(a) What is a tax?
(b) Describe the following rates of taxation.
(i) Progressive tax
(ii) Proportional tax
(iii) Regressive tax
(c) Explain the following principles of a good tax system:
(i) Equity
(ii) Convenience
(iii) Economy
Explanation
(a) A tax is a compulsory levy imposed by the government or its agency on individuals, companies or on goods and services.
(b)(i) A progressive tax is one in which as the level of income rises, tax rate also rises.
(ii) A tax is proportional when all tax payers pay the same percentage as tax irrespective of their levels of income.
(iii) A regressive tax is one in which as the level of income rises, the rate of tax rather falls, thus the higher the income earners are taxed at lower rates than lower income earners.
(c)(i) Equity: This means fairness and states that taxes should be based on ability to pay in order not to cause hardship to the payer.
(ii) Convenience: The payment of the tax should be convenient to the eax payer i.e time and method of payment should be convenient.
(iii) Economy: The cost of collecting the tax should be small in relation to the revenue obtained from the tax.