Theory question 102
Public FinanceThe 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 taxation 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).
Show the model answer
(a) Doctor: 8,000 − 800 = $7,200; Engineer: 7,000 − 840 = $6,160; Civil Servant: 5,000 − 900 = $4,100; Nurse: 6,000 − 900 = $5,100
(b) Regressive taxation.
(c) The tax rate falls as income rises: the highest earner (doctor, $8,000) pays 10% while the lowest earner (civil servant, $5,000) pays 18%.
(d) A regressive tax takes a smaller percentage of income as income rises. Diagram: tax rate on the vertical axis, income on the horizontal axis; a downward-sloping line/curve showing the rate falling as income increases.
Disposable income = income − (rate × income).