Question

4. When you spend money on your children’s consumption, this transfer is not taxed but if you make a large direct gift to your children, it is taxed. Why does this represent a horizontal inequity inherent in transfer taxes? Can you think of any policy modifications that would reduce this inequity?

Answer 1

A horizontal inequity is inherent in the transfer taxes because the taxing is done uniformly without considering the differences economically or socially among the tax paying people. This represents a regressive form of taxation as compared to the cases where the differences are considered and accordingly taxation is done. This clearly represents a horizontal inequity inherent in transfer taxes.

Policy modifications that can help in reducing this type of inequity is creating different slabs with differentiate people economically, socially or based on other parameters and setting different taxes for different slabs of people and this will prevent horizontal inequity in the tax system. Thus, the best way to reduce inequity is creating slabs and taxing people differently in different slabs and one with high economic and social parameter to be taxed high.