(a) What is a tax? (b) Describe the following rates of taxation. (i) Progressive tax (ii) Proportional tax (iii) Regressive tax (c) Explain the following pr...
Question 1 Report
(a) What is a tax?
(b) Describe the following rates of taxation.
(i) Progressive tax
(ii) Proportional tax
(iii) Regressive tax
(c) Explain the following principles of a good tax system:
(i) Equity
(ii) Convenience
(iii) Economy
Answer Details
(a) A tax is a compulsory payment levied by government on individuals, firms or goods, for which the taxpayer receives no direct or specific benefit in return, and which is used to finance public expenditure.
(b) Rates of taxation:
- Progressive tax: the rate rises as income rises, so higher-income earners pay a larger percentage of income than lower-income earners.
- Proportional tax: the same percentage rate is charged on all incomes, so tax paid rises in exact proportion to income while the rate stays constant.
- Regressive tax: the rate falls as income rises, so lower-income earners pay a larger percentage of income than higher-income earners.
(c) Principles of a good tax system:
- Equity (fairness): the burden of tax should be shared fairly according to the taxpayer's ability to pay; those who earn more should pay more.
- Convenience: the tax should be collected at a time and in a manner most convenient to the taxpayer, for example deducting income tax when wages are paid.
- Economy: the cost of assessing and collecting the tax should be small relative to the revenue it yields, so that most of what is collected reaches the treasury.
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