(a) What is a tax?
(b) Highlight the various tax systems.
Explanation
(a)A tax is a compulsory payment made by each eligible citizen to the government. The purpose of tax is to raise revenue for the government.
(b) The various tax systems are:
(i) Progressive tax system: This is a form of tax in which tax rate increases as income increases. It takes a larger percentage of income from people with larger incomes. A progressive tax reduces inequality of income distribution. A good example is the PAYE.
(ii) Proportional tax systems: The rate of tax is the same irrespective of the level of income. If a tax leads to both the rich and the poor paying the same proportion or percentage of their incomes as tax, then the tax is called a proportional tax.
(iii) Regressive tax: The higher the income, the lower is the rate of tax. In this type of taxation, a poor person pays a higher proportion of his income. Regressive tax is considered as unfair to the poor, e.g. poll tax.