THE WHITE paper on tax reform makes fairness its first priority. The question is whether Finance Minister Michael Wilson has made fairness a reality.

There are two criteria of social justice by which to assess tax reform: horizontal equity - are people in like circumstances treated equally? - and vertical equity - is the tax burden distributed fairly between income groups? Most concern tends to attach to the latter.

Tax reform proposals introduced to make the system more vertically equitable, although among the most radical in the paper, are nonetheless curiously tentative.

Says Patrick Johnston, senior advisor to the Ontario Social Assistance Review Committee: ''I'm not sure whether perhaps my expectations were unrealistic, but I thought there'd be much more in this. So it's a bit of a disappointment.''

The centrepiece of the paper, from a social policy point of view, is the wholesale conversion of tax deductions and exemptions to tax credits. Deductions reduce a taxpayer's taxable income and hence indirectly the amount of tax paid; credits reduce his tax payment directly.

More to the point, deductions are worth more in higher tax brackets; credits are the same for everyone. It is not radically progressive, but it's a step forward, at least, from the regressivity of the present system. And it puts some of the pieces in place for the eventual introduction of a guaranteed annual income - though Wilson gave no hint of when that might be.

At the same time, tax rates are to be reduced. The previous 10 rate brackets, topping out at 34% for taxable income over $63,347, are to be replaced by three: 17% on the first $27,500, 26% on the next, and 29% on all income in excess of that.

The major personal exemptions are all to be replaced with fixed-value credits. The basic personal exemption, worth $4,220 in 1987, becomes a $1,020 credit in 1988; the $3,740 marital exemption turns into an $850 credit; the age and disability exemptions, worth $2,670 and $2,920 respectively, become $550 credits.

The upshot of these changes alone, the government says, will be to take 850,000 of the working poor off the tax rolls. Overall, the white paper estimates eight in 10 families will pay less income tax than before: an average of $475 less.

Critics such as Louise Dulude, president of the National Action Committee on the Status of Women, point out that many if not most of the 850,000 were only put on the tax rolls by tax increases introduced earlier in the finance minister's tenure. Many others below the poverty line will continue to pay tax.

Other deductions are to be converted on a 17% scale (equivalent to the lowest marginal tax rate). Taxpayers with pension income, currently deductible up to $1,000, will qualify for a credit worth 17% of that income, to a maximum of $170. Post-secondary tuition fees, medical expenses, charitable contributions, and Canada Pension Plan and Unemployment Insurance premiums will become credits on the same formula, with varying restrictions.

The refundable sales tax credit, introduced in the 1986 budget, is raised to $70 per adult from $50 and to $35 per child from $25 to help low-income families meet the costs of an expanded - and regressive - manufacturers' sales tax. If and when the government brings in its new multi-stage sales tax, the credit will need to be increased again, and substantially.

On the other hand, three of the four other child-related tax expenditures are reduced in value in the white paper, while the fourth - the refundable child tax credit - remains constant.

The child-care expense deduction, though nominally unchanged, is actually worth less since tax rates are lower. The deduction for a dependent child under 18, set at $560 in 1987, is now a $65 tax credit, which to all but the very lowest earners represents a reduced benefit. The deduction for a dependant child over 18 is eliminated altogether.

FLAWS IN CREDITS

As far as the new credits are concerned, critics point to three main flaws in their design: - They are not refundable, that is, they are available only to those with taxable income. Therefore, they benefit chiefly the working poor, while ignoring the very poor who file no return. - They are not phased out as income rises, as the existing refundable tax credits are. All income groups receive the same benefits. This takes away funds that might have been used to lift more of the poor off the tax rolls. - They are not fully indexed. Indexing only covers the amount of inflation in excess of 3%.

All three concerns will have to be addressed before the credits can be used as the ''building blocks'' of a guaranteed annual income.

Other measures in the white paper that are often assessed in terms of equity might better be considered on efficiency grounds. Tax shelters such as the $500,000 capital gains exemption, flow-through shares and other special incentives aren't just inequitable, they're inefficient: they distort investment choices.

A strong case can thus be made for reducing or discarding them without bringing in arguments of equity, whether vertical or horizontal. Inefficiency is enough.

Nor should the shift of the tax burden from individuals to corporations, even if it were much larger, be seen as adding to progressivity: the one thing we know about corporate tax is that corporations don't pay it. The burden is always shifted onto employees, shareholders, or consumers. There are reasons for taxing corporations, but progressivity isn't one of them.

The hard part comes when equity and efficiency conflict, such as in the reduction of the top marginal tax rate on personal income and the retention of expanded RRSP limits. Both can be defended on economic efficiency grounds, but make the system less progressive.

Harvard philosopher John Rawls, in his book A Theory of Justice, offers a way of reconciling these goals. The chief concern of a just society, he argues, should be to raise the lot of the poorest of its members. Inequalities in income ought to be tolerated if and only if they contribute to that end.

If slashing tax rates and expanding savings shelters contributes to greater output, and to greater tax revenues, the wherewithal is created to increase progressivity by other channels: tax credits.

The progressivity of the white paper should thus be measured in the whole package - tax rates, exemptions, and credits - not in its separate parts.