Question

1) Evaluate the following taxes from the standpoint of vertical and horizontal equity.

a. A 25 cent per gallon tax on milk

b. A tax on stock market transactions

c. A sales tax on men’s clothing

d. A tax on cigarettes

Answer 1

Solution:- The standpoint of vertical and horizontal equity is different from thier tax representation formate. Vertical equity is harmed with any flat tax. Horizontal equity is harmed whenever goods that are only consumed by select segments of the population are taxed. The effect on horizontal and vertical equity is as follows:(a)Milk taxes are horizontally equitable, but not vertically equitable because they have a greater impact on low-income families.(b)A tax on stock market transactions is likely to be vertically equitable, in that most lower income families do not execute many trades. The extent of horizontal equity depends on how uniform the preference for stocks is among individuals with similar incomes. The more tastes vary, for example, between stocks and other forms of investment such as real estate, the less horizontally equitable the tax will be.(c)A sales tax on men’s clothing is likely to fair poorly on both counts. It is likely to be regressive (thus not vertically equitable), and is also not horizontally equitable in that it falls only on men rather than both genders.(d)A tax on cigarettes is likely to be neither horizontally nor vertically equitable for the same reasons as a tax on men’s clothing.