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Unit notes and practice questions

Grade 12 Economics unit 5: Tax theory and practice

Everything here is for unit 5 of the Grade 12 Economics textbook: what the chapter covers, the short notes, practice questions with their answers, and the lesson video where one exists.

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3
Cards
10
Practice questions on unit 5
103–121
The textbook pages for unit 5

What unit 5 covers

  1. 1.Taxes: Definition, Principles, Objectives and Classifications
  2. 2.Definition and Terminologies in Taxation
  3. 3.Objectives of Taxation
  4. 4.Principles of Taxation
  5. 5.Characteristics of a Good Tax System
  6. 6.Classification of Taxes
  7. 7.Major Categories and Sources of Taxes
  8. 8.Approaches to Tax Equity
  9. 9.The Benefits Approach
  10. 10.The Ability-to-pay Approach
  11. 11.Tax System and Structure in Ethiopia
  12. 12.Types of Tax and Tax Accounting in Ethiopia
  13. 13.Problems Associated with Taxation in Ethiopia

Short notes for unit 5

The cards filed under this chapter on the Grade 12 Economics page. Open one at a time.

FeatureDirect TaxIndirect Tax
Impact and IncidenceFall on the same personFall on different persons
Tax ShiftingCannot be shiftedCan be shifted to consumers
ExamplesEmployment tax, Business taxVAT, Excise tax, Customs duty

When you use it

Use this comparison to distinguish who bears statutory responsibility versus the ultimate economic burden of a tax.

Watch out

Impact is the statutory first point of contact, while incidence is the final economic resting place.

Drafted from Grade 12 Economics, pages 103-122, then checked twice before it went up

ScheduleSource of Income
Schedule AEmployment income
Schedule BRental income from buildings
Schedule CBusiness income
Schedule DOther income (royalties, dividends, casual rental)
Schedule EExempt income (medical, hardship, pension)

When you use it

Use this table when classifying sources of income and their legal categories according to Ethiopian tax proclamation.

Watch out

Schedule E represents exempt income categories, not a taxable rate band.

Drafted from Grade 12 Economics, pages 103-122, then checked twice before it went up

Tax TypeAverage Tax RateDistribution of Burden
ProgressiveRises as income risesHigh income pays a higher share
ProportionalRemains constant for all incomeEveryone pays the same percentage
RegressiveFalls as income risesHigh income pays a lower share

When you use it

Use this classification to evaluate tax fairness and vertical equity based on taxpayer income levels.

Watch out

A regressive tax takes a larger percentage from low-income earners, even if high-income earners pay a larger absolute amount.

Drafted from Grade 12 Economics, pages 103-122, then checked twice before it went up

Practice questions on unit 5

10 multiple-choice questions written against this chapter, each with its answer and the reason. Try one before you open the answer.

Question 1

According to the OECD definition, taxes are unrequited. What does the term unrequited mean in taxation?

  1. A.Tax payments are completely voluntary.
  2. B.Governments do not provide direct benefits in proportion to the tax paid.
  3. C.Taxes are paid only when citizens receive specific private services.
  4. D.Taxpayers can choose the exact rate they want to pay.
Show the answer and why

Answer: B Governments do not provide direct benefits in proportion to the tax paid.

Why

The term unrequited means that the benefits provided by the government to a taxpayer are not in proportion to the payments made. Tax is paid without a direct return or quid pro quo.

Question 2

What is the standard rate of Value Added Tax (VAT) introduced in Ethiopia on January 1, 2003?

  1. A.5%
  2. B.10%
  3. C.15%
  4. D.20%
Show the answer and why

Answer: C 15%

Why

Ethiopia introduced the VAT Act on 1 January 2003 with a standard rate of 15% applied on taxable transactions.

Question 3

Which tax schedule in Ethiopia applies to income earned from employment?

  1. A.Schedule A
  2. B.Schedule B
  3. C.Schedule C
  4. D.Schedule D
Show the answer and why

Answer: A Schedule A

Why

In Ethiopia, Schedule A covers income from employment, which is withheld by employers at rates ranging from 10% to 35%.

