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{{Short description|Economic concept of fairness}}{{More citations needed|date=October 2022}}{{Pillars of sustainability|width=350px|Scheme of sustainable development: at the confluence of three constituent parts. (2006)}}Equity, or economic equality, is the concept or idea of fairness in economics, particularly in regard to taxation or welfare economics. Equity is a central concept in economics, closely tied to notions of fairness and justice in the distribution of wealth, resources, and taxation within a society. It is a foundational element in the discussions of public finance, taxation policies, and welfare economics, influencing how resources are allocated among different segments of the population.

Overview

According to Peter Corning, there are three distinct categories of substantive fairness (equality, equity, and reciprocity) that must be combined and balanced in order to achieve a truly fair society.WEB,weblink Is Capitalism Fair? | Psychology Today, Inequality and inequities have significantly increased in recent decadesWEB, 2017-02-06, Social Justice: Is It in Our Nature (and Our Future)?,weblink 2023-03-26, American Scientist, en, {{Citation needed|date=October 2022}}. But while most of middle-income countries increased inequality in recent years, it is important tonote that middle classes and—to a lesser extent—poorer-income groups seem to be getting anincreasing share of income in recent years. This advance is still vulnerable and needs to bequickly accelerated in the 21st centuryRavallion, M. (2009). “The Developing World’s Bulging (but Vulnerable) Middle Class.” Policy ResearchWorking Paper 4816. Washington, D.C.: World Bank.

Definitions of Equity

Equity in economics refers to a condition of fairness where the economic processes and their outcomes do not unduly favor or disadvantage any particular group or individual. This sense of fairness, or economic justice, attempts to balance economic disparities among different societal segments to promote a more inclusive and just society. Equity is a central issue in public sector economics and in public policy. It is at the heart of almost all economics policy debates,Ulbrich, H. (2011). Public Finance in Theory and Practice Second edition (1st ed.). Routledge, p. 71 which underscores the integral role that equity plays in shaping public decisions that impact overall societal welfare.Equity looks at the distribution of capital, goods, and access to services throughout an economy and is often measured using tools such as the Gini index. Equity may be distinguished from economic efficiency in overall evaluation of social welfare. Although 'equity' has broader uses, it may be posed as a counterpart to economic inequality in yielding a "good" distribution of wealth. It has been studied in experimental economics as inequity aversion.

Difficulty in Defining Equity

Defining equity presents inherent challenges due to its subjective nature, which depends heavily on societal values and individual perceptions of what is considered fair. Economists often struggle to establish a universally accepted definition of distributional equity because it involves making interpersonal comparisons of utility, which are inherently complex and controversial. Public finance in theory and practice highlights this difficulty: "Economists find it difficult to formulate an acceptable definition of distributional equity because it would require interpersonal comparisons of utility."Ulbrich, H. (2011). Public Finance in Theory and Practice Second edition (1st ed.). Routledge, p. 70 In practice, it may prove impossible to equalise choices without seriously impeding social objectives in other areas, such as the attainment of efficiency or the preservation of liberty. LE GRAND, J. (1984). Equity as an Economic Objective. Journal of Applied Philosophy, 1(1), 39–51.weblink This complexity is a significant barrier to forming a consensus on what constitutes equitable outcomes in economic policy.

Horizontal vs. Vertical Equity

The concept of horizontal equity means treating people alike if they are in the same or similar economic situations—making them pay the same taxes and/or providing them with the same public services. Implicit in the notion of horizontal equity is an assumption that people’s capacity to enjoy income is similar, at least within a given range of incomes.Ulbrich, H. (2011). Public Finance in Theory and Practice Second edition (1st ed.). Routledge, p. 72This principle underpins many tax systems, advocating that those with comparable incomes should incur similar tax burdens. However, the practical implementation of horizontal equity is fraught with challenges, as defining what constitutes similar economic situations can be highly subjective and complex. Much of the complexity in the federal income tax arises from attempts to define equal economic situations for purposes of horizontal equity.Ulbrich, H. (2011). Public Finance in Theory and Practice Second edition (1st ed.). Routledge, p. 72A second and even more challenging concept of equity is vertical equity. Vertical equity means treating people differently according to the differences in their income, wealth, or other measure of need or ability to pay.Ulbrich, H. (2011). Public Finance in Theory and Practice Second edition (1st ed.). Routledge, p. 73 It is typically advocating that those who are better off should contribute more to the public coffers. This principle supports progressive taxation, where tax rates escalate with an individual's income or wealth. The rationale for vertical equity involves recognizing different capacities and needs among the population, which should influence their tax contributions. However, like horizontal equity, vertical equity also encounters practical difficulties. For example, one difficulty with using vertical equity as a guide to public policy is in measurement. Attempting to determine vertical equity also raises the serious problems discussed earlier that are associated with interpersonal comparisons of utility.Ulbrich, H. (2011). Public Finance in Theory and Practice Second edition (1st ed.). Routledge, p. 73

