Fairness in Tax Policy

inviting me to share my views on fairness in tax policy. As you are well aware, the issue of tax fairness is highly contentious and, unfortunately, economics provides little guidance. One person’s idea of a fair tax system—for example, a flat tax on wages—epitomizes unfairness to those who believe in tax progressivity. Defining fairness is tricky. Economists are mostly agreed on one notion of fairness—so-called horizontal equity—the idea that the tax system should treat similar people in a similar way. That means, for example, that the tax system shouldn’t discriminate between owners and renters, people with health insurance and people without, or those who choose to drive a hybrid car and those who drive an old clunker. Of course, the tax system does discriminate in each of those cases, always with the rationale that a higher policy goal is being advanced: building community (mortgage interest deduction), encouraging health insurance coverage (health insurance exclusion), and improving the environment and reducing reliance on foreign oil (hybrid vehicle tax credit). Thus, even when we have an objectively supportable standard, other goals may trump it and often do. The consequence is that neighbors with identical incomes might often pay very differen