The table below shows the incomes and rates of income tax levied on four professionals in an economy. Profession Income per month($) Tax rate % Disposable i...
Question 1 Report
The table below shows the incomes and rates of income tax levied on four professionals in an economy.
| Profession | Income per month($) | Tax rate % | Disposable income ($) |
| Doctor | 8,000 | 10 | |
| Engineer | 7,000 | 12 | |
| Civil servant | 5,000 | 18 | |
| Nurse | 6,000 | 15 |
Use the above data to answer the questions that follows:
(a) Calculate the disposable incomes of the four individuals
(b) What system of taxtation was employed?
(c) Give reasons for your answer in 2(b)
(d) With the aid of a diagram, explain the system of taxation employed in 2(b)
Answer Details
(a) Disposable income is income after tax: \( \text{Disposable income} = \text{Income} - \text{Tax}, \) where \( \text{Tax} = \text{Tax rate} \times \text{Income} \).
| Profession | Income ($) | Tax rate | Tax ($) | Disposable income ($) |
|---|---|---|---|---|
| Doctor | 8,000 | 10% | \(0.10\times8000=800\) | 7,200 |
| Engineer | 7,000 | 12% | \(0.12\times7000=840\) | 6,160 |
| Civil servant | 5,000 | 18% | \(0.18\times5000=900\) | 4,100 |
| Nurse | 6,000 | 15% | \(0.15\times6000=900\) | 5,100 |
(b) The system used is regressive taxation.
(c) Reasons. Under a regressive tax the tax rate falls as income rises. Here the highest earner (Doctor, \$8,000) pays the lowest rate (10%), while the lowest earner (Civil servant, \$5,000) pays the highest rate (18%). The tax therefore takes a larger proportion of a poor person's income than of a rich person's, which is the defining feature of a regressive tax.
(d) Diagram. Plot income on the horizontal axis and the average tax rate on the vertical axis. A regressive tax curve slopes downward from left to right: as income increases, the tax rate declines (from 18% at \$5,000 down to 10% at \$8,000). This contrasts with a progressive tax, whose curve would slope upward. The downward slope visually shows the burden shifting onto lower income earners.
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