Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

 
15.1 PRINCIPLES OF TAXATION 
 
15.1.1 The Concept of Equity 
The concept of equity in taxation refers to the social justice 
in the allocation of burden of tax. Taxation imposes a burden on tax 
payers. The tax burdens are of two types which may be direct 
and/or indirect: 

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a) Money burden and 
b) Real burden 
Direct money burden of taxation refers to the amount of 
money income the people have to pay as taxes to the government. 
It affects the disposable money income of the people. 
Direct real burden means the amount of sacrifice (disutility) 
involved in parting with purchasing power in the tax payment. 
Equity or fairness in the distribution of this real burden is 
considered as important test of a tax system. 
Equity, in short, implies equality of real sacrifice (or income 
disutility) involved in tax payments on the part of tax-payers. There 
are two criteria of equity suggested: 
(i) 
Horizontal equity and 
(ii) 
Vertical equity 
 
Horizontal equity implies that all tax-payers having similar 
economic conditions must be treated equally. In other words, no 
discrimination should be made among the people with identical 
capacities. 
 
Vertical equity implies that different people with different 
economic situation and capacities are treated unequally. In other 
words, it is the idea that a rich person should pay more taxes than a 
poor one for each to bear the same burden in supporting 
government. 
Vertical equity asserts that people better able to pay higher 
taxes should do so. 
 
Implementing a horizontally equitable tax system first 
requires identifying what constitutes equal circumstances 
— 
income, wealth, age or marital status? Then we must specify what 
equal treatment means. Does equal treatment mean equal tax rates 
or equal tax payments over a lifetime? Equity in our tax system 
requires both horizontal and vertical equity. Horizontal equity 
dictates that equals should pay equal taxes; vertical equity means 
that unequals should be treated unequally. 
For an equitable distribution of tax burden, the following three 
principles have been laid down by economists: 
1) Cost of Service Principle, 
2) Benefit Principle, and 
3) Ability to Pay Principle 

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