Measuring Horizontal Equity: A Regression Approach.

Variation of tax liability (or tax rate) within groups developed by classification schemes reflects differential tax treatment of economic unequals as well as horizontal inequity in the tax regime. The coefficient of variation (CV) of either tax liability or tax rate is frequently used as a measure of horizontal equity. The CV overstates the amount of horizontal inequity in a tax regime to the extent that variation within groups is due to income level. An alternative measure of horizontal equity, the coefficient of residual variation (CRV) from a regression, is proposed. The CRV adjusts for progressivity, eliminating a source of distortion in the traditional CV measurement of horizontal equity. Empirical properties of the CV and CRV are compared and illustrated using 1979 and 1986 tax returns from the Ernst & Young/University of Michigan Tax Database.