(a) What is a tax? (b) Highlight the various tax systems.

Answer Details

a. Meaning of a tax. A tax is a compulsory payment imposed by government on individuals and firms to raise revenue and achieve economic objectives, for which the taxpayer receives no direct or equivalent benefit in return.

b. The various tax systems. These describe how the tax rate changes as income (the tax base) changes.

• Progressive tax: the rate of tax rises as income rises, so higher earners pay a larger proportion of their income (for example, personal income tax with rising bands).
• Proportional tax: the rate of tax is constant at every level of income, so everyone pays the same percentage regardless of how much they earn.
• Regressive tax: the rate of tax falls as income rises, so the tax takes a larger proportion of the income of the poor than of the rich (many indirect taxes work this way in effect).