Horizontal Inequity can be a Good Thing

A switch from any given income tax schedule to a differentiated tax structure in which two groups of taxpayers are treated differently, each still facing the same local degree of progression, can induce an increase in welfare despite causing horizontal inequity. We demonstrate this result in a number of special case and make a general conjecture, the thrust of which is that society's acceptance of horizontal inequity will be second-best whenever the government must operate with a limited bundle of income tax instruments such as allowances, thresholds and marginal rates.