Theory question 108
Public Finance(a) What is a regressive system of taxation?
(b) Explain the following principles of taxation: (i) equity; (ii) certainty; (iii) economy.
(c) Outline any three reasons why government imposes tax in a country.
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(a) A regressive tax system is one in which the rate of tax falls as income rises, so the poor pay a larger share of their income than the rich.
(b)(i) Equity: tax should be fair, according to ability to pay.
(ii) Certainty: the amount, time and method of payment should be clear to the taxpayer.
(iii) Economy: the cost of collecting a tax should be small compared with the revenue.
(c) Any three: to raise revenue; to redistribute income; to discourage harmful goods; to protect local industries; to control inflation; to correct balance of payments deficit; to control monopolies.
These are Adam Smith's canons of taxation.