An economic survey records the income tax paid by three earners in a state as follows: • E… — JAMB UTME

An economic survey records the income tax paid by three earners in a state as follows:
• Earner X earns $\text{N}200,000$ and pays $\text{N}20,000$ in tax.
• Earner Y earns $\text{N}500,000$ and pays $\text{N}50,000$ in tax.
• Earner Z earns $\text{N}1,000,000$ and pays $\text{N}100,000$ in tax.

Based on this data, which tax system is being operated?

A proportional tax system, because the effective tax rate remains constant at $10\%$ across all income levels.Answer
B
A progressive tax system, because the absolute amount of tax paid increases as income rises.
C
A regressive tax system, because higher income earners contribute a smaller fraction of their income than lower income earners.
D
A progressive tax system, because the marginal tax rate doubles as income increases from $\text{N}500,000$ to $\text{N}1,000,000$ .

Answer

A proportional tax system, because the effective tax rate remains constant at

10\%

across all income levels.

The correct answer identifies the system as proportional because the tax rate is constant at

10\%

for all earners

(\frac{20,000}{200,000} = \frac{50,000}{500,000} = \frac{100,000}{1,000,000} = 10\%)

. A tax system is defined as proportional when the proportion of income paid in tax stays the same regardless of income level.

Step-by-Step Solution

Calculate the effective tax rate for each earner

For Earner X:

\frac{20,000}{200,000} \times 100\% = 10\%

. For Earner Y:

\frac{50,000}{500,000} \times 100\% = 10\%

. For Earner Z:

\frac{100,000}{1,000,000} \times 100\% = 10\%

Tax systems are classified based on how the tax rate (percentage of income) changes with income, not by the absolute monetary amount.

Classify the tax system based on the calculated rates

Since the tax rate remains flat at

10\%

for all income levels, the tax system is proportional.

A proportional (flat) tax system levies the same percentage rate of taxation on all income levels.

Key Concept

Classification of Tax Systems (Proportional vs. Progressive vs. Regressive)

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