Average citizens are not concerned about the incidence and efficiency of taxes when they debate tax issues. They are concerned primarily about the fairness of the tax system. Economists have proposed two conflicting principles of fairness in any tax system: the benefits principle and the ability-to-pay principle. One theory holds that people should pay equally according to the benefits they receive from public goods and services, while the other theory holds that people should pay according to how easily they can bear the burden of taxation. Out of these principles, there arise two types of equity too: horizontal equity and vertical equity. If taxes are based on ability to pay, horizontal equity says that taxpayers with the same ability to pay should pay the same taxes. On the other hand, vertical equity requires that taxpayers with a greater ability to pay should bear a greater share of the taxes.
In theory, which principle do you support? Why?
Do you see any difficulties putting this principle into practice?
Which type of equity do you endorse? Why?
How would you resolve the discrepancy in fairness that arises when choosing one system as a basis of the tax system?