Theory question 105
Public FinanceSection B: answer three questions only from this section.
(a) What is a tax? (b) Highlight the various tax systems.
Show the model answer
Model answer
(a) A tax is a compulsory levy imposed by government on individuals, firms and goods, for which no direct service is given to the payer in return
(b) Progressive tax: the rate rises as income rises (e.g. personal income tax/PAYE)
Proportional tax: the same rate is charged on all levels of income
Regressive tax: the rate falls as income rises, so the poor pay a larger proportion of their income
Direct taxes (on income and wealth) and indirect taxes (on goods and services) may also be described
Explanation
Define tax, then explain progressive, proportional and regressive systems with examples.