for a certain project. In this case, a low Capital Adequacy ratio could mean that there is a high probability that the project owner will have to resort to borrowing money from the bank simply because the funds are not adequate to complete the project.
Collectability in this case may refer to the ability of the taxes to be collected. There can be a variety of ways how governments could collect taxes from its stakeholders. One example would be the Pay as You Earn or PAYE scheme. This scheme is usually implemented by employers who have several employees to pay. A portion of the taxpayer’s income or salary gets cut and is sent to the government. This way, the individual taxpayers would not have to go directly to the internal revenue bureau to pay taxes. Collection schemes may vary from country to country.
This refers to the ability or in some cases, willingness of the involved parties to expose their tax records, most importantly, their income. It is important to note that transparency bills may also vary from country to country and that not all countries permit the uncovering of a taxpayer’s tax records. Transparency is most commonly used in situations wherein a party is being suspected for not paying the right amount of taxes to the government.
- Economic Effects
Collection of taxes is generally a government responsibility. On the other hand, paying taxes is the income-generating entity’s responsibility. Tax collection is a purely economic activity. It can be affected by a wide range of economic factors. Economic effects may refer to the effects that the process of collecting taxes may inflict on the government. Most of the time, these effects could be good because wealth is transferred from individual households and businesses to the country’s vault.
Part B: Tax Payer Groups
There are certain countries that have established tax payer groups. Generally, tax payer groups work like how consumer rights groups work. They work towards the promotion of fair and generally lower taxation and lower government debt pooling and spending. Basically, these are groups that are concerned with everything that may have a direct or indirect effect on taxes. There are three major taxpayer groups in the United States: The Americans for Fair Taxation, Americans for Tax Reform, and the National Taxpayers Union. In the U.S., all taxpayers pay taxes under a progressive taxation system scheme. Meaning, all these major tax groups have pay their taxes progressively. Generally, the income tax system in the U.S. is considerably better compared to other economic superpowers. Investors would not love to invest in this country if not for its stable and equitable taxation system despite high labor costs and other economic flaws in the first place. Thanks to the taxpayer groups, the government is treading towards the right path. Loopholes in the former administrations’ taxation system have been covered and the income tax system in the U.S. is now citizen and investor-friendly.
Atkinson, A., & Stiglitz, J. (2000). Lectures in Public Economics. McGraw Hill Economics Handbook Series.
Bird, K. (2009). Building a Fair Future: Why Equity Matters. Overseas Development Institute.
Hellerstein, J., & Hellerstein, W. (2001). State and local Taxation, Case and Materials Eighth Edition.
Johnson, P. (2007). Property Taxation in the United States. Massachusetts Property Tax Statute.