Progression-neutral income tax reforms and horizontal inequity

A switch from any given income tax schedule to a tax structure in which two groups of taxpayers are treated differently, each still facing the same degree of progression, can induce an increase in welfare despite causing horizontal inequity (HI). The thrust of much recent research, however, is that removing the HI from an income tax system, by replacing it with a schedule, is itself welfare improving. In this note we reconcile these results, showing that acceptance of HI can be second-best when government must operate with a limited bundle of income tax parameters.