What is Equity?

In a comment on one of my recent posts, co-blogger Scott Sumner quotes my statement:

But implicit in his discussion is the idea that equity is synonymous with income equality or, at least, reduced income inequality. That’s not my view. My view is that people are treated equitably when other people don’t take their stuff.

Scott then writes:

That’s fine as a definition, but in that case I’d just use a different term.  Even if I accepted your definition of “equity”, it would not change my views on Romney’s proposal at all.  I’d just replace “equity” with “income equality” in my post, and otherwise keep the argument the same.

If he had stopped there, we wouldn’t have had a disagreement, except that we have very different views on the desirability of Romney’s proposal.

But then Scott writes:

I think my use of equity is consistent with how it’s used in economics textbooks when they discuss the equity/efficiency trade-off.

That’s a bridge too far.

It is consistent with how it’s used in some, possibly many, economics textbooks. I found words to that effect, for example, in Jack Hirshleifer’s microeconomics text. But some, maybe many, economics textbooks give a few versions of “equity.”

Here are two examples, and I didn’t have to look hard in my remaining few economics textbooks to find them.

In the 9th edition of their textbook Economics: Principles and Policy (2003), William J. Baumol and Alan S. Blinder consider various versions of equity. The two most directly related to this discussion are the concept of “vertical equity” and the benefits principle.

The version of the vertical equity principle they discuss is the “ability-to-pay principle,” which says that “those most able to pay should pay the highest taxes.” But they then give examples of a progressive, a proportional, and a regressive income tax system, in all of which those most able to pay do pay the highest taxes. So that’s not guidance that leads you to income equality or even to reducing income inequality.

The other equity principle they discuss is the “benefits principle,” which says that “those who reap the benefits from government services should pay the taxes.” They note that this principle of fair taxation “often violates commonly accepted notions of vertical equity.”

You can see why. Bill Gates gains a lot from national defense, but does he gain much from U.S. foreign policy, which tends to be focused on national offense? Or even more obviously, does he gain from the existence of the SNAP (food stamp) program?

In the 5th edition of N. Gregory Mankiw’s Principles of Economics (2009), there’s a similar discussion. Indeed, Mankiw uses examples of progressive, proportional, and regressive tax systems, all of which cause those with higher incomes to pay more taxes.

Mankiw also discusses the benefits principle and even argues that it could be used to justify taxing higher-income people more for anti-poverty programs, on the grounds that reducing poverty is a public good. Whether or not you think this is a stretch, the point is that we still don’t get to the conclusion that high-income people should pay a larger percent of their income.

And notice that neither of the two textbooks equates equity with income equality.



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