Question 4

What type of tax places both the initial impact and the ultimate burden (incidence) on the very same person?

  1. A.Direct tax
  2. B.Indirect tax
  3. C.Turnover tax
  4. D.Excise tax
Show the answer and why

Answer: A Direct tax

Why

Direct taxes impose both the impact and incidence on the same person who earns the income, such as personal income tax.

Question 5

What is the key difference between the impact of a tax and the incidence of a tax?

  1. A.Impact refers to the final resting place of tax, while incidence is the first point of contact.
  2. B.Impact is the first point of statutory contact, while incidence is the final resting place of the tax burden.
  3. C.Impact applies only to direct taxes, while incidence applies only to indirect taxes.
  4. D.Impact is the total tax collected, while incidence is the tax rate percentage.
Show the answer and why

Answer: B Impact is the first point of statutory contact, while incidence is the final resting place of the tax burden.

Why

The impact of a tax is felt by the person with the first legal duty to pay the government, while incidence refers to where the final tax burden actually rests.

Question 6

Under the ability-to-pay approach, what happens in a progressive tax system?

  1. A.All taxpayers pay the exact same Birr amount regardless of income.
  2. B.The average tax rate remains constant across all income levels.
  3. C.People with higher incomes pay a higher percentage of their income in taxes.
  4. D.The average tax rate falls as income increases.
Show the answer and why

Answer: C People with higher incomes pay a higher percentage of their income in taxes.

Why

In a progressive tax system, the average tax rate rises as income rises, meaning higher-income earners pay a higher percentage of their income.

Question 7

In Ethiopia, what are the mandatory pension contribution rates payable to the Private Organizations Pension Fund?

  1. A.7% by the employer and 11% by the employee
  2. B.11% by the employer and 7% by the employee
  3. C.10% by the employer and 5% by the employee
  4. D.15% by the employer and 3% by the employee
Show the answer and why

Answer: B 11% by the employer and 7% by the employee

Why

According to Ethiopian regulations, contributions to the Private Organizations Pension Fund are 11% paid by the employer and 7% paid by the employee based on salary.

Question 8

Which rate of Turnover Tax (TOT) is charged on locally rendered services by contractors, grain mills, tractors, and combine harvesters in Ethiopia?

  1. A.2%
  2. B.5%
  3. C.10%
  4. D.15%
Show the answer and why

Answer: A 2%

Why

For persons not registered for VAT with annual transactions below 500,000 Birr, the TOT rate is 2% on contractors, grain mills, tractors, and combine harvesters, and 10% on other services.

Question 9

How does tax avoidance differ from tax evasion?

  1. A.Tax avoidance is illegal falsification, while tax evasion is a legal reduction of tax.
  2. B.Tax avoidance uses legal provisions to reduce tax, while tax evasion is illegal non-payment or fraud.
  3. C.Both tax avoidance and tax evasion are criminal acts punishable by law.
  4. D.Tax avoidance applies only to indirect taxes, while tax evasion applies only to direct taxes.
Show the answer and why

Answer: B Tax avoidance uses legal provisions to reduce tax, while tax evasion is illegal non-payment or fraud.

Why

Tax avoidance is the legal arrangement of financial affairs using deductions and incentives to lower tax liability. Tax evasion is the illegal act of falsifying information or deliberately failing to pay taxes.

Question 10

Which of the following items is exempt from the 10% surtax on imported goods in Ethiopia?

  1. A.Luxury electronics
  2. B.Alcoholic beverages
  3. C.Fertilizers and capital (investment) goods
  4. D.Imported clothing and textiles
Show the answer and why

Answer: C Fertilizers and capital (investment) goods

Why

Ethiopia's 10% surtax on imports exempts specific goods including fertilizers, petroleum and lubricants, motor vehicles for freight/passengers, aircraft, spacecraft, and capital (investment) goods.

The app holds 12 questions on this unit, marked as you go. These are the first 10.

The textbook pages for unit 5

Unit 5 runs from page 103 to page 121 of the Ministry of Education edition.

Ministry of Education edition, English, 214 pages

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All Grade 12 Economics short notes

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