Under a newly revised tax policy, an earner whose gross income rises from \text{N}800,000 … — JAMB UTME

Under a newly revised tax policy, an earner whose gross income rises from $\text{N}800,000$ to $\text{N}1,600,000$ sees their total annual tax liability increase from $\text{N}96,000$ to $\text{N}160,000$ . Based on the effective tax rates, which taxation system does this policy represent?

Regressive taxation, because the average tax rate decreases from $12\%$ to $10\%$ as income increasesAnswer
B
Progressive taxation, because the total tax amount paid increases from $\text{N}96,000$ to $\text{N}160,000$
C
Proportional taxation, because tax liability increases in direct proportion to the increase in income
D
Progressive taxation, because the marginal tax rate on the additional income is higher than zero

Answer

Regressive taxation, because the average tax rate decreases from

12\%

10\%

as income increases

The system is regressive because the average tax rate decreases from

12\%

at an income of

\text{N}800,000

10\%

at an income of

\text{N}1,600,000

. A tax system is classified by how the percentage rate changes relative to income, not by the absolute monetary amount of tax paid.

Step-by-Step Solution

Calculate the initial average tax rate (

ATR_1

) for the lower income level.

ATR_1 = \frac{\text{N}96,000}{\text{N}800,000} \times 100 = 12\%

The average tax rate measures the proportion of total income paid as tax.

Calculate the new average tax rate (

ATR_2

) for the higher income level.

ATR_2 = \frac{\text{N}160,000}{\text{N}1,600,000} \times 100 = 10\%

To classify the tax system, the new effective tax rate must be compared to the initial rate.

Compare

ATR_1

and

ATR_2

to classify the system.

Since

ATR_2 (10\%) < ATR_1 (12\%)

, the tax burden as a proportion of income falls as income rises.

A tax structure where the effective tax rate decreases with higher income is defined as a regressive tax system.

Key Concept

Classification of Tax Systems by Effective/Average Tax Rate

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