Equity can be used to refer to two different concepts in economics. This page focuses on economic equality or the level of fairness within the economy of a nation.
Equity can also mean the value or capital of a firm minus the value of liabilities held by the firm. This concept can be extended to a family's house. The equity would then be the value of the house minus the amount owed on a mortgage.
Welfare economics is a branch of economics, specifically the branch that studies equity. Welfare economics seeks to ensure a baseline level of prosperity for everyone in an economy. The level of equity in an economy measures how evenly the wealth is distributed throughout the economy. This field makes a baseline assumption that any market based economy is inherently prone to inequality. These economists seek to correct imbalances that emerge from unregulated economic activity. To ensure a certain level of equity, economies redistribute wealth. The most common method used to correct inequity is through taxation. An equal distribution of wealth within an economy is an important part of equity, but the redistribution of wealth conflicts with capitalist ideals of efficiency. This market based economic viewpoint says these restrictions (like taxes) reduce efficiency.
Generally, people believe that those who have a similar ability to pay taxes should pay the same amount of taxes; a principle known as horizontal equity. This group of people with a similar ability to pay is commonly known as a tax bracket. Each bracket is a range of income levels that are assigned a certain tax rate. There are a number of brackets or groups that are assigned different rates according to their ability to pay. Generally the more money one makes, the more they pay. Note that governments can adjust an income by providing deductions for children, mortgages etc. to reflect a person's ability to pay taxes.
In the table below, those who have an annual income of between $45,282 and $90,563 will pay a rate of 18% whereas those in the top bracket making over $200,000 annually pay a rate of 33%. The government assessed that people with an annual income falling within one of these brackets have a similar ability to pay. It is obvious that a person making $45,282 annually does not possess the same ability to pay as one making $200,000+ annually as they have less disposable income. Determining the ability to pay for each group is related to vertical equality. It should be noted that everyone pays 15% on the first $45,282 of income, and then pays 18% on money made over that amount. Therefore, someone making $46,000 doesn't pay 20.5% on their entire income.
|Tax Bracket||Taxable Income Range
|Percent of Income |
|Bracket 1||$0- $45,282||15%|
|Bracket 2||$45,282 - $90,563||20.5%|
|Bracket 3||$90,563 - $140,388||26%|
|Bracket 4||$140,388 - $200,000||29%|
Note: These rates are for 2016 and are only the federal tax, not the provincial. This is called the marginal tax rate, because it's how much extra is paid for every extra dollar earned.
Vertical equity deals with determining the quantity paid by each income group.  As stated above those in "Bracket 1" have less of an ability to pay than those in "Bracket 5", thus,those in higher brackets will be expected to pay a larger share of their incomes in taxes (as seen in Table 1). The larger amounts paid at the top of the spectrum will get redistributed through government spending. This is done to ensure that all members of a society have the same ability to pay for essentials such as food, electricity, healthcare and others.
The government does not simply collect money from the rich and give a check to the less prosperous in society. To ensure a certain level of prosperity, the government can use the tax dollars to provide health services, educational support, and other forms of support which reduce or eliminate the need for people to pay for those services.
Services such as education and especially healthcare can be extremely expensive. The scale of the government allows for healthcare to be cheaper and therefore less of a burden to tax payers in lower brackets. Having access to very cheap or free services such as healthcare and education allow for greater prosperity in society overall. A healthy population is more efficient than one where people constantly miss work due to illness. Education is widely regarded as a positive externality meaning the more people who are educated and the higher the level of education, the greater the benefit to society.
Just as it can happen in a country, inequalities persist throughout the world. The contrast between the relative wealth of OECD countries and that of many countries which make up the global south are proof of this. There are a number of factors which create and sustain these inequalities such as ineffective government and market structures, corruption, war and conflict, disease and many others. These factors make it very difficult to address the problem of equity in the world. Unlike a national system, there is less of a mechanism to address global inequality. Today, efforts to curb global inequality are primarily led by charity organizations and intergovernmental organizations such as the United Nations.
One way to measure the amount of equity in a society or globally is to look at the Gini Index. The Gini Index is comprised of the Gini coefficients of countries in the world (not all are accounted for), and when placed on a map it is easy to see how equity differs across the globe. The Gini coefficient is also useful to examine the level of inequality present in any one country, provided there is the data for said country.