Question

A city wants to partially finance a stadium using a 6% tax on alcohol purchased at all restaurants in city. Describe the advantages and disadvantages of this plan in terms of vertical equity, horizontal equity, and the concept of a “sin tax”.

Answer 1

• Vertical Equity -: It states that treat the unequals- unequally . It means a person must pay taxes depending on his income . It rests upon ability to pay principle.

Advantages under this equity for the plan -:

1. Raise more revenue by collecting more taxes by the high income groups.
2. Decrease the consumption of alcohol by low income groups and they will be saved from future expenses on health as alcohol consumption is not healthy.
3. will decrease inequalities in income.

Disadvantages of Vertical Equity -:

1. Risk of insufficient funds . It will put more burden on the lower income groups and they will not demand for alcohol which can affect the tax revenue negatively since the middle class and low income class form the majority of population.
2. Burden up the consumption of low income groups.
3. Hard to distinguish between low income groups and high income groups if the taxing is done in restuarants.

• Horizontal Equity -_ Treat the equals- equally . The people with same income must be made to pay the same tax.

ADVANTAGES-:

1. Uniform tax revenue.
2. Feeling of fairness due to same tax rate on people with similar income.

DISADVANTAGES -:

1. Although the tax% is high for high income groups but they actually pay less in proportion to their income.
2. This may create burden on low income groups as they would have to pay higher amount in proportion to their income.

• Sin Tax -: Tax on goods whbich are considered to be harmful.

ADVANTAGES -:

1. Reduction in demand of alcohol due to highlighting of its harmful effects.
2. A new source of revenue.

DISADVANTAGES -:

1. Burden on poor.
2. Sometimes a sin tax also fails to curtail the consumption of harmful goods because of addiction . This directly impacts the purchasing power of the people.