Equity is closely tied to taxation policies, welfare economics, and the discussions of public finance, influencing how resources are allocated among different segments of the population.
It is at the heart of almost all economics policy debates,[3] which underscores the integral role that equity plays in shaping public decisions that impact overall societal welfare.
Defining equity presents inherent challenges due to its subjective nature, which depends heavily on societal values and individual perceptions of what is considered fair.
Economists often struggle to establish a universally accepted definition of distributional equity because it involves making interpersonal comparisons of utility, which are inherently complex and controversial.
Public finance in theory and practice highlights this difficulty: "Economists find it difficult to formulate an acceptable definition of distributional equity because it would require interpersonal comparisons of utility.
"[4] In practice, it may prove impossible to equalise choices without seriously impeding social objectives in other areas, such as the attainment of efficiency or the preservation of liberty.
The concept of horizontal equity means treating people alike if they are in the same or similar economic situations—making them pay the same taxes and/or providing them with the same public services.
However, the practical implementation of horizontal equity is fraught with challenges, as defining what constitutes similar economic situations can be highly subjective and complex.
Much of the complexity in the federal income tax arises from attempts to define equal economic situations for purposes of horizontal equity.
As a theory, inter-nation equity is concerned with the allocation of national gain and loss in the international context and aims to ensure that each country receives an equitable share of tax revenues from cross-border transactions.