Ms. Mahmood is a retired schoolteacher whose pension income is $25,000 per year. She also receives Social Security income of $5,000 per year. Mr. Little is a young man who does not choose to work. He inherited $600,000 from his Aunt Clara, which he invested in a bond fund that provides a 5 percent return, generating $30,000 income per year. If we are concerned about the equity of taxation, should we consider these two people as equals and tax them equally? Explain why or why not.

What will be an ideal response?

The incomes are not derived from the same types of sources. Horizontal equity would say that
since incomes are the same, they should be taxed the same. In the United States, income
derived from capital gains is not taxed like other sources of income. This issue is related to the
ability to pay principle, as discussed in the textbook.