YOU DECIDE: What's in a word?
Different people interpret the meanings of many words differently; this perhaps is nowhere better illustrated than with “equity.”
One dictionary's definition of equity is “the state or ideal of being just, impartial and fair.” Using this definition, who could be against equity? It's a term frequently heard in policy discussions, and whatever the user's politics, it's used positively.
But when people are pressed on what they think equity really means, in operational terms, the agreement falls apart. I recently experienced this first-hand in two situations that convinced me that defining equity's meaning should be the first order of business.
My first encounter with the pitfalls of equity was in a discussion about tax policy. About 60 businesspersons, academics, think-tank heads, legislators and interest group advocates were discussing the state's tax structure. As soon as we began debating specific tax components, it was clear everyone wasn't on the same page when it came to defining equity.
For example, what is an equitable system of tax rates for the individual income tax? Some say it is one in which the tax rate rises with the taxpayer's income. That is, higher- income taxpayers pay not only more dollars in taxes, but they pay a higher percentage of their income in taxes.
Supporters say such a system is equitable for two reasons.
First, higher-income households can afford to pay a larger share of their income in taxes. Second, to equalize the pain of paying taxes, those with more income must pay a larger share because each additional dollar is worth less to them than it to lower-income taxpayers.
But such views of equity aren't universally accepted. Some say just because richer taxpayers have and can pay more doesn't mean they should be taxed at a higher rate. And even if added dollars mean less to upper-income folks, how do we measure this decreased value? Where are the income cutoffs, and how much higher should tax rates be to account for the dollar's reduced marginal value?
When the group discussion came around to the sales tax, a similar clash of interpretations occurred. Some tax committee members said the sales tax is inequitable because the “effective” rate is lower for higher- compared to lower-income taxpayers. This can happen if richer taxpayers save and invest more of their income than their lower-income counterparts. In this case, when the sales tax paid is expressed as a percentage of total income, the rate is lower for the rich than for others.
“But wait a minute,” chimed in other committee members, “the money richer taxpayers save and invest will eventually be spent, and when it is, sales tax will be paid.” So, they argued, looked at over the lifetime of a taxpayer, the sales tax is equitable!
My second encounter with defining equity came in observing a debate about income distribution. A writer cited rising shares of national income going to the highest income households as evidence of increased inequity in the country.
However, a challenger of this view indicated that households in all income categories have experienced an increase in average income — even after accounting for inflation — in the last three decades. While higher-income households enjoyed the largest gains, lower-income households also have gained, just not as much.
Further, the source of the income differences seems to be education. Today's economy favors education, and higher-income households tend to have more education and training than lower-income families. Is this equitable or inequitable?
It's not my intent to answer these questions: That's your decision. But it's clear that your personal definition of equity will largely shape your view of the important economic issues of the day.
So first things first: Decide how you define equity.
Dr. Mike Walden is a William Neal Reynolds Professor and extension