Equivalence scales, horizontal equity and optimal taxation under utilitarianism

Abstract

This paper analyzes the question of how differences in family size should be treated by the income tax system in order to achieve horizontal equity. Family size is incorporated into the demand system by the procedure of demographic scaling. Horizontal equity is defined as `equal treatment of equals'. It is shown that when lump-sum taxes are not available and the government has to rely on income taxation, then the only way to entail equal utilities for household of different size is to equate the labor supplies and the per-standard-adult consumptions of these households.