The 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 taxtation 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)
(a) Disposable Income = Income - Tax
(i) Doctor = $8,000 - (10% of $8,000)
= $8,000 - $800
= $7,200
(ii) Engineer= $7,000 - (12% of $7,000)
= $7,000 - $840
= $6,160
(iii) Civil Servant = $5,000 - (18% of $5,000)
= $5,000 - $900
= $4, 100
(iv) Nurse = $6,000 - (15% of $6,000)
= $6,000 - $900
= $5, 100
(b) Regressive system of taxation
(c) Regressive because the higher income earners pay lower rate of tax while low income earners pay higher rate of tax.
(d)
In the diagram above, the curve is negatively sloped indicating that higher income earners are levied at lower tax rate and vice versa. A regressive system of taxation is one in which the higher income earners pay a lower rate of tax while the lower income earners pay a higher rate of tax.
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