Theory question 107
Public FinanceSection B
Explain each of the following types of taxes:
(a) Proportional tax (b) Progressive tax (c) Regressive tax.
Show the model answer
(a) Proportional tax: the same percentage rate is charged whatever the income; tax paid rises in proportion to income (e.g. 10% on N10,000 = N1,000 and on N100,000 = N10,000).
(b) Progressive tax: the rate rises as income rises; higher earners pay a larger percentage (e.g. 5% on low income, 20% on high income). Equitable; used for personal income tax.
(c) Regressive tax: the rate falls as income rises, or the tax takes a larger share of low incomes than of high incomes (e.g. flat poll tax, taxes on essential goods). Burden is heavier on the poor.
Diagrams or numerical examples earn credit.
A numerical example for each makes the difference clear.