Defining Income Evaluating the H-S Criterion Clearly, arbitrary decisions need to be made on how to define income from a practical point of view H-S criterion appeal to Horizontal equity-people with equal incomes should pay equal taxes Neutrality -it treats all forms of income the same, and does not distort economic activity9 Defining Income: Evaluating the H-S Criterion • Clearly, arbitrary decisions need to be made on how to define income from a practical point of view. • H-S criterion appeal to: – Horizontal equity – people with equal incomes should pay equal taxes – Neutrality – it treats all forms of income the same, and does not distort economic activity