Equity Axioms

Equity axioms are theoretical constructs that provide frameworks for understanding and implementing fairness in economic policies. While there are many variants of equity principles, they could be divided in two broad categories, namely, procedural and consequentialist.JOURNAL, Dubey, Ram Sewak, On construction of social welfare orders satisfying Hammond equity and Weak Pareto axioms, Mathematical Social Sciences, November 2016, 84, 119–124, 10.1016/j.mathsocsci.2016.10.006, Among these, Hammond’s equity principle is notable. It suggests that a progressive transfer—redistributing income from richer to poorer individuals without altering their relative positions in terms of utility—enhances overall welfare. This principle is grounded in the belief that "an increase in one person's utility matched with a decrease in another person's utility that does not alter their respective positions on the utility scale – what we refer to as a Hammond progressive transfer – constitutes a welfare improvement.“Nicolas Gravel, Brice Magdalou, Patrick Moyes. Hammond’s Equity Principle and the Measurement of Ordinal Inequalities. 2017. halshs-0143083weblink axiom is Sen's weak equity axiom, which states: „Let person i have a lower level of welfare than person j for each level of individual income. Then in distributing a given total of income among n individuals including i and j, the optimal solution must give i a higher level of income than j.“Equality: On Sen's Weak Equity AxiomAuthor: James GriffinSource: Mind , Apr., 1981, New Series, Vol. 90, No. 358 (Apr., 1981), pp. 280-286Published by: Oxford University Press on behalf of the Mind Associatioweblink This axiom prioritizes the needs of the most disadvantaged when allocating resources, ensuring that equity considerations directly influence economic outcomes.

Equity in Taxation

The role of equity in taxation is pivotal. An equitable tax system aims to distribute the financial burden fairly across different income groups, ensuring that everyone contributes their fair share towards public services. The principles of horizontal and vertical equity are often discussed regarding taxation. In public finance, horizontal equity is the idea that people with a similar ability to pay taxes should pay the same or similar amounts. It is related to the concept of tax neutrality or the idea that the tax system should not discriminate between similar things or people, or unduly distort behavior.Musgrave (1987), pp. 1057–58. Burgers, Irene JJ, and I. J. Valderrama. "Fairness: A dire international tax standard with no meaning". Intertax 45 (2017): 767.Vertical equity usually refers to the idea that people with a greater ability to pay taxes should pay more. If the rich pay more in proportion to their income, this is known as a proportional tax; if they pay an increasing proportion, this is termed a progressive tax, sometimes associated with redistribution of wealth.Musgrave (1959), p. 20. Progressive tax is one of the main financial tools to help decrease the inequality between income groups.In addition, Equity may also refer to inter-nation equity. As a theory, inter-nation equity is concerned with the allocation of national gain and loss in the international context and aims to ensure that each country receives an equitable share of tax revenues from cross-border transactions. The tax policy principle of inter-nation equity has been an important consideration in the debate on the division of taxing rights between source and residence countries. OECD (2014), “Fundamental principles of taxation”, in Addressing the Tax Challenges of the DigitalEconomy, OECD Publishing, Paris.DOI:weblink

Fair division

Equitability in fair division means every person's subjective valuation of their own share of some goods is the same. The surplus procedure (SP) achieves a more complex variant called proportional equitability. For more than two people, a division cannot always both be equitable and envy-free.Better Ways to Cut a Cake by Steven J. Brams, Michael A. Jones, and Christian Klamler in the Notices of the American Mathematical Society December 2006.

See also

• Distributive justice
• Educational equity
• Equity (law)
• Excess burden of taxation
• Justice (economics)
• Progressive tax
• Proportional tax
• Tax incidence

Notes

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References

• Anthony B. Atkinson and Joseph E. Stiglitz (1980). Lectures in Public Economics, McGraw-Hill. Economics Handbook Series.
• Xavier Calsamiglia and Alan Kirman (1993). "A Unique Informationally Efficient and Decentralized Mechanism with Fair Outcomes", Econometrica, 61(5), p. 1147-1172. {{jstor|2951496}}.
• A.J. Culyer (1995). "Need: The Idea Won't Do — But We Still Need It", Social Science and Medicine, 40(6), pp. 727–730.
• WEB, Jean-Yves, Duclos, 2008, horizontal and vertical equity, The New Palgrave Dictionary of Economics, 2nd,weblink dead,weblink" title="web.archive.org/web/20160304052531weblink">weblink Mar 4, 2016,
• Allan M. Feldman (1987). "equity", (The New Palgrave: A Dictionary of Economics), v. 2, pp. 182–84.
• Peter J. Hammond (1987). "altruism", The New Palgrave: A Dictionary of Economics, v. 1, pp. 85–87.
• Serge-Christophe Kolm ([1972] 2000). Justice and Equity. weblink" title="web.archive.org/web/20121010141137weblink">Description & chapter-preview links. MIT Press.
• Julian Le Grand (1991). Equity and Choice: An Essay in Economics and Applied Philosophy. Chapter preview links.
• Richard A. Musgrave (1959). The Theory of Public Finance: A Study in Political Economy.
• _____ (1987 [2008]). "public finance", The New Palgrave: A Dictionary of Economics, v. 3, pp. 1055–60. Abstract.
• Richard A. Musgrave and Peggy B. Musgrave (1973). Public Finance in Theory and Practice
• Joseph E. Stiglitz (2000). Economics of the Public Sector, 3rd ed. Norton.
• William Thomson (2008). "fair allocation", The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
• World Bank. World Development Report 2006: Equity and Development.Summary with ch. links. {{Webarchive|url=https://web.archive.org/web/20071018043436weblink |date=2007-10-18 }}
• H. Peyton Young (1994). Equity: In Theory and Practice. Princeton University Press. Description, preview, and chapter 1{{Dead link|date=December 2019 |bot=InternetArchiveBot |fix-attempted=yes }}.
• Colombino, U., Locatelli, M., Narazani, E., & O'Donoghue, C. (2010). Alternative basic income mechanisms: An evaluation exercise with a microeconometric model. Basic Income Studies, 5(1).

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