This article points up a fundamental conflict between the horizontal and vertical equity of a progressive income tax when prices vary spatially. A model is developed to show that progressive taxes on nominal income—designed to further vertical equity in taxation—create inequalities among people with equal real income before the tax is applied. The magnitude of this effect is illustrated for taxpayers in five U.S. cities in 1975. Earlier work has tied this effect to inflation; here the effect is shown to exist even when prices are stable over time.
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